Daily Market Digest: What You Need to Know Every Day

[IvanGlobalPrime]

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Market Thoughts Sept 25: ECB Keeps Laying The Ground For A Normalization Of Policies

Key Themes at Play in the Forex Market

The Sterling found enough buying interest to revert some of its recent sizeable. The currency has transitioned from being the worst performer last Friday to accumulate the highest gains on Monday. A slew of more constructive Brexit headlines were sufficient for short-term flows to return back into the Sterling. German’s European affair said a Brexit deal is still possible by November, while UK’s Brexit secretary Raab sounded fairly optimistic that a deal is still within reach in the next 8 weeks. Be ready for the constant mix of headlines over Brexit to become the norm in coming weeks as politics rule the price.

The selling pressure was felt in the US equities as the ongoing trade tensions and US political issues hogged the headlines. On the latter, reports indicate that US Deputy Attorney General Rosenstein will meet Trump on Thursday to present his resignation, with some arguing that it may have been behind the imbalance of supply seen in stocks. On the China trade war front, while the Asian giant appears to still be willing to sit down, they are not going to budge, and more signs keep emerging that they are prepared for a long-lasting fight if needed. For now, markets appear to have discounted enough into the price of assets.

ECB’s President Draghi animated the market with some juicy commentary on inflation expectations. The policy-maker, in a speech on the state of the EU economy at the ECON Committee in Brussels, said that he sees “relatively vigorous pick up in underlying inflation”. The headline is further evidence that the ECB is slowly but surely moving towards the normalization of policies. While the Euro failed to hold onto its gains against the USD, it sent both the 2y and 10y German bond yields into new trend highs at -0.51% and 0.51% respectively, as the yield curve keeps steepening to the highest levels since early August ‘18.
A major risk event for the markets this week, aside from the FOMC and the BOC policy meetings, is the Italian budget conundrum, which is part of the reason the Euro couldn’t keep the Draghi-led gains. We saw a spike in the Italian 10-yr bond yield as a reflection of the growing concerns ahead of the budget plan going through the parliament this week. The fears orbit around the Italians overblowing EU’s budget deficit limits on the promise of a basic income, which if true, is rather unrealistic unless they resort to a larger deficit in violation of EU treaties. The range that appears to be the make or break for the market is 3%, with any deficit larger to translate into a higher Italian premium and a lower Euro. Even above 2% may see some jitters.

Shifting focus to emerging markets, it’s hard to imagine that EM currencies are out of the woods in an environment where Central Bank around the world is gearing up for an era of normalization. The latest observations by ECB’s Draghi is another reminder that the Central Bank is laying the ground to join the likes of the Fed, BoC, BoE in the tightening of policies. The steepening of the US curve and higher ‘real’ US yields makes it a toxic combination that may see further outflows of capital away from EM back into the US. The major Central Banks left in limbo having to still deal with limited inflationary pressures are the Asian/Oceanic economies, the likes of the RBA, the RBNZ or the BoJ.

There were little signs that the heightened trade tensions between the US and China are having any significant impact on German business confidence. The IFO business climate came at 103.7 vs 103.2 exp. On the grand scheme of things, the reality is that the economic projections have decelerated a notch with the economy expected to grow at an annual pace of 1.8-1.9% vs 2% earlier on the year. Sooner or later, the uncertainty emanating from US-led trade wars may feed into confidence.

Our prop macro risk-weighted index remains above the 100 hourly moving average. As a rule of thumb, as long as the index is underpinned above the indicator, we should expect the overall market conditions to remain supportive in attracting ‘risk on’ flows. Last week, the index broke outside a pennant pattern on the weekly chart, reinforcing the view that it’s ‘game on’ to keep playing the reflationary trade as equities keep rising in combination with the steepening of the US yield curve and higher DM bond yields.

The price of Oil saw a major breakout above the sticking resistance of $70.00 following news that OPEC and allies are not considering to boost output. The rise in Oil further anchors the notion of the reflationary environment in play amid higher energy prices. This has direct implications, especially for a region like the European Union, strengthening the case for inflationary pressures to stay relatively elevated.

[IvanGlobalPrime]

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Market Thoughts Sept 27: FOMC Delivers Near Term, Market Grows Less Convinced

Key Themes at Play in the Forex Market

Following the injection of volatility by the Federal Reserve policy statement, which as widely expected, rose its interest rate by 25bp to 2-2.25% range, the performance by the USD was far from impressive although when all things considered, it feels as though at least it saved the day. We see a bearish outside day on EUR/USD and USD/JPY, a doji-like indecision candle in GBP/USD and USD/JPY, a major absorption in AUD/USD and NZD/USD, while the Canadian Dollar remains unloved as the prospects of a NAFTA deal worsen short term, which translated into a bullish breakout of the 1.30 key area in USD/CAD. The overall positive USD performance didn’t help gold, while oil prices keep the bullish momentum, holding onto recent gains above $72.00. The bearish outside day in the S&P 500 does not bode well for risk.

We kicked off the Fed outcome by an algo-led sell-side campaign to exploit the initial policy statement in response to the ‘accommodative line’ being removed, which was a dovish sign as the market interpreted less scope to raise rates in the future. The Fed kept is a firm view that the jobs market remains strong and that risks remain roughly balanced. When comparing the dot plot of today vs the June meeting, no real adjustments took place, with the majority of members still expecting a range between 3% and 4 %. The figures below still suggest 3 rate hikes during 2019 and only one in 2020. However, it gets interesting if one analyzes the first time projections were published for 2021, as the expectations are for no further hikes, and here lies part if not most of the reason for the flattening of the curve.

In terms of the Federal Reserve forecasts, the changes were not impressive for the interest of USD buyers, as the growth estimates were revised slightly higher for 2018 (no surprise here), with no positive adjustments in the unemployment rate, and a slight downgrade on the inflation outlook heading into 2019.However, something to take into account going forward as it may remove support for the USD and turn the Fed more cautious, is a note from BNY Mellon, stating: “Survey-based data (“soft” data) in the US has been consistently running stronger than data related to real activity (“hard” data).”

