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8@eight: ASX set to open higher but miners under pressure

ASX futures are pointing to a firmer open, despite a lack of strong leads overnight.

Overseas trading suggests there'll be some weakness in miners like BHP Billiton and Rio Tinto after metals prices fell on China's latest trade data, but the banking sector looks likely to have a better day.

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All eyes on Chinese inflation and currency

As China's currency reaches the weakest levels of the year, could further weakness bring out volatility and spur weakness in the AUD? (This video was produced in commercial partnership between Fairfax Media and IG Markets)

China in focus

  1. China once again takes centre stage today, after yesterday's disappointing September trade data, with the market awaiting inflation reads both at a consumer and business level at 12.30pm AEDT. Looking at the reaction to the China's trade data, there hasn't been a huge fallout from the 10 per cent drop in exports, or the sub-par import print, although perhaps one shouldn't be too surprised given the weakness seen in the recent Korea and Taiwan export data. Copper was perhaps telling the purest read-through, with the price dropping 2 per cent from yesterday's ASX 200 cash close. Today's producer price inflation read is largely expected to improve a sizeable 50 basis points to -0.3 per cent, which would be the lowest levels of deflation seen at a business level since 2012 and a remarkable move from -5.9 per cent seen in late 2015. At the risk of sounding like Donald Trump, the weakness in China's currency, married with a sizeable fiscal stimulus, is helping China export its deflation to its trading partners.
  2. The S&P; 500 rallies off key support: One should also pay attention to US bank earnings tonight, with JPMorgan, Citi and the new bad boy of banking, Wells Fargo, set to report numbers. Looking at the S&P; 500, the price is starting to turn more bearish trading through 2140, where good buyers were seen from September 25, and on to the September lows of 2116. If there's a break of 2116, I suspect we will see the bears really come out to play and market volatility ramp up, so this is the line in the sand. A closing break of 2116 and I would expect stronger downside risks at a time when US corporates are not allowed to buy back stock. Dow -0.3%, S&P; 500 -0.3%, Nasdaq -0.5%.
  3. US rates: Keep an eye on the XLF (US financial sector ETF) as a guide towards sentiment to the banks. While earnings are one input, traders are really using the banking sector as a vehicle for trading a steeper US yield curve and will keenly buy when US rate hike expectation increase. If you feel the Fed will hike in December (current probability is 65 per cent) and perhaps more aggressively than 21 basis points of hikes priced in for 2017, then the US banks are a buy. The XLF ETF would be my weapon of choice.
  4. Local equities: With US equities finding buyers off strong technical support, we should see modest buying support in Asia, with the ASX 200 likely to open at 5445. A close above 5467 would mean we close higher on the week, but there don't seem like too many bullish catalysts today. SPI futures are up 15 points from the re-set (5pm AEDT), with the various ADRs suggesting slight weakness in BHP, but better days in the Aussie banks, largely as a result of a fall in bond yields. In New York, BHP -2.7%, Rio -3.1%.
  5. Currency markets are where the action is: It seems the while US equity markets could be finding an increase in volatility, we are already there in FX land. There have been some excellent trading opportunities of late, with the US dollar flying high, although the greenback failed to really push through the July highs overnight, which would have suggested adding to long positions. The British pound has been smashed, but I wouldn't be surprised, given everyone in the world is short to the hilt, to find short covering into the $US1.2450 area. CNH (Chinese offshore yuan) is trading at the weakest levels of the year and having the real potential to spur on greater volatility from here in emerging markets, especially now Trump will have to pull something huge to win the November US presidential election and with Hillary Clinton taking a far softer stance on China's currency weakness.
  6. AUD/USD has rallied nicely off the 75 level, largely as a result of better buying in the US bond market (removing some US dollar valuational support). Philadelphia Federal Reserve president Patrick Harper's comments about his concerns around the election and the side effects around a drop in confidence have been noted. Commodities certainly haven't really assisted any feel-good factor, with copper and iron ore under pressure, while US crude has seen a whippy session.
  7. Oil has a whippy night: The oil market has reacted to a messy weekly US Department of Energy inventory data release, with US crude futures falling 1.7 per cent in five minutes. Crude inventories rose by the most since April (+4.85 million barrels), however, gasoline and distillate inventories fell sharply, seemingly causing the oil market to reverse and rally. Watch for a break of the June highs ($US52.00) next week, as it seems the bulls still have the upper hand here. Brent crude +0.2% at $US51.90 a barrel.
  8. Strange goings on: While not necessarily relevant to markets I stepped off a plane from Dubai this morning, only to see much talk about Marmite rationing in the UK and a gorilla breaking out of a zoo … it all sound like London has stepped back into a post-World War II era. Brexit is seemingly having clear side effects. 

What happened yesterday

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 Photo: Peter Braig

The Australian sharemarket fell for a second day on Thursday as investors again shed resources stocks and banks slipped on interest rate speculation. 

At close of trade the S&P;/ASX 200 Index was down 39 points, or 0.7 per cent, to 5435.5, while the All Ordinaries fell 37 points, or 0.7 per cent, to 5518.3.

Description  This column was produced in commercial partnership
   between Fairfax Media and IG