Article / 31 May 2016 at 8:57 GMT

From the Floor: Stock markets could be 'ready to rip'

Consulting editor / TradingFloor
  • Asian stocks gain on broad wave of risk-on sentiment
  • General feeling is that equity markets could be 'ready to rip': Van-Petersen
  • Markets await new cue from US opening after long Memorial Day weekend
  • US data, including PCE inflation, to be closely examined for rate-hike implications
  • If data stay positive, May could prove turning point for global economy: Garnry
  • AUD jumps on better-than-expected 3% growth in building approvals
  • Greek bailout hits snag as finance minister stalls on some reforms
  • Click on this link for a replay of our morning call 

By John Acher

Asian stocks rose broadly on Tuesday on a wave of risk-on sentiment, and the gains in global equities could be extended if Wall Street opens positively after the three-day Memorial Day weekend and macroeconomic data remain favourable, Saxo Bank senior traders say.

“It feels like this market wants to rip on the equity side of things,” says Saxo Bank's Asia macro strategist Kay Van-Petersen, adding: “This is not based on any fundamentals, [but] purely trader talk and the feeling out there.”

“I think we will see a bullish week for equities,” says Saxo Bank's head of equities strategy Peter Garnry. “We had a strong finish last week and it continued mildly yesterday though the US was closed. We are ticking higher in Asia this week."

The Shanghai Composite index jumped 3.3% on Tuesday, boosted partly by news overnight that Goldman Sachs sees an increased probability of China mainland shares being included in the MSCI index.

“We’ve got this general risk-on, particularly across the different equity markets, the only exception maybe being Australia, which has been pretty topsy of late,” says Van-Petersen.

Markets await a fresh cue later on Tuesday from Wall Street, where markets were closed on Monday for the Memorial Day holiday, as well as signals from US data, including the ISM Chicago business survey, Chicago PMI, the personal consumption expenditures (PCE)
price index – a key inflation measure watched by the Federal Reserve -- as well as personal income and consumer spending.

May turning point?

“I think most macro indicators will surprise to the upside this week, showing that May is likely a turning point for the global economy,” says Garnry.

“There already have been some early indications from some of the May indicators in Europe, and today we have the Chicago PMI and consumer confidence,” Garnry says. “Expectations are for a rise in May from April, and I think they will hit those estimates.”

A healthy gain in US personal income and spending would bolster the view that wage pressures are coming through in the US economy, which would lead to higher inflation expectations, and thereby add fuel for the Fed to raise interest rates at least twice this year, says Garnry.

The market is also looking ahead to Friday’s US nonfarm payrolls data for May. “If they are solid, they I think we are really in for a July hike,” Garnry says.

China weighting in MSCI

The heightened possibility of mainland China shares being included in the MSCI emerging markets index could be a major shift, Garnry says. An MSCI decision on inclusion in the index, which hinges on Chinese reforms, lies ahead in mid-June. 

“If you see a full inclusion of China A shares in the MSCI emerging markets index, it would raise China’s weighting to around 45% [from 22.5% currently], and that would be a major shift in global financial markets, and also divert investment flows away from other EM markets,” Garnry says.

If the weighting for Chinese stocks rose to 45% in the MSCI EM index, then India, Taiwan, South Korea and China would have a total weighting of around 75-80% in the index. “I think we really have to follow this one, I think China is really moving in the right direction on their currency, their financial markets, and it is very positive for the global economy,” Garnry says.

Aussie jumps

In the Asian session, the Aussie dollar jumped after Australian building approvals beat expectations with 3.0% growth, against expectations of a 3% decline, and private-sector credit also slightly exceeded estimates.

“We saw the Aussie rallying against all different kinds of currencies,” says Van-Petersen.
AUDUSD rose to around 0.7240-50 from Monday’s close of around 0.7180.

AUDUSD surges on upbeat data, including Australian building approvals:
Source: Bloomberg, Saxo Bank 

Another currency pair with potential for strength is GBPJPY, which Van-Petersen says could gain on prospects for higher US interest rates over the next few months, which would lead to a softer yen, as well as receding worries about Japanese policy and fading fears of a Brexit.

“I think there is a very, very high chance of the Fed moving over the next three meetings. My money is on July, but there are obviously also very, very good arguments for June, and that basically takes a weaker yen coming back on the table,” he says. “The market is still long yen -- I don’t think that is going to be for much longer.”

“Brexit is seemingly less and less of an issue than it was a month ago,” he says, adding that by the time the June 23 referendum rolls around, it may turn out to have been “a lot of huff and puff for nothing”.

GBPJPY has been trading in a congested 160-163 area.

“We seem to be kind of breaking out,” Van-Petersen says, suggeting going long GBPJPY at current levels around 163 with a first target at 166, a second target at 169.50 and a third at 174.00 on a horizon of 2-4 months, though possibly quickly for the first two targets. (For details, see Van-Petersen's new #SaxoStrats trade idea here.)

Van-Petersen says he is also closely watching the digital currency Bitcoin, which jumped sharply on Monday and functions as a proxy for stress on the Chinese yuan.

“Every time we are going through periods of stress in China, you tend to see quite a lot more activity in Bitcoin and more grinding up and moving up in Bitcoin,” Van-Petersen says, showing the following graph of Bitcoin against the Chinese yuan.

Bitcoin reflects stress on the Chinese yuan:
Bitcoin vs yuan

Create your own charts with SaxoTraderGO click here to learn more

Source: Saxo Bank

Greece again

Fixed-income markets were mainly steady, though the 164 price level was rejected again in the German Bund future on Monday, and news that Greece's finance minsiter was hesitating over agreed reforms in the latest bailout deal put the spotlight on Greek bonds, says Saxo Bank's fixed-income trader Michael Boye.

"It's not sure if it is a deal-breaker or not, but something to watch out for in Greek bonds," Boye says.

New York grocery store

Key economic data this week include Tuesday's release of the US personal consumption expenditures (PCE) price index, a measure watched by the Fed. Photo: iStock

John Acher is consulting editor at Saxo Bank

Editor’s note: From the Floor takes advantage of's unique real-time access to Saxo Bank’s various trading desks around the globe to put our community in touch with the developments that matter to their portfolios.
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