During Fed Chairman Powell speech, the main takeaway is how he played down the removal of accommodative from the statement, making the case that data dependency will be far more relevant going forward than the rather anecdotic and merely descriptive nature of having removed accommodative in the statement. That helped the USD recover its early losses as it reinforces the notion that the path of least resistance, based on the US data, is towards higher rates. As such, the market is now pricing in 75% chance of another hike in Dec.

When scanning through the post-Fed reaction in fixed income, the sharp drop in the 10yr US bond yield from near its May peak at 3.10% down to 3.05% has led to a significant flattening of the yield curve. While the short-term outlook for rate hikes firms up, as reflected by the subdued move in the 2yr bond yield, the market is growing less convinced over the assumption of rates staying above the neutral setting heading into 2019. The drop in the S&P 500 further anchors the view that Wed’s market play is to dial down bets on the reflationary trade (widening of yields), which as a reminder, is one driven by the optimism towards anera of higher growth and inflation.

The German bundswere able to capitalize the FOMC outcome by narrowing the US yield spread advantage, which should play in favor of the Euro as an underpinning factor should riskconditions be sustained at relatively stable levels. One focal point for the Euro is the Italian budget deficit, and depending on the official numbers, which are due in the next 24h, we will see volatility pick up. The latest by the Italian press point at a deficit target of 2.4%. The Italian bond yields came off on Wednesday, an expression by market forces that they expect the Italians to walk the talk and respect the limits imposed by the EU.

The risk sentiment environment, judging by our proprietary macro risk-weighted index (RWI measures 9 risk-sensitive assets), has now broken below the 100-hourly moving average for the first time since Sept 11. The sharp downward move implies caution around bidding up risk, and in the currency market, this might translate in reservations to be overly committed to play longs the likes of commodity currencies (AUD, NZD, CAD) and be tentatively positive for JPY, USD as safe-haven bets. On the big picture, the weekly macro RWI recently broke a pennant continuation pattern, so one must keep in mind that the overall theme is still supportive of ‘risk on’ trades.

A recent development that must be emphasized is the notion that the market is starting to look past the US vs Chinese trade dispute as a source of concern short term. The cancellation of bilateral talks over the weekend led to some opening gaps on Monday, but it’s fair to say that by and large, the positive performance by the Chinese equities and the recovery in risk leading up to the FOMC is the proof in the pudding one needs to come to grips on the realization that the market has moved on. China has plenty of tools at their disposal to mitigate the short-term negative impact in the economy, and it looks as though the offsetting effect of the trade tariffs via a lower yuan exchange rate is at play once again, as the local currency is edging closer to a potential breakout of the Sept range between 6.82-6.88.

On emerging markets, our prop EM currency index, which monitors 7 of the most EM-linked currencies has come to a crossroads this week, as it retests a crucial level of resistance now turned support circa 68. On Wednesday, weakness in the Indonesian rupiah, Argentine peso and the persisting decline in the yuan kept the index bid (negative for risk), but the latest move is characterized by a further recovery in currencies the likes of the South African rand, Russian ruble or Turkish lira, and that’s keeping EM currencies from turning into a renewed source of concern near term. As long as moves are not disorderly, we can look elsewhere for now.

In terms of the other major Central Bank that was due to publish its latest monetary statement, the RBNZ just came in and in line with market expectations, the rate was kept unchanged at 1.75%. Expectations remained the same for the rate projections heading into 2019/2020, stating that the uncertainty around inflation keeps them with an open mind to adjust rates up or down. Overall, the NZD reaction was subdued, as a reflection of the absence of new insights, which tends to be more probable when there is no media conference as was the case today. You can find a note on how the latest statements compare here viaMNI.

A theme to follow closely remains the NAFTA talks, and the sell-off in the Canadian Dollar on Wednesday should be interpreted as a market discounting a no deal in Sept, with the hard deadline of Sept 30 looking like a very distant prospect to be met. The announcement by the White House about the publication of a trade agreement between Mexico and the US opened the can of worms and led to the risk of Canada being left out. There is still time, but the latest news is far from promising as Trump went on his latest bluster noting that Canada has treated us very badly in trade, adding that they are not getting along at all with Canada’s trade negotiators. But it gets worse. Pres Trump has reportedly rejected a one-on-one meeting with Canada PM Trudeau. However, Canada PM Trudeau Spokeswoman said that Trudeau did not request a one-on-one meeting with Trump. Go figure. That’s the lay of the land with Trump.

Thanks!

[IvanGlobalPrime]

Hi all,

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Market Thoughts Sept 28: USD Strength Assisted By Italy, Month & Quarter-End Flows

Key Themes at Play in the Forex Market:

The market transitioned from the FOMC into its new focal point, the Italian budget deficit. From very early in the European session, a clear clash of views over the spending targets by the Italian coalition government led to a major sell-off in the Euro that lasted until the very last minutes of NY.

It was this broad-based weakness in the shared-currency and assisted by other flow-related factors, that benefited the USD throughout as the top performer. In the Italian conundrum, the Deputy PM Di Maio eventually reported that the government had reached an agreement on a 2.4% deficit GDP target for 2019, confirming the disappointment by the market and well manifested through EUR price action.

A quick look at the currency pairs leave no ambiguity, the USD stormed back with tremendous strength, as reflected by the 120 pips sell-off in the EUR/USD. The Sterling followed suit and if 1.3050 now gives in, the cracks in the daily bullish structure will be evident. Meanwhile, USD/JPY printed a very commanding bullish outside day, negating the FOMC’s bearish reaction; note, this move is in line with the pick up by large specs to play longs as per the latest CoT data.The Aussie was inevitably dragged towards 0.72, as was the Kiwi down to 0.68, while surprisingly, the Swiss Franc, which continues to behave strongly correlated to the Euro, had a terrible day, and we see USD/CHF now testing the 100dma. The Canadian Dollar put up a fight against the USD, rejecting 1.3050. Despite the USD strength, Oil held firm above 72.00, which comes in stark contrast with the performance of Gold, hitting a one month low. Global equities saw gains on Thursday, as the Nikkei 225 breaks above 24k, the DAX 30 printed a bullish outside day and is now retesting the 100dma, while SP500 recovered the FOMC-led losses, up +0.3%.

