Hi all,
In this new video series, I will be providing a daily analysis of the ever-evolving market structures from an hourly, daily and weekly perspective. What this means is that the information in this thread will be most relevant to swing & position traders. As a reminder, if you are interested in learning the principles that I apply to determine market cycles, I invite you to visit the following article below:
Without further ado, let’s now get into the study of today’s market cycles:
Today’s report has been published. The report contains EUR/USD, GBP/USD, AUD/USD, USD/JPY.
Find below the first analysis In the EUR/USD. The rest can be found at the link above.
EUR/USD: Poor quality downcycle as descending trendline broken
Cycles & Levels: Be aware the weekly cycle has been bullish ever since mid last year when acceptance was found above 1.14/1.15. The price is now all the way back re-testing the previous resistance-turned-support, which coincides with the 50% fib retracement. Drilling down into a lower timeframe, the down-cycle formation on the daily keeps the bias bearish even if short-term there are tentative signs of a rebound as the price rejects a key area of support circa 1.1350 (blue line).With regards to the hourly, the first cracks on the well-established downtrend are starting to occur after the descending trendline was violated last Friday. Besides, the latest buy-side flows have been impulsive in nature on the way up vs the more corrective two-way business on the way down. When this occurs, one should be on guard for an upward continuation.
Correlations & Volumes: The German vs Italian 10-year yield spread continues to recover, breaking above its most recent peaks (magenta line), with an analogous picture is seen in the German vs US 5-year yield spread (blue line). The divergence between price (lower) and correlations (higher) argues for a potential recovery up to the next area of daily resistance circa 1.1450. This view is also anchored by the continuous decreasing tick volume on the way down. A breakout of the recent lows would invalidate this thesis, while a re-take of Monday’s POC at 1.1390 reinforces the bullish viewfor higher valuations heading into mid-week.
Drivers & Risk events: The lack of an immediate positive resolution on the Brexit saga nor the Italian budget have damaged the outlook for the Euro, while broad-based USD strength added further downside pressure. Be aware that in the next 24h the following events have the capacity to create notable volatility: German preliminary CPI, EZ preliminary GDP, US CB consumer confidence.
Today’s report has been published. The report contains EUR/USD, GBP/USD, AUD/USD, USD/JPY.
FX Majors: Analysis on Cycles, Vols, Correl, Levels for Nov 1
Authored by Ivan Delgado, Head of Market Research at Global Prime. The purpose of these institutional-level chart studies is to provide an assessment of the market conditions for the next 24h of trading in order to assist one’s decisions on a regular basis. It, therefore, aims to anticipate the next cycle structures based on volume activity, order flow, correlations, and levels. The analysis is equally relevant for intraday, swing and position traders, as I break down the charts from the weekly down to the hourly.
Risk sentiment model: DXY and equities move up in tandem
The breakout through the descending trendline in the S&P 500 was materialized in the first hour of cash trading. That was the missing piece to confirm our thesis of a constructive risk environment, encapsulated within a USD strength context, as per the active up-cycles in the DXY and US yields. It was the last day of the month, so the market had to contend with FX rebalancing flows, which would always make this day more unpredictable in nature.
We should now be reverting back to a clean slate in terms of risk sentiment dynamics, hence judging by the cycles I am seeing, I expect JPY crosses to remain on the backfoot, while the USD should continue to find grateful buyers on dips. The present context would still justify European currencies (EUR, GBP, CHF) to trade heavy against the likes of commodity FX as the recovery in equities extends, but the positive Brexit headlines in the last 24h are likely to distort this view.
EUR/USD: USD buy-side flows confirm fresh hourly down-cycle
Cycles & Levels: Subject to the US NFP outcome, the odds are on the rise of seeing a back-to-back bearish week with a close below the 50% fib retrac of last year’s meteoric rise. If the weekly candle can make it sub the Aug 13 swing low, that would strengthen the case for an ultimate weekly downside target of 1.0845. On the daily, if sellers garner enough momentum through the 1.13 round number, the new sell-side campaign could exploit a 65-70 pips leeway until the proj target of 1.1242 is reached. Don’t rule out a potential rebound as we are at a crossroads here (Aug 15 validated swing low) On the hourly, the re-grouping of sellers at the mid-point of Wednesday’s range honored with precision those avid enough to read price action. The rejection of a range’s mid-point is a great predictor showing us the potential directional resolution of range-bound conditions.
