Global Markets Overview – August 27, 2014

Thinning trade sees US to 2000

The uptrend momentum on the S&P has continued unabated, as it breached and held 2000 points for the first time in its history this morning.

US consumer confidence reached its highest level since October 2007 and there are no signs of rate risks inside the next six months on current talk from the Fed. The risk trade remains the trade for investors and traders alike, and dips remain shallow and lack conviction. I see this trend continuing until the end of December as policies are locked in and momentum continues.

This momentum is currently driving everything in Europe too. EUR/USD continues to slide as ECB speculation ramps up (the same can be said for EUR/AUD). Peripheral European bonds hit record low yields on the same speculation, as the Bernanke put becomes the Draghi put - sending European bourses higher too.

However, looking at the depth of trade overnight, one thing that may see a shallow dip coming is volume - US trade volumes were 20% below the daily average. The reaction to the headline durable goods order was quickly undone, as the record jump in orders was attributed to a UK air show that saw aircraft orders surging 318%. Stripping out these orders, durable goods actually contracted by 0.8%, suggesting consumption of US goods is tampering on dower consumption from Europe and Asia. The lack of trade may see some bearish sentiment in the next few trading sessions.

Ahead of the Asian open

The subdued trading in the US is likely to flow into Asia; there is an eerie quiet in Asian markets while Japan waits for Friday's 14 pieces of macro drop data. The data on Friday is likely to shape talk from BoJ and Governor Kuroda for the coming quarter.

The bets in Europe on increased stimulus are matched by bets in Japan. Expectations the BoJ will further expand its balance sheet has seen the Nikkei strengthening, and that is likely to continue over the next 48 hours of trade heading into Friday. The CPI read on Friday is expected to have stagnated at best. Stripping out the consumption tax impact of 2% from last month's CPI read, excluding fresh food, was 1.3%. Any read below this will see USD/JPY and the Nikkei higher, as it will only fortify that the speculation will come to fruition.

The Australian market will see 13 points being lost on the open as Telstra, QBE, Santos and Woodside all turn ex-dividend. We are currently calling the ASX 200 down five points to 5632, which suggests the broader market will be mildly positive considering the player going ex.

However, iron ore is matching to lower lows - down a further 0.3% to US$88.90 a tonne, a two year low. On estimates from UBS, Atlas Iron's production cost is US$89 a tonne, meaning on a spot price basis it is making a ten cent loss per tonne from today. Next in the firing line is Arrium at $83, then Mount Gibson at $80. High cost producers are going to find the coming few weeks and months very tough as the market evaluates how much margins are being squeezed. Average prices are falling at these mid-cap plays. This is likely to see materials continuing to drag on the ASX's match to 5700 points.

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