The moves in the USD today left me scratching my head, and I suppose this has to do with the juncture we found ourselves. The rolling into quarter and month-end led to a rebalancing of portfolios and when these readjustments occur, there is a risk for flows to play a role in market dynamics, leading to a temporary distortion of the usual behavior we are accustomed. Otherwise, the strength in the USD is hard to justify amid rising equities or the subdued performance by US bond yields.This is a time when foreign-denominated currency holders, the likes of banking institutions, must also hedge their exposure while in need to plan cash balance into year-end. This leads to lending being more restrictive (higher funding costs), resulting in cross-currency basis swaps to have an effect; this all underpins the USD too.
The most powerful approach that as traders we can tap into is to seek congruence between the price action and fundamentals, only when we merge them together, we can gain more clarity and conviction. And I must say that judging by the performance of the Italian stocks on Thursday, with the MIB up by over 1.3%, along with the Italian bond yield up a mere 5bp to 2.87% from 2.85%, I think the Italian budget saga is soon going to become a sideshow that markets are going to look past. Remember, earlier this week, I also stressed how the market had spoken via higher Chinese equities or a jump in risk appetite despite the cancellation of trade talks between the US and China, implying that Chinese vs US trade war has become a secondary focus for now.

There are many moving pieces, but I believe, the market is soon going to move away from the Italian budget impasse, as has done with China trade, and attention will quickly be moving back to fixed income, economic data, Brexit, and NAFTA to determine the next movements in capital flows and currency performances.

In the data front, we saw some mixed data out of the US on Thursday. The US final GDP came unchanged at 4.2%, while US durable goods orders left a bitter/sweet taste, with the headline number at 4.5% vs 2% exp, while the core figures dropped to 0.1% vs 0.4%. Other second-tier data in the US gave traders reason for optimism, even if the US trade balance got deeper into the red, which is only going to worsen the rhetoric between the US and other trading partners. When it comes to Europe, the German CPI printed a strong number, coming at an annual reading of 2.3%, which will undoubtedly support the notion that the ECB is slowly but surely preparing the markets for an exit of its QE era and moving into a tightening phase mid-2019.

On Brexit, there was an absence of fresh news in the negotiations. The fairly low volatility in the Sterling is a testament of that. The brinkmanship by UK and European politicians of trying to convince the other party about their own deal is a dangerous game currently at play. On Thursday, UK Foreign Minister Hunt reiterated that the chequers in the basis of any agreement, while EU’s Brexit negotiator Barnier keeps harping on the notion that they are still working with the goal in mind for an agreement with the UK to avoid a no deal.

The NAFTA negotiations between the Canadians and the American went on another day without any breakthrough. A comment by the Canadian PM Trudeau that it’s still very possible to get a good and fair deal allowed the Canadian Dollar to perform better on Thursday. Looking at the big picture, the currency has been punished, especially this week, as the negotiations look set to drag on for weeks potentially. For now, the market has been discounting both countries to meet the deadline of Sept 30. The hints one gets from Trump’s random bluster is not the most promising, as he recently noted that Canada has treated the US very badly in trade, adding that they are not getting along at all with Canada’s trade negotiators.

[IvanGlobalPrime]

Hi all,

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Key Themes at Play in the Forex Market

Notwithstanding a round of sell-off into the month and quarter end, the USD ended on a strong footing last week, especially against the likes of the yen, Swiss franc, euro or pound. Less so against the oceanic currencies or the Canadian dollar. The latter has been boosted on the prospects of a NAFTA deal.

One aspect worth highlighting is the commanding bullish outside week on the DXY last week. While factors such as the month and quarter end flows were at play, price action is king and it definitely feels like a major victory by the bulls. The recovery in appeal by the USD comes on the heels of an FOMC last week that reinforced the notion of a hawkish stance short term. However, for the USD to further anchor its price action advantage, we now need to see a few scenarios play out. These include risk aversion conditions which lead to safe-haven bids, a renewed steepening of the US curve, or further pressure in Italian yields, and that alone by default may see the continuation of last week’s theme where market participants resort to the attractiveness of the USD as an alternative option. Also, one must keep a close eye on the 10-yr US yield and whether or not acceptance continues to be found at 3%, also key this week.

The situation in Italy remains very fluid, as Italy stick to its 2.4% budget deficit to GDP target. The country is flooded with high debt and this episode of defiance against the European Union won’t help. As a result, the Italian 10-yr bond yield, which has acted as a barometer, spiked to 3.12% last Friday, the highest levels since May, when fears of the populist government coming to power were at its peak. October 15th is the time to submit the budget to the European Union for review. One should expect both sides to play hardball but overall, the month of October is off to a rough start for the Euro and the prospects are not looking any better as long as Italy dominates the headlines. Keep an eye on the Italian yield as the ultimate gauge for the risks emanating from Italy. Also notice that unlike last Thursday, on Friday we saw Italian stocks sold aggressively, and that’s going to weight further on the negative sentiment in the Euro, as its evidence of a loss in confidence towards Italy. Remember, one of the extreme yet conceivable scenarios is for the populist government of Italy to threaten the EU with an exit of the EUR. I personally don’t see that happening at all, but the volatility it may cause could be quite damaging for the outlook of the Euro short term, even if that’s a debate for another time altogether.