Correlations & Volumes The risk of an exhaustive move is fading as the latest 24h of tick volume activity show an increase in commitment, which reinforces follow-through downside risks. The absence of profit-taking at 5pm NY is another negative input, as it is the fact that sellers keep buyers trapped on the wrong side of the market judging by Wednesday’s POC (1.1344). In terms of correlations, the German vs US 5-year yield spread keeps trending lower, just a stone’s throw from claiming new multi-year lows. Meanwhile, the other key driver (Italian premium vs German) is consolidating, which reduces the risk of acting as a key driver.
Drivers & Risk events: The Euro continues pressured via lower growth expectations in the EZ (poor showing in the latest EZ or Italian GDP), which raises the risks of a more cautious ECB. Besides, the Italian and Brexit conundrum is also weighing. In the last 24h, positive USD flows on month-end rebalancing and upbeat ADP non-farm employment data anchored the currency further, as does the USD strength environment highlighted above. It’s a public bank holiday in both France and Italy on Thursday. In the US we get the US manufacturing PMI.
Today’s report has been published. The report contains EUR/USD, GBP/USD, AUD/USD, USD/JPY.
FX Majors: Cycles, Volumes, Correlations, Levels for Nov 9
Authored by Ivan Delgado, Head of Market Research at Global Prime. The purpose of these institutional-level chart studies is to provide an assessment of the market conditions for the next 24h of trading in order to assist one’s decisions on a regular basis.
Risk model: Order flow & structure in favor of the USD
The risk-weighted index is coming back down as a function of positive order flow in the USD and a lower correction in equities. The DXY index has broken above its descending trendline, carrying strong momentum behind as per the impulsiveness of the move. The extension has landed to its 100% fib projection based on the normal distribution dynamics of the volume profile. This may take us back down as longs take profits off the table. I’d argue that unless we make a new push higher with subsequent closes above 96.74, the market may still be at risk of confirming a range if 96.20 (the midpoint of the last up-cycle) gets validated. Nonetheless, the conviction back into the USD bandwagon is strong, that’s why my focus is now reverting to be more constructive and opting to mark a structure of USD strength as the main view, even if that will hinge on the ability of buyers to make another push up as stated above.
The move up in the DXY index is underpinned by the rise in US yields. Let alone the double bottom post US election day, buyers have re-grouped to show up at the 3.41% support, so we seem to be all set to transition into a new up-cycle to re-test the 3.46% resistance area, further anchoring the USD strength environment. With regards to equities, I am closely monitoring the 100% fib proj at 2,830.00 for an eventual top. If we don’t make it up there and instead the S&P 500 breaks below its ascending trendline and the level of support at 2,766.00, that’s a bad omen as the leg up would have fallen significantly shorter in magnitude vs its previous one. As the backdrop stands, equity performance continues to be absolutely key to determine whether or not risk will be supported. Follow through USD strength with falling equities is going to place JPY crosses under significant pressure, more so than if equities were to sell-off in an environment of USD weakness. The reason being is because USD strength acts as a drain to global liquidity.
If you prefer to watch my analysis via video format, find the analysis below:
Today’s report has been published. The report contains EUR/USD, GBP/USD, AUD/USD, USD/JPY.
FX Majors: Cycles, Volumes, Correlations, Levels for Nov 12
Risk model: The picture has turned ugly quite rapidly
Let’s dissect what are the risk conditions heading into Monday. First of all, I’d like to first highlight the hammering in value witnessed in our prop risk-weighted index as a result of classic ‘risk-off’ flows, which means lower equities, lower yields, and higher DXY. Interestingly, despite the malign conditions, Gold is behaving as a function of USD performance once again vs a ‘risk-sensitive’ vehicle.
