Global politics dominate the minds of traders and investors on the open this morning, and it will do going into US trade as well, with expectations that we could get colour on the Republican blueprint on tax reform. That said, there has been talk the announcement is to be pushed back to Wednesday, which makes sense given Donald Trump is scheduled to speak in Indiana.
1. What's ahead this week: Amid a strong step-up in the rhetorical war between Donald Trump and Kim Jong Un (and other NK officials), and growing divide between Trump and various US sport codes, US tax reform should be a clear dominant catalyst for sentiment this week in my opinion. That said, Janet Yellen's speech tomorrow (amid a raft of Fed speakers due this week) could give clarity on her stance around a December rate hike and markets will pay focus to this event risk. In the immediate short-term though, markets are focusing on the results of the German and New Zealand elections, where both have resulted in a prolonged period of negotiations ahead to form coalition governments.
2. NZ election: Certainly the New Zealand election initially seems to be causing some angst in NZD, with NZ First leader Winston Peters refusing to commit either-way and traders are still not ruling out the prospect of a coalition between NZ First and Labour. Most still sense that the probability trade is for a National led coalition with NZ First, but the broad-based selling in the NZD suggests there is no conviction to trade this view. Markets obviously dislike uncertainty.
3. Europe: There is more a pronounced offer in the EUR this morning, with EUR/USD trading into $1.1894 at one stage, with EUR/GBP into ??0.8816, although liquidity is poor, so let's see how price fares when we get into the latter stages of Asian and early European trade. Certainly, Asia hasn't been overly concerned about holding GBP's despite the Moody's one-notch downgrade to the UK's credit rating late Friday and it will be interesting to see if there is any selling in the UK bond market on open; one suspects it will also be limited.
4. Merkel wins: The German chancellor has the job now to form a coalition, after securing another term as chancellor, although her polling was worse than expected, while the right-wing AfD party, polled far better than expected, with 13.5% of the votes (a gain of some 8.5ppt) and have secured representation in the Bundestag. The water is starting to settle here and there are a lot of questions that markets are asking and that is before we have seen a coalition formed which in itself may not happen this calendar year. All the talk seems to be around a "Jamaica coalition", with representation between the CDU/CSU-FDP and Greens. What will be the impact on EU integration, reforms and Brexit?
With FX markets open and underway, it's all eyes on the 08:00(AEST) futures open, where the wash-up of the weekend political news shouldn't impact risk to greatly. USD/JPY is a good guide here and that pair is trading a touch higher at ??112.15, suggesting S&P 500 futures should have a quiet open. US crude closed +0.2% on Friday, but should find support this morning with the weekly US Baker-Hughes Rig count falling a further five rigs to 744 rigs, while Brent crude looks quite bullish here, with future contract in clear backwardation.
FTSE 100 futures open at 10:00 aest and this may provide a guide around sentiment into the broader Euro region, but I would be paying closer to Eurostoxx and DAX futures open at 16:00 aest, which I would expect clients to be active in trading and one suspects modest net selling should be seen.
5. ASX: Our open of the ASX 200 currently sits at 5693, so we should see the market build on Friday's gain. What is clear though is the 5800 to 5670 range the ASX 200 has been in since late May is being respected and I would continue to define the strategy this week.
6. Stocks to watch: Materials stocks still look vulnerable, with spot iron ore closing -3.8% on Friday and taking the losses from the 22 August highs to 20.8%. Dalian iron ore futures closed -1.7%, while steel and coking coal futures fell 0.8% and 3.7% respectively and the bulks, along with moves in copper, which despite finding small buyers on Friday closed lower for a third consecutive week. BHP's ADR closed up 0.8%, however, so one suspects BHP's variability to petroleum should support on open. Financials were the driver last week, which won't surprise although we are seeing the sector move inversely the Aussie government bonds, which is interesting because for some long if bond yields move higher so did the banks.
7. Wall Street:
The S&P 500 closed slightly higher on Friday as worries about Washington's latest healthcare legislation overhaul proposal eased and investors shrugged off concerns about US-North Korea tensions even as Apple weighed on the market.
The S&P 500 Index, churning in one of the tightest ranges in its history, rose slightly, continuing an eight-day stretch without a move of more than 0.3 per cent. The Dow Jones Industrial Average drifted downward, while the Nasdaq Composite Index posted a marginal gain.
8. Market watch:
SPI futures up 7 points or 0.1% to 5679
AUD +0.4% to 79.62 US cents
On Wall St: Dow flat, S&P 500 +0.1%, Nasdaq +0.1%
In New York, BHP -0.1% Rio -0.1%
In Europe: Stoxx 50 +0.1%, FTSE +0.6%, CAC +0.3%, DAX -0.1%
Spot gold +0.5% to $US1297.30 an ounce
Brent crude +0.7% to $US56.81 a barrel
US oil +0.2% to $US50.67 a barrel
Iron ore -3.8% to $US63.56 a tonne
Dalian iron ore -1.7% to 461 yuan
LME aluminium -0.6% to $US2158 a tonne
LME copper -0.4% to $US6457 a tonne
10-year bond yield: US 2.25%, Germany 0.44%, Australia 2.79%
This column was produced in commercial partnership
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