The Canadian Dollar has received a trifecta of positive inputs all at once. An upbeat Canadian GDP reading last Friday, which came at 0.2% vs 0.1% exp, coupled with USD selling flows during the month and quarter end led to intense selling. The straw that broke the camel’s back as Asia open on Monday is the emergence of new reports that seem to suggest the US and Canada are very close to a NAFTA deal. If the latter is confirmed, the Canadian Dollar should see a wave of buying interest throughout the week, with the usual initial retracement as short-term momentum trader take profits, leading up to a temporary removal of liquidity, before the real money steps in to keep riding the trend.

A headline over the weekend by Fed’s Williams, which in a way has been the member endorsing the most the concept of neutral rates, confirmed that the Fed is moving away from utilizing neutral rates as a communication strategy. Williams said neutral rates is less relevant as policy normalizes. This is very much in line with Fed’s Powell position to simply adapt to economic data, and it somehow vindicates that the Fed can’t come to an agreement where the short term neutral setting stands.

Over the weekend, we saw the Chinese PMI figures missing out expectations. Both the Caixin and official headlines came on the soft side and as Caixin notes, after 15 months of expansion, export orders fell the fastest in over two years, suggesting U.S. tariffs are starting to take a toll on the economy’. Personally, I think we shouldn’t forget that even if US sanctions start to bite the Chinese, a lower Yuan has an offsetting effect. USDCNY broke above sept range. Overall damage from the trade conflict on China’s economy much less than 0.5% of GDP, even if the policy is not loosened again.

It’s worth highlighting the incredible resilience by the Sterling even as the negative headlines around Brexit keep pouring in. What this means is that if some progress is achieved or at least the perception of it, even if eventually carries little substance, the Sterling looks set to benefit. The positive headlines have been consistently giving buyers a greater bang for their buck, which has led to speculators recently bailing out of their perma bear view as the most recent COT illustrates. Back to the negative headlines, late last week, we learned that UK PM May is losing support from her own cabinet and that essentially makes her option of a no-deal brexit one teetering to collapse. As a reminder, that’s one card May can still play to threaten the EU in case, as it’s expected, the EU rejects the chequers proposal. May keeps saying that a no deal l is better than a bad deal” and that remains, as said, her only plan B as the convoluted state of the Brexit negotiations stand. Volatility in the Sterling is set to be dependent on a brexit headline by headline basis but at the same time, from this week, the focus will too be shifting towards the Tory party conference, which comes at a time of growing dispute between UK PM May and Boris Johnson.

Looking ahead, the key events for this week include: German retail sales, UK manuf (today) and services pmi, US ISM manuf (also today) and non-manuf PMI, Australia’s RBA policy decision and Australian retail sales, two speeches by Fed’s Powell, and the monthly job reports by the US and Canada. Don’t forget, the Chinese markets are closed the whole week.

[IvanGlobalPrime]

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Market Thoughts Oct 2: The Loonie Reigns Amid Resurgence In Risk

Key themes at play in the forex market

The week kicked off with a last minutenew and not so punchy USMCA trade agreement, effectively replacing the NAFTA deal, as the US and Canada finally found a compromise for what US President Trump termed a ‘win-win-win’ for all parties. From very early in the Asian session, the Canadian Dollar was the main beneficiary, building upon last Friday’s gains after an upbeat Canadian GDP number and with higher Oil prices also underpinning the CAD trend. The outperformance by the Canadian Dollar has led the USD/CAD to trade at a 4-month low.

The positive risk appetite was reflected via higher bond yields, buoyant equities and a mixed performance by the US Dollar. The fact that Italy continues to cast a shadow in the Euro led to further losses in EUR/USD, which under more normal circumstances, may have seen more resilience by the Euro. The symbiotic upward moves in equities and bond yields, including the steepening of the US yield curve in both measures, the 10y -3m (Fed’s favorite) and the 10y-2y, suggest a market still betting on the reflationary trade of higher growth and inflation, and when such context is in place, the USD tends to see limited flows as foreign capital finds more attractive alternatives.

It’s undeniable that the higher-than-expected Italian budget deficit at 2.4% has severely hit sentiment in the shared currency, with a lower-than-expected German retail sales reading on Monday (0.1% vs 0.4% exp) not helping either. As Credit Agricole emphasizes in a weekend note, “fears about a potential downgrade of the Italian sovereign rating and/or outlook next month or an escalation of the tensions between Italy and the European Commission are likely to keep investors cautious.”

The sharp losses in the Euro come on the back of a firmer inflation outlook by the ECB, as it keeps laying the ground for a transition from a QE era into a tightening of policies by around mid-2019. What this means is that sooner or later, once the Italian concerns fade out, buying cheap Euros may represent a decent opportunity as the divergence in monetary policies between the ECB and G10 FX Central Banks may narrow. For now, a point I keep reiterating is that it remains risky buying the EUR given the event risks ahead.

The recovery in risk appetite has also morphed into the outperformance of EM currencies vs the USD, with our prop EM currency index, which monitors 7 of the most relevant EM-linked currencies, down a full point at 68.00. The Indian Rupee, Indonesian Rupiah or Argentine Peso are the main laggards, but the index finds a respite from the gains seen via the Russian Ruble, the South African Rand or the Turkish Lira.

The release of Monday’s US ISM manufacturing index for Sept came at 59.8 vs 60.00. The snippets of information the report contained were highly interesting, as producers of various industries start to outline that the higher tariffs imposed to US products are taking a bite out of profitability and margin compressions. There are two significant risks for the US economy heading into 2019, one being the fiscal effect starting to fade by early next year, while at the same time, there are worries that business margins and hence the outlook for growth may be capped by the higher trading barriers imposed by China as retaliation to US trade policies.