As the structures in equities, yields and the DXY stand, we seem to have transitioned into mild ‘risk off’ conditions owed to not only the upside resolution in the DXY as a proxy for ‘risk aversion’ but I am also accounting for the potential development of a new down-cycle in the US 30-year bond yield if we can get back-to-back hourly closes sub a critical daily support area at 3.39%. If this materializes, let me clearly state that this is not a good recipe for risk at all. We’ve already seen the order flow dynamics bid up US bonds (lower yields) while the DXY heads higher, that’s why I emphasize that if a structural break lower in US yields comes amid USD strength, that’s the clearest sign yet of a pick up in ‘risk off’ flows, independent of how equities perform. Obviously, the lower equities head amid the above premise (higher DXY, lower US30Y), the worse it will get.
The hope for contrarian traders is that equities can find support, which short -term is not a scenario to rule out as the S&P 500 tests an important hourly support. The rebound will need to come in tandem with a recovery in US yields though. There are a few warning signs coming from the S&P 500 chart though. The latest push up failed short in magnitude compared to its previous bounce (158 points vs 115 points) before breaking its ascending trendline. The index has also rejected a daily resistance area, which is making further progress all the more challenging. There is still room for equities to trade lower without compromising the bullish structure (as long as 2,700.00 can hold), the problem is that it won’t matter for the interest of a re-invigoration in risk dynamics if we continue to see a theme dominated by lower yields and a higher DXY.
Today’s report has been published
FX Majors: Cycles, Volumes, Correlations, Levels for Nov 13
Quick take
Brexit and Italy roil markets, Euro under the cosh
Risk-off conditions firm up, DXY strength dominates
The new weekly target for the Euro is found sub 1.09
A fragile Pound amid pessimism on Brexit
Yen resurrection a theme to keep in mind
Aussie heading into key support at 0.7150 & below
Risk model: Conditions deteriorate further
Our risk-weighted index (sp500+us30y-dxy) has seen a further collapse in value, driven by the combination of a higher DXY and falling equities, not accounting for US yields as the market was closed due to public holidays in the United States.
In terms of order flow, we continue to be caught in a classic ‘risk-off’ environment as marked in purple above. Even structurally wise, we are not far from shifting into a classic ‘risk-off’ structure too. It will take a break and acceptance sub 2,700.00 in the S&P 500 and the validation of a new down-cycle in US yields, which looks poised to be the case considering the most recent order flow seen.
It’s also worth noting that the impulsive order flow witnessed in buying up the US Dollar or selling equities has been decisive. A strengthening US Dollar at such pace leaves little room for risk conditions to show much life unless both equities and yields both revert the current downward momentum, which as I mentioned, based on the conviction of the order flow is unlikely.
Youtube video
FX analysis Nov 14: Yen crosses expensive based on risk context
Authored by Ivan Delgado, Head of Market Research at Global Prime. The purpose of these institutional-level chart studies is to provide an assessment of the market conditions for the next 24h of trading in order to assist one’s decisions on a regular basis.
Quick take
JPY crosses look expensive based on both order flow & structure of the risk-weighted index.
It looks like an attractive proposition to engage in sell-side action all else equal.
Up the manipulative stairs & down the value elevator. Report coming up.
The risk-weighted index calculatesSP500+US30Y–DXY
Risk model: Unsupported by order flow/structures
By analyzing the risk-weighted index, we can clearly see that there is something off, a misalignment of sorts which presents an opportunity to re-engage in a buy-side campaign on risk-off assets the likes of the US Dollar or the Japanese Yen. Either that or there is an awful lot of catch-up to do by equity and bond traders. And when it comes to dissecting and judge the risk conditions, I will be taking my clues off equity and bond traders all day long.
The anomaly that I mention between where the risk stands and the valuation of JPY crosses can be measured by the decoupling of the correlation between the index and AUD/JPY to nearly 0, as exhibited by a red area in the 2nd window of the chart above. What’s interesting is that this rare occurrence happens to take place at a time when the depreciation of the RWI in the last 24h came as a function of lower yields, lower equities, and a lower USD. When that’s the case, it presents a genuine opportunity to look for sell-side business in the instruments that look set to be expensive, in this case, the Japanese Yen crosses are hands down the best play.
