The euphoria remains palpable from a global macro perspective. It is best to remember that momentum is a cruel foe, and many investors trying to call the end to the risk-seeking party have been bloodied and bruised in the evidence of lower account equity.
Whether you look at shares, commodities, or higher yields, there remains a persistent rhythm of buyers expecting greater things, and that's naturally caught the attention of some like US Treasury Secretary, Steve Mnuchin.
Mnuchin urged passage of recent tax reform and warned that such failure would lead to markets eroding a "significant amount" of their recent gains if the tax reform plan in the US is not passed.
Across the world, Chinese President, Xi Jinping opened the formal start of his second five-year term as president by applauding the "unstoppable momentum" of his party in helping make China move closer to the "centre of the world."
The long and short of it
- Chinese 'momentum': The likely global macro highlight of October was China President, Xi Jinping's speech at the 19th Communist Party Congress. The speech was peppered with highlights as Xi outlined the strategic importance ahead of the socialist economy that has accomplished much in the last nearly five years since Xi became the fifth leader since Mao Zedong. President Jinping also focused on improvement of the real economy, which seems to turn the focus from quantity to quality.The yuan gained alongside the China CSI 300 that rose +0.8 per cent to 3944 with environmental shares standing out. Xi's three-hour speech honed in on the China thriving through the complex changes both China and the world faces while holding to socialist values and shunning economies and newly elected administrations that "retreat into self-isolation".
- RBA tone: The breakout higher in the price of ASX 200 shares can be looked at through the lenses of the recent consolidation since June while other global equities were trading to either all-time or multi-decade highs and potentially the recent release of the Reserve Bank of Australia's minutes. The RBA has taken on a pre-tightening era Federal Reserve tone by saying that economic resilience is on the upswing with no plans to follow other central banks into tightening mode.The minutes echoed what has been said from recent RBA speakers that have kept the Aussie from strengthening on rate hike expectations and helped support exporting industries. While concern will doubtlessly be presented as to the market being overbought, investors and traders should look to the recent 2 per cent rise over the last five sessions to lead to a series of higher-lows on the price charts to see if the rally will extend. Aggregating this all together we have seen SPI futures close 4 points lower and our call for the ASX 200 sits at 5888. A simple sense check suggests that if BHP and Rio Tinto are facing headwinds and we have a flat index call then banks will find buyers and support the open. Let's not forget that the ASX 200 has gained for six straight days and we have only seen one period in 2017, back in May, when the local index has closed up for seven straight days, so a pullback and some modest mean reversion continue to become a higher probability.
- Dollar link: The Australian dollar has become range bound in October against the US Dollar and other major FX pairs.The two-cent range between 77.30-78.97 US cents against the Australian dollar has been driven by US developments more than AU developments. If Australian dollar weakness does develop as the highly correlated price of iron ore continues to pull back and diverge from the strength seen in many base metals contracts like aluminum and copper. The price of iron ore has fallen nearly 10 per cent over the last month, and a recent correlation study shows a positive correlation of +0.3 to the dollar. Keep in mind there is real event risk today when, at 1pm, we get China's third quarter GDP. Consensus is sitting at 6.8 per cent (economist predictions are in the range of 6.9 per cent to 6.6 per cent), which would be a slightly slower pace than the 6.9 per cent pace of growth we saw in second quarter. We also get the higher frequency data dump, with September retail sales expected to grow +10.2 per cent, industrial production +6.5 per cent and fixed asset investment +7.7 per cent. Locally, we get the September Aussie jobs report due at 11:30 am to push this pair out of the doldrums, with consensus currently sitting for 15,000 jobs to be created (the economist range sits at +30,000 to -10,000) and the unemployment rate to remain at 5.6 per cent. Keep in mind we haven't seen a month of net job losses since September 2016!
America surges: The US share markets are charging higher as the 30 blue chip companies in the US that make up the Dow Jones Industrial Average recently tagged 23,000. Looking back to new highs hit at 1000 increments from 20,000 through 22,000 does show a pattern worth your attention. When the market first traded through the new 1000-point incremental level, the market paused for seven, eleven, and six weeks. Recently tagging the 23,000-level may provide a pause in the rally, but that shouldn't be confused with a reversal as multiple metrics fail to point to pending market stress that would take down the market.
Oil pressure: Crude oil inventories falling aggressively beyond forecast was not enough on Wednesday to keep the key energy commodity trading higher. Per the EIA Weekly Inventory Report, offshore shut-ins caused crude production to drop aggressively, with a 5.73 million draw in crude stocks, though this was seen as temporary. Another sign of OPEC+ keeping their word on the production accord garnered new evidence as U.S. American imports of Saudi crude fell to an all-time low. The market concern likely originated around the drop in refining utilization as runs fell in all regions of the US despite only two refiners being taken offline due to Hurricane Nate. After the report, the S&P 500 Energy Index traded lower alongside Crude Oil thought the price of WTI continues to hold above the key $US50 zone.
Tougher tone: The semi-annual US Treasury report to Congress was delivered without mentioning any major US trading partners (e.g., China) as a "currency manipulator." The report did take a firmer tone than historical norms by addressing the stance that the US "should not and will not bear the burden" of unfair trade, and pointing out that the Administration is "deeply concerned by the significant imbalances in the global economy." The report also commented on recent actions taken by Chinese authorities to have "prevented a disorderly currency depreciation."
Hike likely: A recent theme of US Dollar strength has taken over at the start of the fourth quarter as event risks get priced in around the world. The biggest gains over the week have been seen against the Japanese Yen, where hedges have come off in anticipation of a successful election for Abe's LDP. Additionally, NY Fed President Bill Dudley said the Fed is on track to deliver on their forecasted three rate hikes of 2017 with an 80 per cent pricing in of a rate hike in December. While sell-offs have been avoided, the Euro has remained under pressure as political risks ranging from the remaining uncertainty surrounding the Catalonian independence situation to the Italian election in H1 2018.
- SPI futures moved +0.87 or 0.01% to 5890.48.
- AUD/USD remain unchanged to 0.7846 - Session High: 0.7858 Session Low: 0.7819
- On Wall street: Dow Jones +0.64%, S&P 500 +0.12%, Nasdaq +0.13%.
- In New York: BHP -2.1%, Rio -4.06%.
- In Europe: Stoxx 50 +0.33%, FTSE 100 +0.36%, CAC 40 +0.42%, DAX 30 +0.37%.
- Spot Gold moved -0.23% to US$1282.13 an ounce.
- Brent Crude moved +0.19% to US$57.99 a barrel.
- US Crude Oil moved +0.06% to US$51.91 a barrel.
- Iron Ore moved -3.37% to CNY444 a tonne.
- Dalian Iron Ore moved -0.35% to US$62.72 a tonne.
- LME Aluminum moved 0.19% to US$2140 a tonne.
- LME Copper moved -1.51% to US$7027 a tonne.
- 10-Year Bond Yield: US 2.34%, Germany 0.4%, Australia 2.72%.
- SPI futures down 6 points or 0.1% to 5865
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This column was produced in commercial partnership
between Fairfax Media and IG
