Home World Business 8@eight: Dollar taken to the cleaners ahead of soft day

8@eight: Dollar taken to the cleaners ahead of soft day

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The ASX is set for another down day after a soft lead from global markets.

1. Dollar down

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There are a number of interesting talking points on the floors this morning, but perhaps the most prominent has centred on the moves in the AUD, which has been taken to the cleaners overnight, falling 1.4 per cent. Perhaps my description is dramatic, but there really isn’t one smoking gun behind the falls and there are seemingly a number of factors at play.

Firstly, we can see price really selling off from 10:00 am yesterday, which makes me believe (without any proof) that this could be equity related, with an international money manager perhaps unwinding a sizeable position in an Aussie bank – one just has to look at the correlation between AUD/USD and SPI futures.

The day is set to begin slowly on the markets. The day is set to begin slowly on the markets. Photo: Justin McManus

2. Commodities sold

We can also see iron ore, steel and coking coal futures were sold 6.6per cent, 2.7 per cent and 3.2 per cent respectively overnight and there is certainly a more aggressive view that China has seen peak growth, with producer price inflation to head lower from here too.

We must also take into consideration that by and large we have seen a move into the USD more broadly.

3. US yields up

We have seen yields across the US fixed income curve moving higher by around four to five basis points, with the curve (two and ten-year Treasuries) ultimately remaining unchanged at 101 basis points. The ‘real’ (or inflation adjusted) ten-year Treasury yield has moved higher by five basis points overnight and it’s no surprise then that gold has been sold off fairly heavily (-1.3 per cent). It’s interesting that US-listed gold stocks have held in quite well despite the strong move in gold.

US data flow has been more upbeat, with the ADP private payrolls printing 177,000 jobs and giving us some believe that Friday’s non-farm payrolls will be close to current consensus of 190,000. The services ISM index showed growth in the service space growing at a faster clip at 57.5, with solid increases in new orders and export orders. The employment sub-component of the services index printed 51.4 and again supports the notion that we should see a strong rebound in jobs after the worrying 98,000 jobs print last month.

4. Fed predictable

The FOMC meeting provided few surprises and that’s how the Federal Reserve like things. They are part of the reasoning why the world has a love affair with selling volatility. One could even say the statement was somewhat hawkish at the margin as they clearly believe the weakness in Q1 data has been “transitory” and most economists would see that as the correct view, with Q2 GDP likely to print above 3 per cent, at this stage. Perhaps a greater attention to any future reduction of their $4.5 trillion balance sheet was expected, but this is something we will want to explore at the June meeting.

5. June increase

In terms of the June meeting, the market has raised its implied probability closer to 70 per cent, with the fed fund future pricing in 17 basis points of tightening through June. At this stage 70per cent seems too low on the news we know, especially with financial conditions still so accommodative.

6. French debate

There hasn’t really been any reaction either to the live debate between Marine Le Pen and Emmanuel Macron. There has been little conviction behind the flows in our out-of-hours CAC 40 index either and if the French index were to open now it would be pushing 5300. EUR/USD has largely been influenced by the US data, although we have seen EUR/USD one-week implied volatility fall and at 10 per cent is just simply not expressing a view that we are going to see Le Pen take the presidency on Monday, which of course would promote a near armageddon scenario. 

Pricing would suggest that while the debate was an absolute slug fest, it probably lacked the depth and persuasion to move the undecided vote. One suspects if you were voting for Macron before the debate you heard little in the rhetoric to change that. The view from one (French speaking) trader was that both candidates had their strengths and clear weakness’s and assessed the battle as a fairly even split and no clear winner.

7. Asia benign

Turning to the Asian market open and we see fairly benign conditions, with our call from the ASX 200 sitting at 5893. Yesterday’s 1 per cent fall was ugly, especially given the value of the sell-off totalled $7.381 billion, which is some 23 per cent above the 12 month average. The bulls will take the fact that breadth wasn’t terrible, with only 57 per cent of stocks falling on the day. With that in mind todays open will tell us a lot about sentiment and specifically one question whether we see traders look to buy into the market after the unwind. It may have been that we saw a fund moving out of a sizeable position in the banks and again I have no proof and the local investment banks would need to detail this as they would have seen the flow.

So the banks will be key in whether the ASX 200 finds buyers on open or gravitate lower again and that could dictated by NAB’s 1H 17 numbers which are released shortly. The materials sector will probably attract increased trading capital and while spot iron ore closed largely unchanged, as mentioned bulk commodity futures have been sold aggressive and if we look at Vale’s US listing (as a proxy) it closed -5.2 per cent. BHP’s American Depository Receipt suggest BHP opens -0.8 per cent, helped to a degree by little move in US crude. 

8. Market watch:

SPI futures down 6 points or 0.1% to 5871

AUD -1.5% to 74.21 US cents

On Wall St, Dow flat, S&P 500 -0.1%, Nasdaq -0.4%

In New York, BHP -3.4%, Rio -3.7%

In Europe, Stoxx 50 +0.2%, FTSE -0.2%, CAC -0.1%, DAX +0.2%

Spot gold -1.6% to $US1236.95 an ounce

Brent crude +0.4% to $US50.68 a barrel

Iron ore slips 4 US cents to $US68.68 a tonne

Dalian iron ore -6.5% to 493 yuan

LME aluminium -0.3% to $US1924 a tonne

LME copper -3.5% to $US5600 a tonne

Comex copper -4.4%

10-year bond yield: US 2.32%, Germany 0.32%, Australia 2.59%

Description  This column was produced in commercial partnership
   between Fairfax Media and IG

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