Let’s recap: We have a clearly bullish DXY, which essentially minimized the chances of seeing a long-lasting recovery in risk based on the premise that the index is now favored by a newly bullish structure as depicted by the black lines above. For argument’s sake, let’s scratch the DXY, therefore, as a market unlikely to alleviate the downward pressure in risk assets. It gets worse when we add the renewed allure to bid up US bonds (lower yields). As the US 30-year bond yield reflects, we’ve now transitioned into a fresh cycle-low, with the order flow also in alignment with sellers for now.
What about the equity market? And to be more concrete, let’s look a the S&P 500 as the bellwether indicator for the appeal towards equities. This is where a glimmer of hope still resides given the up-cycle structure on the hourly, which won’t be compromised until we see a break and acceptance sub 2,700.00, in which case, I am expecting risk conditions to really take a hit. But here is the kicker. The signs we are getting off equities are far from promising, as the last leg up fell short of its minimum magnitude extension, then we broke the ascending trendline on a pick-up of order flow (more impulsive), and for two consecutive days, the market is finding equilibrium (value) just ahead of the 2,700.00 area. Not good.
EUR/JPY: Looks expensive b/ on the risk-weighted index
Today, there is a compelling case to be made whereby if one compares the value of the risk-weighted index and JPY crosses (exc USD), it looks expensive based on both order flow & structure of the risk-weighted index. It looks like an attractive proposition to engage in sell-side action all else being equal.If we look at the EUR/JPY, the pair has rebounded quite vigorously, but long and behold, the risk-weighted index still trades at the lows of the cycle as noted above. It’s important to note that the rebound happens to just test the 50% fib retracement of its recent down-move and is also in line with the down-cycle in play, which adds to the bearish case. A similar opportunity exists if we were to analyze the AUD, NZD, CAD, GBP, CHF against the JPY, subject to any individual headline that may alter the ebbs and flows towards a particular currency.
Forex Majors: Cycles, Volumes, Correlations, Levels for Nov 15
Authored by Ivan Delgado, Head of Market Research at Global Prime. The purpose of these institutional-level chart studies is to provide an assessment of the market conditions for the next 24h of trading in order to assist one’s decisions on a regular basis.
Risk model: From bad to worse, structure shifts to classic ‘risk off’
What risk bidders may have feared has come to fruition with the break lower in the S&P 500 as the bellwether barometer of equities. What this means is that the bearish structure on the hourly has now been confirmed, which results in a further deterioration of our risk-model from tier-2 risk-off conditions to tier-1 (classic risk-off). Equities now join lower cycles in US yields and the underlying bullish cycle in the DXY, constituting the worst case scenario for risk from a cycle or structural point of view. In terms of order flow, in the last 24h, the environment has been dominated by USD weakness amid a debilitated state of affairs in stock performances, a context that should still be playing in favor of the Japanese Yen.
If the market were to respect the current market structures, which means we just need to see the re-calibration back into USD longs, make no mistake, this market looks poised to catch risk-off flows. If the scenario materializes, it should be Yen supportive as stated above. Notice, the DXY is fast approaching the 50% Fibonacci retracement of its latest buy-side campaign, which should reinforce the notion of greater appeal towards the Greenback. I am not placing much hope on a market recovery in the US yields given the fact that buyers have failed miserably at the retest of the daily resistance as depicted by the chart above. What about the S&P 500? I am not getting much inspiration out of the hourly outlook, as the breakout of the structure occurred on the heels of a poor magnitude last leg-up, which communicates buyers run out of steam.
As the RWI (Risk Weighted Index) chart above shows, the value has been on a sharp decline, yet JPY crosses are yet to catch up. Proof of that is the major divergence seen in the AUD/JPY, even if this pair may have some more justification to still hold stronger given the AUD-specific buy flows on the back of the Aus jobs report. Short USD/JPY, EUR/JPY or CAD/JPY appear to be a great proposition.
