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Monday 10

December, 201810:08 PM



The Daily Fix - Inter-Market Analysis and Macro Insights

The Daily Fix - Inter-Market Analysis and Macro Insights

The tone around Asia is again been fairly sour and there just aren?t many reasons to buy risk with any conviction.

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09.10.2018 03:39 PM

The tone around Asia is again been fairly sour and there just aren’t many reasons to buy risk with any conviction. Investors require clarity on moves upcoming moves in US fixed income, while Italy debt concerns and the drawdown in Chinese financial markets are reasons to sit on one’s hands and we have seen the buyers sit this one out.

The fact the IMF have cut its global growth forecast from 3.9% to 3.7% should in no way surprise as Christine Laggard gave us the heads up likely last week. However, this is the first time any recognised body has been prepared to officially recognise the trade tensions and mark down their forecasts and that is a message in itself.

If we look around the equity markets, impressively the China 300 is up 0.4% on the day, although we should remember that yesterdays 4.3% sell-off was a three Z-score event, and statistically, that is rare even if the index was playing catch-up. There is little conviction behind the buying though even if volumes are 15% above the 30-day average (for this time) and it is a worry that Chinese authorities cut Reserve Ratio Requirement’s by 100 basis points (bp) and the result is such a minimal impact on sentiment. The key line in the sand is 3,200 in this index and there is concern that a break here will affect confidence in the economy, where the feedback loop between asset prices and economics is real.

The Hang Seng is already at multi-year lows and eyeing a break of 26,000, where, should this materialise will only attract more shorting interest from traders. There is just so few reasons to be long here given the strong trend in play, although there are signs of divergence on the daily chart, with price making a lower low and various oscillators making a higher low and this could suggest a reversal is due – although, there is still a lot of technical work needed to see this play out. The Nikkei 225 has re-opened after closing yesterday and the index sits 1.1% lower. That said, with price having closed and filled last Wednesday’s gap at 23,039 that puts this index firmly on the watch list, as gaps are there to be filled, and its how price reacts once that occurs that defines how we trade. Hence, any rally from here needs to be respected and make no bones about it, if bearish on US fixed income there are few better markets to hedge US Treasury upside than the Nikkei 225, which has such a high correlation coefficient with USDJPY. 

The ASX 200 has taken few prisoners today, with healthcare slammed taking the broader index firmly below the consolidation range of 6100 to 6200 its held for the past 22 days. We’ve also seen a move through the 200-day moving average at 6081, although this fate alone is not reasoning to be genuinely concerned, as we saw a close through this average in February and April, and after a short period below, the index staged a rally of 5.1% and 7.4% respectively over the next week or so. We can also focus on valuation and while analysts may still need to react and revise down estimates, consensus 12-month EPS estimates sit at $4.04, which is the strongest level of earnings for Aussie corporates since 2009. If these estimates are even remotely accurate then this market drawdown puts the index on 14.9x forward earnings, which is a fairly compelling multiple for the levels for the earnings growth.

(ASX 200 fundamentals. Green - Consensus 12m EPS, white - 12m P/E ratio) 

(Source: Bloomberg)

Interestingly, the correlation between the ASX 200 and the S&P 500 broke down quite convincingly on 5 September, when the US benchmark went on to new highs and Australia followed Asia lower, while domestic issues stemming from the Royal Banking Commission also hit the local banks. We keep the S&P 500 on the radar, as price sits at a key tipping point here and held up at a confluence of support levels at 2864, representing the May uptrend and strong horizontal support. With price below the 5-day EMA and momentum oscillators headed lower there is no clear buy signal yet, in fact, a break of 2864 would promote short positions for a move into 2805/2800.

(S&P 500 cash index)

(Source: Bloomberg)

One to watch, although, if the macro environment can settle and implied vols (VIX index) can head back towards 12%, then micro issues with become a far greater influence on sentiment.  With US earnings in play this week and with calls for 21% EPS and 11% revenue growth from S&P 500 companies on the quarter (YoY), if vols fall and outlooks look rosy enough the index is going higher.

So, Asia hasn’t provided much inspiration, and with S&P 500 and FTSE futures flat on the re-open and that doesn’t lend much support to the European open. The focus remains on Italian bond yields and the spread over German bunds, where the path of least resistance here is for a further widening of the differential from 302bp, as the relationship between the Italian government and the EU heads in a similar trajectory as that of China and the US. US bond futures are back trading and we see small selling, with the US 10-year Treasury sitting +1bp at 3.24%, while the 30-year has moved up 2bp into 3.43% and this is another factor keeping investors from adding risk today, as this is a pivotal week for US fixed income with a monster $230b in paper being auction this week through various maturities. Will supply be the reasoning for a further cycle high in US yields?

In FX land, Asia has seen limited moves with the AUD holding the biggest percentage move thus far, although a 0.2% is really a rounding error. However, there is some scope here to move into $0.7130, where I would be watching price for a reversal and better levels to sell into. We can find the USD index unchanged on the day, with EURUSD trading an 11-pip range with bids coming into the market around $1.1465, so a break here and I would jump on for a move into $1.14000. 

Published by Chris Weston, Head of Research, Pepperstone
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