Since the global equities market rally inspired by Trump inflation, the trading community is now falling into two camps. The first believe this equities and commodities rally is just getting underway, this is highlighted by the trading and hedge fund investment houses being net long everything from equities to property and commodities. The second, is the group that are waiting in angst for the potential correction or significant pull back for an entry point but they watch the markets march higher every trading day.
Two schools of thought
1. Oil: In the past few days the Oil futures market has moved into an event called backwardation, that is where the front spot price is higher than longer futures settlement price. This suggests the market is concerned about an immediate shortage and are taking delivery. This often happens in the soft commodity market when there is a weather event or crop damage can create a shortage and future delivery is questionable. It is important to remember the difference in the futures market quote and the current spot price will eventually be closed as expiry nears. In the oil market this can play out two ways, the future demand will fall (unlikely) and the spot price will fall to meet the then futures price. To maintain delivery, oil buyers will have to eventually move to the futures price to ensure delivery, in a falling production, rising consumption market, oil only has one direction, higher. And once again the market will be in Contango where the futures price is higher than the current spot price. In late overnight trading, the spot price of oil has again traded higher though the $US54 resistance level in place for the past nine weeks. At $US55.65 a breakout signal will occur, forcing a short cover rally with the potential for a move back to the June 2016 high's of $61.00 and on its way to the OPEC inspired $65bl.
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The busiest week for the ASX 200 earnings season
Over 75 companies will report as the cyclical side of the market opens its books. The big names to watch include BHP, FMG, Woodside, Woolworth, QANTAS and many, many more.
2. Wall Street: Coming back to our two groups of market participants, for markets to continue higher all of the players must be of one mind, bullish. The Dow moved higher again, however the Dow transports came off a full one percent or 100 points, the Nasdaq fell by half a percent at 5835. This is often the warning shot across the bow that price weakness may be coming and may offer an entry point to those left behind.
3. Commodities: Commodities metals also took some heat with Iron ore falling three percent and Copper moving lower by three percent to $2.65 and under a key support level at $2.70.
4. ASX: Our SPI futures are down one point, and are showing no direction for the open today, we will see a large volume day as happens after an ASX options expiry yesterday. The BHP ADR at $25.32, shows a lower valuation from yesterday's close at $25.84.
Financials look to be the drawcard today with the CBA ADR pricing in at $84.12 a 0.64 cent gain from yesterday.
5. Currencies: The AUD has rallied back over the key 77 US cent level overnight after the US dollar declined.
6. Reporting season: Automotive Holdings, Mayne Pharma, Super Retail Group, Charter Hall Group, Regis Healthcare, Billabong and NextDC.
7. What's on: RBA governor Philip Lowe is due to testify before the House of Representatives Standing Committee on Economics, in Sydney, at 9:30am AEDT.
8. Market watch: SPI futures is down 4 points at 5755.
AUD +0.1% at 77.1 US cents
On Wall St, Dow Jones +0.1% to 20,799, S&P; 500 flat at 2363, Nasdaq -0.5% 5830
In New York, BHP -2%, Rio -3.7%
In Europe, FTSE Euro Top 100 -0.2%, FTSE 100 -0.4%, DAX -0.4%
Spot gold +1.1% at $US1250.24/ounce
Brent crude +1.2% at $US56.50/barrel
Iron ore -3.1% at $US91.34/tonne
Copper -3% at $US5859/tonne
This column was produced in commercial partnership
between Fairfax Media and IG