EUR/USD: Time for sellers to step in, risk-reward appealing
Sellers have a clear task in the next 48h, and that is, to fix the slight trouble they find themselves in by approaching the second half of the week with the price back above 1.13. On a weekly basis, sellers must re-take the upper hand and close below to keep the unambiguous bearish bias. On the daily chart, the downcycle is clear, acceptance sub 1.13 was found even if the extension fell short in magnitude from the previous leg down (for now). This market must soon find sellers willing to engage at the next levels of high interest at 1.1353 and 1.1395, which would make for some great risk-reward as the horizontal level aligns with the dominant cycle. The latest 2 corrective legs up have come amid a smart-money acceleration based on the increase of tick volume as the first stage out of many hurdles in the Brexit deal has gone through. With regards to correlations, we’ve seen a pick up in German vs US yield spreads but further deterioration in the German vs Italian spread. Watch the interaction of price at the key decision areas 1.1350 & 1.1395/1.14 as that will give us the next clues for a directional move.
Forex Majors: Cycles, Volumes, Correlations, Levels for Nov 16
Authored by Ivan Delgado, Head of Market Research at Global Prime. The purpose of these institutional-level chart studies is to provide an assessment of the market conditions for the next 24h of trading in order to assist one’s decisions on a regular basis.
Risk model: Recovery in risk against ‘risk-off’ structure
Our risk-weighted index has seen a marked recovery off the lows on the back of more positive short-term flows. The rise in US equities (S&P 500), the bounce in US yields and the limited buy-side interest in the US Dollar has led to a microstructure characterized by the return of ‘risk-on’ flows. Extreme caution must still be applied, as the short-term movements come in stark contrast with the ‘risk-off’ structure we recently transitioned into, as marked by blue above.
The S&P 500 has validated the creation of a new cycle low after breaching 2,700.00 earlier this week and is now headed straight into two major areas of intraday resistance at 2,746.00 and 2,765.00. I am expecting limited upside, which if true, would constitute the 2nd shoulder of a potential head & shoulder formation on the hourly. Less clear is the outlook for the 30-year US yield, which appears to be establishing a range between 3.33 and 3.39 following a double bottom. Even if long-dated US yields break higher through 3.39, it’s going to take a rise in equities above 2,765.00 or further weakness in the US Dollar to sustain the ‘risk on’ environment. Judging by the impulsive latest leg up in the DXY, I doubt this is a plausible scenario.
Overall, we should see as more logical a reshuffling of flows back in alignment with the defined structures than the other way around. The critical areas to monitor will be 2,765.00 in the S&P 500 and about 96.70 or 1.1350/60 in the Euro/US Dollar. Let me reiterate it again, be wary of supporting risk flows when the structure is still far from offering us clear signals for risk flows to extend much further. Never lose sight of the forest (structure) for the trees (flow).
EUR/USD: Tapering of volume & order flow hint falls ahead
Will the weekly print a fake candle? We are about to find out in 24h. On the daily, the price is re-testing again the 50% fibo retracement from its latest fall, which makes it attractive to start considering shorts. By dissecting the hourly, we can see how the connotations of the order flow and volumes are both indicating the rebound should be limited in nature. Firstly, the velocity of the move down came much more impulsive vs the corrective upside move. Secondly, we are finally starting to see the tapering of volume into 1.1353 resistance ahead of the next critical area at 1.1395/1.14. By analyzing the 3-day correlations on a 30-period, we can start to justify as to why selling the Euro around near-by levels would be well justified based on the latest tick ups in the pair while both the German vs US and German vs Italian yield spreads head lower. The correlation for most of 2018 has been very strong, hence it’s acted as a great guide to assess the intrinsic value of the pair.
Markets Scan: Classic Risk Aversion Boosts the US Dollar
Authored by Ivan Delgado, Head of Market Research at Global Prime. The purpose of these institutional-level chart studies is to provide an assessment of the market conditions for the next 24h of trading in order to assist one’s decisions on a regular basis.
