IG | Aug 12, 2016 03:45AM ET
The Australian equity market will open on the front foot today, with leads from US stocks constructive. Oil has been at the heart of the move, helping high yield credit spreads to narrow relative to US treasuries and put real backbone behind the feel good factor.
The interesting phenomenon is that while we have seen higher oil and a modest sell-off in fixed income we have actually seen US inflation expectations falling. That will not please the Federal Reserve, who focus very closely on market-based measures of inflation (through the bond market).
It’s interesting to see that the move higher in equities, amid comments from San Francisco Fed president that it’s still appropriate to hike rates this year resulted in the probability of a hike at the December meeting increasing to exactly 50:50. It is clear the September meeting is ‘live’ in the sense they could lay a foundation for a move in December.
There is also a view that the market is pricing in a clear win by Hillary Clinton and a Democratic Congress. While Trump’s comments about President Obama and appealing to gun owners have been front page news, the real issue is that his economic policies have many question marks.
Cutting the corporate tax rate to 15% and lowering the top personal tax bracket to 25% is great for those who believe in ‘trickle down’ economics (i.e. make the rich richer and hope it filters down to the lower earners), but it will require lost revenue to be made up in other areas. Clinton’s policy of going after the rich is probably the bigger vote winner.
Locally, we will need to see a close below 5495 to print a third consecutive week of losses; a fate we see at a 5% probability. The ASX financial sector is key behind the broader index move though and while I am neutral on the sector if we look at the daily chart of the ASX financial sector one can turn more bullish on the sector (as a short-term trade) when we see a move through the August highs of 6182.
Iron ore has pulled back 2.1%, and there are signs that the good times could be behind FMG, at least in the short-term. A move above $4.71 would negate this view, while a break below the January 2016 uptrend would be a red flag. Any moves through $4.00 would certainly encourage higher short interest – One for the radar.
The AUD is still attractive in this low volatility environment, specifically against the EUR, GBP and to lesser extent JPY. AUD/USD is a slow grind higher at present and the overnight range was non-existing.
All eyes on today's China data dump, although FX traders are not as sensitive to China data as it once was. That could change soon, but for now as long as volatility is low then traders will gravitate to long AUD positions.
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