The local sharemarket is set to finish September on a down note, with futures pointing to a drop at the open on the back of global declines - with more Deutsche Bank woes grabbing the attention of investors.
The headlines are filled with talk of loss of confidence in Deutsche from a number of hedge funds who use the German bank as their prime broker. Some would see this as a negative as these hedge funds would have done due diligence on Deutsche balance sheet and assessed liquidity and clearly feel there are risks from having funds held with them. Traders will be focused on the open of the German DAX and it seems likely that the media focus will be on their subordinated credit-default swaps (CDS) as well. We should also look at interbank funding costs to see if there is a genuine credit risk fear, although I suspect that shouldn't be the case.
1. ASX: The ASX 200 looks set to open at 5442 (-0.5%). BHP and RIO had huge sessions in London (BHP rallied 6.5%), but if we use its American Depository Receipt (ADR) we should see a fairly flat open. SPI futures closed at 5429 -34points or 0.6%.
2. Volatility: Some pick up in implied market volatility with traders happy to pay up for portfolio protection. The US volatility (VIX) increased 14%, although at 14 the 'VIX' is hardly indicative of a huge move in either direction.
3. Equities: The S&P 500 fell 0.9%, with banks and health care at the heart of the selling. The moves lower were broad based with 88% of stocks lower on the day and volume (through the market) 13% above the 30-day average. On Wall St, Dow -1.1%, S&P 500 -0.9%, Nasdaq -0.9%. In Europe, Stoxx 50 flat, FTSE +1%, CAC +0.3%, DAX -0.3%
4. Deutsche Bank: Some focus on reports a number of hedge funds, who used Deutsche Bank as their prime broker were pulling business. Deutsche closed up 1% in Frankfurt, but has dropped 6.7% on its US listing. Our call for the DAX (if it were to open now) is 1% lower on the open and eyeing a test of the 16 September low of 10245. The German index has effectively moved sideways since mid-August and one questions if it is ready to trend lower.
5. US: US Q2 GDP was revised up to 1.4%, although personal consumption was revised 10 basis point slower to 4.3%. Keep a focus on core PCE (personal consumption expenditure) and personal spending at 22:30 aest. Core PCE is the Fed's favourite inflation read, so a number higher than 1.8% (consensus is for a slight tick up to 1.7%) would push up longer maturity bonds and get the USD bulls excited. By way of a guide, US Q3 GDP (released on 28 October) is tracking at 2.8% if we go off the Atlanta Fed's GDP model. We would expect Q4 to pull back closer to 1.5% however.
6. Energy: All eyes on oil yesterday, but more sanguine trade have been seen today. US crude hit a high of $48.43, but settled a lower. Watch how price behaves into $49.00 (and the 19 August high), a break here takes us to $50, but given the question marks around the execution of OPEC's production cuts one suspects the bears will be happy to accumulate short positions into the figure.
7. Currencies: AUD/USD traded in a range of $0.7710 to $0.7623 and currently resides at the lower end of that range. Traders will be eyeing US inflation tonight, but technically we have seen a bearish key day reversal (i.e. price trading above Wednesdays high and set to close below the low). We should watch for a lower low and this would suggest the trend higher that started on 13 September could be over. The bigger moves in the AUD were seen again the CHF and EUR. EUR/AUD could rally from here into the A$1.4800 level and I would be trailing stops higher on a break of this level. Traders are still focused on USD/JPY, with good selling coming into the pair into the 20-day average at ¥101.58. It seems unlikely we will see a break of ¥100.00 today, but this is the level all FX traders are watching.
8. Footy fever: Clearly volumes will be an issue today with the Grand final holiday in Victoria, so expect struggle for direction after the unwind of the auction. We need a close today above 5431 to print back-to-back gains for the Aussie index, so that is the target for today. Lots of talk of grand final on desks today. I am calling Doggies by 15.
No need to panic
Taking all the leads into consideration, the ASX 200 is eyeing a weaker open but there will be absolutely no panic. A close above 5431 is the target, as we will then print back-to-back rallies, something we haven't seen since late July. Data wise we get Aussie (August) private sector credit at 11:30 AEST (consensus is for +0.5% month-on-month), although I don't see this affecting the FX or rates market too greatly. Japan (August) core inflation is released at 15:00 and the market expects this to slip to 0.4%, but again we don't expect a huge reaction. As mentioned in point 7 AUD/USD had a key day reversal, so a lower low could suggest the recent trend is over.
What happened yesterday
Investors piled into energy shares on Thursday in the wake of a surprise agreement by major oil producing nations to cut output levels in the coming months.
The benchmark S&P/ASX 200 and the broader All Ordinaries Index each rose 1 per cent to 5471.3 points and 5558.2 points, respectively.
The energy sector roared 6.3 per cent higher, enjoying its best day since July 2015, despite oil prices coming off the boil a bit during the session as the lack of detail in the agreement hit home for investors.
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