Quick take (express version)
In the last 24h, we’ve seen an aggressive sell-off in risk assets, in what I categorize based on my risk model as classic risk aversion. The DXY was by a country mile the outperformer on Tuesday.The immediate outlook for the Euro has been damaged, even if a confluent area of support on the hourly still offers certain credence for buyers to still find technical value engaging in weakness.
The Sterling is piggybacking the performance in the EUR/USD while awaiting new cues out of the Brexit conundrum. The USD/JPY is going to face tough hurdles through 113.00/113.10 if the recovery keeps extending. On the Aussie front, the pair has been punished on risk-off flows and it looks like an interesting proposition to buy on weakness but make sure to keep an eye on equities performance.
In my usual market scan, I’ve also spotted an attractive long play in the AUD/CAD based on valuations, and a similar trade might be in store, judging by the divergence in yield spread, in favor of the Kiwi. The short call on EUR/JPY yesterday played out well.
Risk model: Risk-off conditions at full steam
The risk-weighted index has taken another harsh beating, this time courtesy of what I call a classic ‘risk-off’ scenario, which refers to lower yields and stocks and a higher USD as a safe haven. It, therefore, leaves us with an ugly picture in the short-term, while from a structural point, it doesn’t get any better. We still remain in a weak USD context as depicted by the black lines in the DXY chart. Either way, if the DXY were to keep breaking higher unless we see a major turnaround in equities, the bottom line is that market conditions appear far from conducive to bid risk assets.
On a chart by chart basis, let’s first dissect the rout we’ve seen in the S&P 500 as the sell-off extended. There is little reason to believe the index won’t fall further until it reaches its next 100% proj level at 2,600.00, which happens to coincide with a weekly level of support and where we might see a short-term termination of the sell-side flows before a more meaningful rebound. The junk bonds index* (HYG) suggests more pain ahead.
*HYG is one of the most widely used high yield bond ETFs…Providing exposure to a broad range of U.S. high yield corporate bonds. The lower the index goes, the worst the outlook for what’s often referred to as junk bond or high bond corporates.
US yields deserve some closer examination as we are at an area on the daily where I believe we might start to see some recovery. Not only on the premise of the static support but on the inability of the 30-yr yield in the US to close under level despite a deep break. At this stage, this is just a tentative forecast, nothing else.
We still need to see rates recover at least the 3.35% area and find acceptance above before we can start making a stronger case. If this scenario were to be combined with the breakout of the descending trendline in the DXY with acceptance found above the 97.00 area, watch for a transition from USD weakness into strength across the board. As the cycles stand though, there is more work to be done by USD bulls before order flows and the structure can align.
The Daily Edge — Fed Delivers 4th Hike of 2018 But No Equities Circuit Breaker
The Daily Edge is authored by Ivan Delgado, Head of Market Research at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth look of market dynamics, factoring in fundamentals, technicals, inter-market, futures and options, in order to determine daily biases and assist one’s decisions on a regular basis. Feel free to follow Ivan on Twitter & Youtube.
Market Drivers & Fundamentals
Fed delivers a well-telegraphed 25bp hike but lowers rate increase expectations for 2019-2021 via the dots diagram by an average of 25bp.
The Fed continues to highlight that “some gradual increases” in rates may be required, which implies not closing the doors to more hikes, even if the pace slower from here on out.
US equities, with lower Put premiums priced ahead of the FOMC in expectations of a more dovish Fed, take another plunge as the outcome does not provide an immediate circuit breaker.
The Fed lowers its 2018/2019 GDP forecast, leaves inflation unchanged. Reasserts its stance that the Central Bank will be as data-dependent as it gets given uncertainty in 2019.
The UK inflation came flat at 2.3% ahead of today’s BoE, which is expected to be a non-event, until the Brexit impasse can be addressed next year.
The Canadian inflation data undershot consensus. Even if marginally, enough to rule out the possibilities of any BoC rate hike in January.
The BoJ leaves its policy rate unchanged as widely expected by the market.
The NZ GDP for Q3 disappointed by coming way below expectations at 0.3% vs 0.6% expected, causing banks such as ANZ to revert back to calls of rate cuts by the RBNZ in Q3 2019.