Looking at the Pound, the ‘risk on’ lent support to the currency, while an off-the-cuff and potentially misplaced headline by Bloomberg reporting on the UK considering a compromise on the Irish backstop to reach a Brexit deal saw the currency spike through 1.31 before retracing all its gains. No other news agency reported on the sensitive topic of custom checks, and that led to the notion that the headline may not carry enough substance, especially since it wasn’t quoting any official name either. This week, a key focus when trading the Sterling must be on the UK Conservative party conference and to what extent UK PM May can find enough endorsement to reinforce her hard-line stance to stick with the Chequers’ Brexit plan.

Amid such an ebullient ‘risk on’ environment, the Japanese Yen was always set to suffer. By the end of NY, the USD/JPY reached another milestone by filling offers at the 114.00, where it found a temporary ceiling. The major bull run in the Nikkei 225, which has led to handsome gains in the pair through the Asian session since mid Sept, has undoubtedly been a contributing factor acting as an accelerant. As a reminder, the CoT data since mid-Sept continues to show large specs piling into shorts Yen.
Under renewed optimism, one would think the Aussie would see a solid performance, but the currency, along with the Kiwi, didn’t quite live up to the expectations despite the friendly risk environment. As a reminder, the RBA monetary policy is due today, with the neutral tone to prevail. During the first half of 2018 though, the Australian economic activity has remained firm, which should anchor the view that heading into mid/late 2019, it places the risks of a rate move to the upside vs previously feared lower rates. At the current level of around 72 cents, it provides support for trade balance and the overall economy. As long as fears over the consequences of a full-blown trade between China and the US remain on the backseat, which leads to stabilization on EM currencies, it should see a very solid interest for the Aussie to be bought on weakness.

[IvanGlobalPrime]

Oct 3: EUR Down On Ballooning Italian Yields, Will Amazon Move Lead To More Hawkish Fed?

Key themes at play in the forex market:

The shine was taken away from risk appetite conditions on Tuesday. The strength in the Japanese Yen, which ended topping the climbers’ board is a testament to that, while the US Dollar and the Swiss Franc traded head to head disputing the second place. On the flip side, the Aussie found no underpinning factor from a largely neutral RBA monetary policy decision with some slightly dovish remarks on housing (“remains a source of uncertainty”), ending as the worst performing currency by breaking below the 0.72 level; the price of gold was catapulted higher, but it couldn’t help to stem the tide of selling pressure of the Aussie, as this time the yellow metal was driven by safe-haven bids rather than a function of USD weakness. Looking at Oil, notwithstanding the wave of ‘risk-off’ moves, it trades stubbornly high near $75, a 4 ½ year high, which continues to lent support to the CAD on the back of the reworked USMCA trade deal.

The Euro remains pressured as concerns over the Italian budget deficit reign, which led to ballooning Italian bond yields, upby a whopping 60bp from 2.82% to 3.41% in a matter of just one week. Nonetheless, the weekly area of support around the 1.15 has acted as a major sticky barrier and a rejection off the lows saw the EUR/USD end near the 1.1550 in a rebound that is far from impressive. It won’t be easy for bulls to take control as the context stands, one characterized by the return of risk aversion. Italian yields traded at the highest since mid-2014 and the German vs US yield spread knocked down further towards the -2.64%, which is a new trend low. The comments that really opened the can of worms and saw the implosion in Italian yields came courtesy of Italy’s Lega party economic chief Claudio Borghi, who said the country would solve its problems if it had its own currency, reminding investors the not so distant memory ghosts of the Greek financial crisis. The downward spiral in the Italian bonds is in part a response of the heightened risk that the Italian credit rating or outlook gets revised lower by Fitch or Moody’s in the near future, which may lead to a very difficult situation and a potential escalation with the European Union on the need to adjust deficit targets lower.

It’s also interesting to see the bearish cracks in the Sterling, finalizing the day below the 1.30 round number against the US Dollar despite UK Conservative politician Boris Johnson endorsed unity amongst the party to support UK PM May. However, some cold water was thrown, as expected, by expressing the well-telegraphed criticism towards the Brexit chequers plan. Another snippet of information we learned on Tuesday, which under different risk circumstances may have provided support to the Sterling is the report that UK PM May is prepared to limit trade deals by staying in the customs union. What this means is that May would limit Britain’s ability to agree on free trade deals after Brexit, with the clear aim of breaking the current deadlock with the EU.

The deterioration in risk barely budged equity traders over the appeal to buy into Tuesday’s weakness through Europe and the US, which led to the German DAX 30 and the S&P 500 to recover its early losses and end flat. In Asia, a different story played out, with the MSCI EM index, the Nikkei and the Hang Seng in Hong Kong coming under pressure. The US 30-yr bond yield traded down to 3.22% as capital flocked off from risky bets into US treasury bonds, while US corporate credit yields surged in response to a more uncertain environment, diverging off the more robust response seen in the S&P 500, and probably to do with the wave of selling seen in the Nasdaq, down by 1.4%. Our prop macro risk-weighted index, to be referenced as a form of barometer for risk conditions, is starting to show a bearish structure of lower lows on the hourly, trading sub the 100-HMA. It’s also worth noting how in EM, the Indonesian Rupiah is one of the currencies dragging the Asian complex lower. The currency trades at its worst levels since the 1997 Asian financial crisis, as it struggles to put its house in order amid higher Oil prices, a current account deficit, and higher USD-denominated debt to be serviced.

One of the news worth highlighting on Tuesday is the announcement by Amazon to raise the salaries to all its employees (250k+ full time and 100k+ seasonal) from as lows as $10 up to a new minimum threshold of $15, with the policy coming into effect on Nov 1st. Jeff Bezos, Amazon’s CEO and richest man in the world, encouraged competitors to follow their steps too. Moreover, the company will also be revising up salaries in the UK, while advocating for a campaign of higher Federal minimum wage. The implications of this move might be significant, as it occurs at a time of relatively high wage growth in the US (2.9% y/y), so this decision may add to the momentum and assist the US economy to generate a cycle of solid growth and inflation; the latter has been the puzzle of the last decade, that is, poor inflation at a time of very low employment rate and full capacity utilization. It’s precisely this symbiosis that Fed’s Powell needs to manage carefully. On Tuesday, the Fed Chairman gave a speech about the outlook for employment and inflation at the National Association for Business Economics, reiterating the balanced approach the Fed must take between not slowing down the economy by raising rates too quickly nor overinflating prices by the complacency of staying pat. The latest news from Amazon, all else being equal, does suggest risks skewed towards the latter, hence the continued gradual rise in rates to avoid runaway inflation, which as we know, has been well contained since the GFC. For now, the market continues to price a chance of about 75% that the Fed will raise again in December.

