IG's trading wrap - Monday,3 June 2013

IG's trading wrap - Monday,3 June 2013

Price action in US trade became quite violent into the cash close on Friday, with S&P futures leading the charge, and over 100,000 contracts traded in the last minute alone. Clearly the market was keen to re-weight allocation, although why traders left it so late is interesting; it actually turned out to be the largest non-quarter end volume since November 2011.

Clearly the Chicago PMI and University of Michigan prints were really good numbers, and if we are going to see that sort of volatility in bonds and equities off these tier- two economic releases, you have to wonder what sort of price action we will see with manufacturing and services ISM, ADP, trade balance and non-farm payrolls out this week alone! Long VIX anyone? Of course month-end flows have played a factor, but the moves in US yields through May have many questioning where they will be and what the impact will be on stocks and the USD if US data continues to improve this week. Being long banks and insurance names have historically been the places to be on a rise in yields; however this has always been backed by growth, while this time it’s predominantly driven by a change in QE expectations.

June has started relatively positively for risks asset in Asia if you bear in mind they had the headwind of a 1.4% drop in the S&P 500. US traders will have to pick themselves up and push the market away from 1630 where it closed the month, which coincidentally is the 38.2% retracement of the recent rally from 1536 to 1687. There are a number of interesting themes in Japan, China, Australia and South Korea, but at the margin the news flow has been positive.

Japan, firstly, made an attempt to rally, but gave up once more and is currently at session lows, down 3.3%. Local press is reporting that Japanese firms will look to boost capital spending by 12% in fiscal year 2013, although it will also look at increasing overseas investments by as much as 30%. There is clearly pressure being put on the private sector by the government ahead of the July Upper House elections, while the one basis-point fall in JGB yields (ten-year) can probably be attributed to reports the BoJ may offer two-year funds at its market operations. USD/JPY should become less of a derivative of the equity market this week, and as we move into the July elections the promotional rhetoric should ramp up, thus we wouldn’t be surprised if the lows in USD/JPY have been seen.

It’s hard to remember a day where so much economic data was released in Australia. It’s also quite interesting to see the reaction in the forex market, with AUD/USD pushing higher to 0.9636 from a 0.9571 close on Friday. ANZ job ads have been soft, however it was the slightly below par inventories (-0.6%), retail sales (+0.2%) and wage increases (+2.6%) which raised the risk that Wednesday’s Q1 GDP print could come out below the +0.8% consensus. Whether this has a bearing on tomorrow’s monetary policy decision is debatable, and it seems swaps traders don’t see it having an impact, with market pricing in a fall as a 14% probability, from 17%. We pointed out positive divergence on Friday on the daily RSIs, and although not 100% textbook, with positioning becoming quite stretched (as seen in the 30% increase last week in net short positions to 42,307 contracts), we continue to feel the risks are to the upside, for a short-term bounce.

The ASX 200 looks to have started the new month through slightly more optimistic eyes. OK, the market is down 0.4%, but there has been good buying off the low of 4894 as traders defend the April pivot low of 4883. It seems the banks have been the saviour, with investors warming to the yield on offer, after the recent pullback. Clearly the weekend’s Chinese (official) PMI numbers have helped, although the materials space hasn’t found too many buyers, with the sector down 1.4%. Talk that the Chinese State Reserve Bureau has been purchasing base metals on the international market for the first time since 2009 to 2011, doesn’t seem to be helping, although CME copper is up nearly 1%.

US futures have pushed up modestly through Asia, but aren’t really providing too much in the way of a backbone for support. Our calls are still for a weaker open across the European bourses, although event risk really comes alive today with PMI (revisions) seen in Germany, France and the eurozone as a whole, with no changes expected. Italy also releases PMI numbers for May and the market expects a slower pace of contraction at 46.2. UK and US PMI are released, with the UK set to see expansion after three months of contraction.

There will still be some focus on the Fed Chairman’s Princeton speech yesterday, with the Chairman long on humour, short on commitment for a new term. We sit in the consensus camp that Janet Yellen will be the next Fed president, with Christina Romer a close second.

Ahead of the European open we are calling the FTSE at 6546 -37, DAX 8326 -22, CAC 3937 -11, IBEX 8285 -35 and MIB 17162 -52

ENDS

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