The Australian jobs report came higher than expected, almost doubling estimates, but behind the headline number the full-time/part-time split and jobless rate cast a shadow.
Events Ahead
The Bank of England (BoE) is in no rush to make any changes in policy and it is set to keep the Bank Rate unchanged. Besides, the meeting is not attracting a whole lot of attention as it’s an interim one not followed by an Inflation Report, therefore we should not expect any new developments of interest. The BoE is in a wait-and-see, but not precisely on data-dependency as the ECB or the FED, but rather they’ve been taken partly hostage until Brexit clears up.
Risk Model
Risk continues to be punished severely after the risk-weighted index lost another 3% on the aftermath of the less dovish rate hike by the Federal Reserve. The combination of a trounced S&P 500, along with the hammering of US bond yields to a new cycle low of 2.78% was the perfect risk-off storm.
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By looking at the anatomy of Wed’s sell-off in the S&P 500, we saw renewed sell-side commitment on increasing volume, way above the 20-day MA. The price action also screams more trouble ahead, with the selling only finding a temporary base on the touch of the 2,500 major psychological number. The free-fall in the junk bond market (HYG) shows no end in sight, while a hefty VIX above 25.00 is very troublesome. To make matters even worse, the US yield curve dropped mercilessly, with the 10y-2y at 0.11bp, while the Fed’s fav measure 10y-3m is at 0.43bp
The outlook for the 10-yr US bond has also worsened, even if one must be extremely vigilant as the yield, currently at 2.78%, just landed into what signifies a major support area. The violent move, with an increase in volume heading into the level, does suggest that the downside pressure may persist. Meanwhile, the US Dollar continues to be boxed in within a rising wedge on the daily. Until the pattern finds a resolution either way, movements in equities and yields will be far more important to determine the state of affairs when it comes to the risk profile.
Forex Majors
EUR/USD — Supply Imbalances Topside Still Dominant
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The bullish tendencies in the pricing of the pair came to an abrupt halt at the key 1.1435–40 resistance after the Federal Reserve delivered a less dovish rate hike, leading to a major removal of downside liquidity immediately after the event. The daily chart still provides an unambiguous bullish macro backdrop, even if the back-to-back daily topside rejections, accompanied by the intraday impulsive move down clouds the outlook for the pair short-term.
I must say that we are experiencing an unprecedented and very prolonged compression in this pair. Be prepared for volatility to pick up substantially on a breakout. For now, imp vols via options do suggest gamma scalping at the edges of the broad range should continue to ensure familiar levels.
Let’s be clear. Sellers have gained ground, but structurally wise, the battle is not yet lost by buyers, as the cycle of higher highs and higher lows is still intact. The sell-side flows managed to absorb Tuesday’s POC, but residual demand at 1.1350–55 still needs to be cleared before the structure turns bearish on the hourly time frame. On the upside, the clustering of offers around 1.14 (POC Wed) must contain further appreciations or else 1.1420 (origin supply imbalance post-Fed) is next up, in which case, the risk of an upside breakout would be a realistic outcome to expect.
GBP/USD — At A Key Juncture, Buyers Must Show Up
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We continue to see the contrast of opposing forces. On one hand, the yield spread valuation does scream to buy this market as the widening continues. However, the moment we stare at the daily price action, it’s almost the dreamed setups to engage in further selling following two pin bar rejections off 1.2680–1.27, an area that I’ve consistently highlighted as a major cluster of offers where trend traders may be looking to engage with impetus on the back of the weekly close sub 1.27.
On the hourly, the bullish structure is the Pound has been semi-compromised by the transition into ranging conditions. If the cluster of bids fails to absorb the increasing sell-side pressure post the FOMC, the Sterling risks a renewed directional bias to the downside. The exchange rate is resting at a critical intersection, represented by a horizontal line + 3rd touch of an ascending trendline. Failure to break lower sees room for a recovery until 1.2670 ahead of 1.27, while the clearance of 1.26–2610 bids triggers the initiation of a new cycle low towards 1.2580 as the next horizontal target.