Heading into Wednesday, be reminded that the Chinese markets remain closed the entire week, while Germany will also go through a bank holiday today to celebrate the German Unity Day. In terms of risk events, in the UK we have the services PMI next, while in the US the ADP non-farm employment and ISM non-manuf PMI are due. Also note, several FOMC members are due to speak, including another intervention by Fed’s Chairman Powell.

[IvanGlobalPrime]

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Market Thoughts Oct 5: Stocks Sell-Off As US-China Cold War Escalates

Key Themes at Play in the Forex Market

On Wednesday the big story was the spike in US bond yields, with the US 10-year Treasury yield standing at the highest since mid-2011 following the largest one-day spike since President Trump’s election. Fast forward 24h, and the positive ebbs and flows for risk have reverted, especially in equities.

A confrontational speech from US VP Pence against China’s policies set in motion the snowball effect in what became a consistent sell-off in US equities. US VP Pence hardened the rhetoric towards China by stating the country “is meddling in America’s democracy”, adding that a “comprehensive and coordinated campaign to expand” its influence inside the US and across other regions of the world.

“China has initiated an unprecedented effort to influence American public opinion, the 2018 elections, and the environment leading into the 2020 presidential elections,” Pence said in a speech to the Hudson Institute, a conservative Washington think tank.

These accusations only reinforce the suspicion by China’s leaders that the trade war is not really about a fair treatment but to undermine China’s strategic goal ‘made in China 2025’, where the aim is to develop a competitive, high-tech economy and extend its global influence. To make matters worse, CNN reported on Wednesday that the US Navy is proposing a major show of force to warn China.The CNN article read: “While one official described it as just an idea, it is far enough along that there is a classified operational name attached to the proposal.”

The US sees China’s rise as a threat and as I type, it looks as though we are entering a potentially long cold war. Unequivocally, the stocks that suffered the most were the tech names (Nasdaq index), down by 1.8%. Amid this gloomy environment, the commodity currencies (AUD, NZD, CAD) found further selling vs the USD. The European block held meritoriously firm though, especially the Sterling, printing a bullish outside day and recovering the 1.30 area.

The Euro saw a recovery but was not as impressive. The shared currency must still deal with its fair share of troubling drivers, including uncertainties around Italian politics, which has translated into multi-year highs in Italian bond yields, or battle through new decade lows in the German vs US 10-yr bond yield spreads.

A currency that received a much-needed boost was the Japanese Yen, as risk-off flows settled in. A story making the headlines on Thursday was the more flexible approach by the BoJ on the bond market, as yields make multi-year highs. According to a report by Reuters, amid its bond-buying draining liquidity, “the central bank is seen tolerating further rises in super-long yields as long as the increase does not push the 10yr yields well above its zero percent target”, according to sources familiar with the thinking.

EM currencies is another source of concern that is starting to see some technical cracks as the USD resumes its upward trend. A bullish structure in our prop EM currency index is firming up, which heralds more trouble ahead for EM. As a result, the Aussie and the Kiwi are especially vulnerable, as the breaks below 71c and 65c indicate.

A major theme that is slowly sinking into investors’ minds is the notion that the Federal Reserve is set to maintain a fairly aggressive tightening campaign heading into 2019. This is the last thing EM economies flooded with USD-denominated debt need at this stage, as it worsens the difficulty to serve their obligations.

Also, right from the horse’s mouth, on Wednesday, Fed’s Chairman Powell stated that “we’re a long way from neutral at this point, probably.” Bond traders took immediate notice by selling treasuries in mass, so continue to monitor this theme very closely, especially the confirmation of a major breakout in the US30s, as it battles some major sticky weekly/monthly resistance levels. Looking at the 10y TSYs, it reached 3.23% before easing back around 3.19%., although the break and hold way above the 3% has been a psychological win.

The announcement of Amazon to raise salaries and its planned lobbying to increase the minimum federal wage in the US has been another catalyst putting further pressure on US Treasuries. The line of reasoning is that it may assist in kickstarting a virtuous cycle of higher wages as competitors must adjust to the new norm of higher salaries to retain their employees at a time of full employment and extreme capacity utilization.

Bottom line, the environment remains one with many perils ahead for the likes of EM and the Oceanic currencies as the steepening of the US curve develops, while the European block FX face a different set of circumstances in order to challenge the positive USD flows, largely dependable on how the immediate short term risks, namely Italy and Brexit, play out. On the Euro front, keep an eye on a recent article by MNI, indicating that “the ECB may engineer a pseudo operation twist next year while deciding where to put re-investments of maturing bonds”, citing unnamed ECB officials.

Heading into Friday, the focus will shift towards the US NF release, which comes on the heels of further evidence of the rude health by the US economy, as depicted by this week’s 21yr high in the US non-manuf ISM numbers or the rise in ADP employment figures. On Thursday, US Factory orders were up 2.3% m/m in August vs 2.1% estimates, while durable goods orders came in a tenth below their initial estimate at 4.4%. According to ANZ, “early reads (ADP etc) are pointing to a large number, market consensus 185K.”

[IvanGlobalPrime]

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Thoughts Oct 8: A Brexit Deal Priced in, US NFP Passes the Test

Key Themes at Play in the Forex Market

The latest round of capital flows entering the currency market was entirely driven as a response to an average US NFP payrolls last Friday. The headline number missed expectations, but it was largely offset by the lowest unemployment rate (3.7% vs 3.8% exp) we have seen since the Vietnam war more than half a century ago. The input USD bulls would have expected to do better is the wage growth, which remained unchanged at 2.8% y/y, although the recent pressure has been upwards. To appease any downside risks in the USD, we also saw a positive revision from last month’s NFP.

