Chris Weston, Research Analyst, IG
It’s been a fairly crazy session today in Asia and there has been a lot of head scratching as to the reason behind the sharp moves, which were predominantly centred in US futures.
It’s not every day you see NASDAQ and S&P futures dropping 1.3% in around 20 minutes, and 0.7% in three minutes, especially when risk FX (such as AUD/USD) or copper didn’t go along for the ride. Initially there were some tongue in cheek comments that perhaps the China PMI data had been leaked, but clearly that wasn’t the case as we actually saw expansion in the larger manufacturing series, although the new orders sub-component did fare a little worse than February.
Generally you will see the algos pull markets closer together in alignment, especially when US futures do their own thing, but that wasn’t the case. Brent futures were closed at the time when S&P futures started to tail off, and this was the most logical asset to watch given the barrage of headlines around the negotiations between Iran and foreign diplomats.
Some focus on negotiations with Iran
From all accounts, some progress has been made in the talks; although the official deadline was missed there is still a view that an agreement will be reached soon. It all seems reminiscent of the Greek talks where we see painful negotiations, with deadlines missed and the final result being a positive one. We have already seen the market express a clear desire to push energy prices lower on the perception of agreement, as Iran is already OPEC’s third biggest producer and this will only increase if agreement is found. Falls in energy as we have seen as bad for US equity markets, although the Federal Reserve (among other central banks see lower oil as vert positive for economics).
There has been some techincals moves made as the S&P futures broke the 100-day moving average at 2046, a level at which the market has found good buyers over the last few days. I don’t put much weight behind the technical call myself and would look much more favourably at liquidity and stops being the key driver. The new quarter may also be a factor.
US futures have recovered some 50% of the losses from the earlier highs of 2060, as has brent and WTI oil prices, but the falls have still taken the wind out of the sails of the likes of the Nikkei and ASX 200. China, however is once again pushing higher and is likely to continue to outperform from here. Our European opening calls are looking weak and client business has tended to trade the move lower than question the logic of the move lower and buy the dip.
The market now heavily leaning on an April cut from the Reserve Bank
We’ve even seen some buying of iron ore futures during Asian trade, although not quite enough to push AUD/USD through the former uptrend drawn from the March low at $0.7644. Better building approval numbers and house price data have helped to a degree, as did the Chinese data, but the swaps market tells a clearer story here and have actually modestly increased the probability for an April cut from the Reserve Bank to 76%. Just like we have seen in the March and February meetings, there is clear disagreement between market pricing and the economist consensus, with only seven of 27 economists surveyed (by Bloomberg) agreeing with the market. Naturally those calling for cuts will all be saying ‘why wait’?
(Daily chart of AUD/USD)
With volatility seemingly picking up, today’s European and US trade will be revealing, especially with S&P cash market trading through the October uptrend. Data comes firmly into play, with US ISM manufacturing expected to grow at a slightly slower pace, while the ADP private payrolls is expected to see 225,000 jobs created. This could lead to a slight tweaking in expectations for Friday’s payrolls report, while Federal Reserve presidents John Williams and Dennis Lockhart are due to speak and recall both are calling for rates to go up this year. With the Fed funds future currently only pricing in 40 basis points of tightening by December, which is a post March FOMC low and now 22 basis points below the median, the risks are for a stronger USD, with pullbacks in the USD offering good buying opportunities in my opinion.
Ahead of the European open we are calling the FTSE 6712 -61, DAX 11835 - 131, CAC 4985 -48, IBEX 11385 -136 and MIB 22901 -256