The market had undoubtedly been building up some expectations ahead of the event following a major boost in the US non-manuf PMI, at the highest in more than 20y, or a very strong ADP number. That’s probably the reason why the USD didn’t extend gains (exc commodity currencies). That slight disappointment in the US NFP headline number not living up to the heightened positive expectations eventually morphed into the USD, ending the day in a mixed-bag performance, strengthening against a vulnerable commodity complex (AUD, NZD, CAD), while trading on the back foot against the likes of the Euro or the Sterling.

Overall, the report should continue to support the dominant theme of a hawkish Federal Reserve for another rate hike in December, and at a bare minimum, at least three rate rises heading into 2019. The prospects in rates will be in constant fluctuation as the market moves away from trying to guess what the neutral rate setting in the short-term is and focusing more on adapting to US economic data and how the economy in the US responds to a potential fade of the fiscal stimulus or an escalation to the US-Chinese trade war in 2019.

One must pay a close eye to the performance of US yields, as they keep charging higher into multi-year highs amid the steepening of the US curve (10s rising faster than the 2s); the 2-yr yields stands at 2.89%, the 10s at 3.24% and 30s at 3.41%. Could we be at a paradigm shift where higher yields warrant the reshuffling of capital away from equities into the attractiveness of higher yields in bonds? If the last 10y of trading stocks in the US serves of any indication, I’d say don’t hold your breath for such outcome.

As market participants return back to their desk this Monday and algos are turned on, they’ll have to take the batton of a rather suppressed risk appetite, following back-to-back declines in US equities. The selling flows recently seen have provided a much-needed cushion to the Japanese Yen, recovering from multi-month lows against the USD, even if the drop in equity valuations comes within the broader context of the longest bull trend in US history.

In the big scheme of things, we’ve been building a structure of higher highs and higher lows in our prop risk-weighted index – RWI – (monitors 9 key risk-sensitive assets equally weighted including the SP500, yen, franc, DXY, gold, corp bonds, MSCI EM, DAX, US 30yr bond yield). However, last week we saw the printing of a bearish engulfing bar, which warrants caution ahead. While the structure should still translate in a macro picture still non-supportive for a long-lasting Yen recovery or consistent follow through in equities, given the critical levels where it has occurred, further setbacks in risk appetite cannot be ruled out. Since what’s been pushing down the risk-weighted index has been the underperformance of equities, at the epicenter this week, expect flows to take major cues, in terms of the level of risk tolerance, through global equities. The S&P 500 is retesting a former all-time high turned daily support at 2,870.00, while the EM MSCI index will also take center stage after being caught in the eye of the selling storm as well.

On emerging markets, the resumption of the bearish trend in the MSCI EM index in tandem with the sharp falls in global equities in the last 2 days has placed renewed downward pressure in EM currencies. As a result, the Aussie and the Kiwi have fallen victims of their own fragility to trade as direct proxies of these regions’ currencies. Even the weekend news that the PBOC has cut the RRR applicable to some banks by 1%, effective Oct 15th, to further support the economic activity, has so far not led to any notable recovery. It’s a double edge sword type of approach the latest move by the PBOC as on one hand the release of extra capital into the Chinese economy should be positive for emerging markets, but at the same time, the weakness seen in the Yuan (USD/CNH trades at 6.91) is far from reverting and is also acting as a factor limiting the recovery in the AUD. The bullish structure on our prop EM currency index (USD trend resumption) should raise some red flags here.

Another theme that has caught the market attention is the vigorous recovery in the Sterling. Some are wondering if the bullish move and hence confidence towards the British currency is somewhat misplaced as the deadlock between the UK and Europe on Brexit negotiations continue. However, since the market is all about discounting expectations, the market appears to definitely be buying into the notion that the UK is edging closer into some type of compromise with Europe. The decisive rise in UK bond yields is also a strong testament to this theme playing out. Proof of that is the recovery in the UK vs US yields spread from -1.74% to -1.66% even at a time of ballooning US yields.

Another piece of the puzzle was revealed last Friday, and even if it didn’t act as an accelerant for the Sterling, its further evidence that a deal may get done in the coming weeks. A Bloomberg article reported that the EU is considering to offer a so-called ‘super-charged’ free-trade deal to the UK. There are many fine details and a web of complexities to still be resolved, with the Irish customs borders still casting a shadow in making further progress, but it nonetheless signals optimism as depicted by GBP.

[IvanGlobalPrime]

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Oct 15: Volatility In Forex Set To Return With A Vengeance

Key themes at play in the markets

Much has been debated about what’s causing the disconnect between the heightened volatility in US equities/Treasuries and the currency market. This unfolding week, however, risks are building up for this talking point to be negated. Volatility is set to return with a vengeance in the forex arena, even if we remain in a state of confusion when it comes to market correlations, which makes picking near-term direction trickier.

There are a plethora of events lining up with the potential to move markets this week, with the list of market-moving catalysts only expanding. In a surprising turn of events, a new geopolitical risk has emerged, following US President’s Trump sanction threats to Saudi Arabia over the weekend. The controversy over the killing of a Washington Post journalist, allegedly orchestrated by the Saudi Kingdom consulate, is at the core of the matter. The state news agency said the Kingdom will retaliate against any measures taken by the United States. We saw a major tumbling of the Saudi Tadawul Index, closing at -3.5% after down over 7%, as a response.

Moving on. One event that will take center-stage this week is the outcome of theBrexit summit mid-week. The rise in optimism leading up to the event has galvanized the market to increase long-bets on the GBP since the month began. However, the Irish backstop still remains the main issue outstanding. There are no further negotiations planned ahead of the crucial mid-week formal discussions. That said, there are evident headline risks, which warrants major caution to trade the short-term GBP price gyrations. Goes without saying that this week’s UK CPI and employment data will be a side-show as Brexit rules.

Before Brexit steals the limelight, the immediate risks this Monday will emanate from the US retail sales print. If the value of sales in the US for Sept comes strong enough, it should keep alive key thematics causing US bond volatility. These include fortitude of the US economy, a hawkish Fed and the outlook for inflationary pressures sustained. Besides, further cues via US earnings will determine flows’ biases. if the corporate earnings outlook remains positive, that could relax the frayed nerves by equity investors. Some companies reporting in the week ahead include Bank of America on Monday; Goldman Sachs, Morgan Stanley, and IBM on Tuesday. In investors mind, the main question mark lies on whether or not corporate America is being undermined by China’s trade war.

Additionally, one should watch out for the much-awaited US Treasury currency report with all the attention towards whether or not China is labeled a currency manipulator. It may be tentatively released by the end of NY trading on Monday.Remember, the US follows three specific criteria, per the 2015 Trade Act, before taking action, which include: 1) A ‘significant” bilateral trade surplus with the US,2) A “material” current account surplus that is greater than 3 per cent of GDP,3) Persistent, one-sided intervention in its currency market, in excess of 2 per cent of GDP.

Out of the above points, only number 1 justifies the action, but when all 3 considered, China should be in the clear. This is precisely what the latest reports suggest, after Bloomberg revealed that the U.S. Treasury Department’s staff has advised Secretary Steven Mnuchin that China isn’t manipulating the yuan. If confirmed, a short-term risk will be removed, but with so much going on, can’t foresee it as a sustainable positive driver. On the flip side, if it is labeled, it will be for political reasons, and that may see markets nose-dive.

In the US, the FOMC minutes on Wednesday will get its fair share of attention, as will the Philly Fed survey. With the debate about what’s the Fed’s optimal neutral rate setting played down, no major surprises are expected. Fed’s Chairman Powell has been advocating for monetary policy to be in a constant flux of adaptation to the economic data in the US. Even if it won’t represent much of a market-mover, the main findings the market would be after may include the Fed’s latest stance on trade policy or their outlook on inflationary pressures amid the full-capacity utilization in the jobs market and mild increases in wages growth.

In terms of market dynamics, they will orbit around the volatility in US assets. The main theme this October has been the increase in US asset volatility (VIX above 20.00) as the rise in US bond yields lead to a reshuffling of foreign asset holdings in the US. As the chart below illustrates, US bond volatility has broken higher, which tends to play out in favor of Yen longs.

Looking at the performance of key assets, let’s start with the US equities. The S&P 500 & Nasdaq both saved the week on Friday by still respecting their long-term trend lines, which date back from 2016. The fact that the VIX still trades at a hefty level above 20.00 is a major red flag to be mindful of, but there are tentative technical signs of temporary respite as 25-26 resistance continues to be a tough nut to crack.In the US bond market, the US10YR bond yield testing finds itself testing a key support at 3.13%.

In Europe or the far east, the performance by the Eurostoxx 50 or China’s CSI300 offers no comfort for a sustainable recovery in risk, as both indexes confirmed fresh weekly down-cycles. US assets volatility, Italian debt jitters, US-China prolonged cold war have all played a role for investors to diversify away from stocks.

An event from last week that I find quite telling about the potential USD underperformance is the breakout in gold. This year, the asset has been trading on the back foot as a function of the USD strength. However, with a new weekly upcycle confirmed after a close above its former resistance at $1,210.00, the risk is that the precious metal keeps finding renewed interest on diversification away from US stocks. This breakout may be a precursor of thevulnerability of the USD vs surplus currencies this fall.

In the energy complex, one would expect Oil prices to be anchored at the key juncture traded, as technicals now find further underpinning via fundamentals (Saudi news). If US assets volatility can be contained, the risk appears to be to the upside at these levels. The broader CRB index is too at a crossroads testing a key support and so far buyers in control.

Technical reads in major currencies exhibit a temporary setback in favor of the USD. However, it occurs as part of a technical environment not ideal for a resumption of the USD trend.

Be reminded that last week’s resurgence in EUR buying led to the first hourly cycle since Sept 24, therefore the current move down sub 1.1550 should be interpreted as a setback within the context of a developing upcycle. The next decision point to potentially engage in buy-side conditions include the area of 1.1520-1.1480. Remember, as a rule of thumb, if swing trading, the 50% fib retracement of a cycle should be the minimum area to engage if aiming for an attractive entry point in line with a cycle. Tick volume suggests increased commitment on the way up, while the move lower so far carries lamer tick activity, which supports the bullish cycle structure for a potential continuation. The EU vs US 10yr yield spread does not negate the upcycle for now.

Price action in the Sterling shows some clear crack. The breakout of the ascending trendline has come amid increasing tick volume so that’s something to be worried about. The breakout of the trendline is also validated by the lower moves in the UK-US 10yr yield spread and DXY performance. If you are going to trade the Sterling, be aware that you will be facing a headlines feast, with volatility to pick up significantly. While not confirmed yet, the pair is transitioning from an hourly upcycle into range-bound conditions. On the daily timeframe , however, an upcycle is still playing out, so be cautious to be a seller at oversold conditions.

The US Dollar/Japanese Yen trades vulnerable at an area of macro interest circa 112.00, where sizeable bids are expected. A downward trendline still commands prices lower, with risks of a range breakout into a fresh cycle low away from the established range increasing. The significant pick-up in tick volume in the last 3 days vindicates the notion that the level around 112.00 is a major point of interest to add into longs by macro accounts. The market structure in correlated assets such as the SP500 (hourly downcyle), US 30yr bond yield (hourly downcycle) and the recovery in the DXY (still within hourly downcycle but far from lows) does not bode well for Yen shorts.