USD/JPY — Selling On Strength Favored As Risk Deteriorates
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Once again, the pair saw a vigorous rejection away from a key area of support circa 112.20–30. The correlations continue to provide clear selling signals as both the risk profile and the US vs JP yield spread keep deteriorating dramatically, suggesting a fair value of sub 110.00 in USD/JPY.
The absorption out of the daily chart is notable, but with sellers still drawing the line in the sand at the topside of the hourly range around 112.60, they remain the clear side in control. Selling on strength at key liquidity areas continues to be a strategy that should keep sellers ‘on the money’ as long as the divergence in valuations remain as clear as they are. If the follow-through doesn’t abate, 112.00 and 111.80 are the next objectives to aim for by sellers. Overall, the market still remains in gamma scalping mode judging by the impl vs hist vols, so be aware of fading moves at the edges.
AUD/USD — Aiming To Retest Yearly Lows
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We were well tipped way in advance, via the increase in Put premiums ahead of the FOMC, that interest to engage in topside sell-side action on the Aussie was on the rise. The daily shows a sizeable bearish price action, with the breakout of the key 7160 now a reality. The spurs of risk-off have dramatically compromised the outlook for the Aussie, as equities sell-off with earnest.
Drilling down into the hourly chart, the 100% fib projection target comes at 0.7192, a level that also aligns with the POC from the October balance area. If the momentum extends, the next key area to be targeted would be the year lows at 0.7150–0.7130, where support should be found, as it also aligns with the 100% projection target from the 7380–7220 breakout measure.
Options — 25 Delta RR & Vols
From today’s 25 delta risk reversals, we can observe the gradual reversion towards pricing Puts in the E6 contract more expensive than on the lead up to the FOMC, suggesting that the options perceive higher risks of the pair being offered after the supply imbalance see post the FOMC. Interestingly, the Sterling is not as bearish heading into the BoE, with the Puts premium reduced. The pricing of Puts in the Canadian Dollar has also come lower, in expectations of a potential pullback after the overextension in the charts. Not the case of the Aussie, with Puts priced at the same levels, which is never a positive sign. The most notable change in option premiums can be found in the ES contract, with the pricing of Puts going through the roof vs Calls, indicating the high degree of fear that exists. Lastly, we’ve seen a surprising reduction in the Call premium in the ZN contract (10-yr US bond).
Source: http://cmegroup.quikstrike.net (The RR settles are ready ~1am UK).
The Daily Edge — The USD Keeps Rolling Over In Line With Expensive Valuations
The Daily Edge is authored by Ivan Delgado, Head of Market Research at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth look of market dynamics, factoring in fundamentals, technicals, inter-market, futures and options, in order to determine daily biases and assist one’s decisions on a regular basis. Feel free to follow Ivan on Twitter & Youtube.
Quick Summary — Dec 21, 2018
It’s often said that the best times to buy is when there is blood in the streets. Can the worst Dec performance in the S&P 500 since 1931, down more than 10%, qualify as fears having reached a dramatic peak and a relief rally to soon ensue? I won’t just simply speculate, but I will talk about the facts.
We have a rampant VIX above 28.00, junk bonds rolling down the hill in monstrosity fashion, funding costs on the rise (10-yr Treasury yield vs 3-month US Libor inversion), and a plethora of other undeniably negative cues not to sit too comfortably on the contrarian camp.
However, in today’s report, I also perceive the ES front-month contract experiencing a notable reduction in Put premiums after what arguably looks like signs of buy-side absorption in the S&P 500. Similarly, the ES contract exhibits a P/C ratio in low delta options volume at nearly 2:1, which tells us interest to buy cheap downside protection goes in crescendo.
The fact that the USD/JPY is falling by over 2x its daily ADR may also be a sign of some potential exhaustive movements short-term, even if judging by the cost of Calls in the JPY contract, along with increased interest to raise the pricing of US bond Calls, does suggests the trend should be our friend in the grand scheme of things, especially after such a violent breakout.
In the Euro front, a resolution by closing above the sticky 1.14 has finally manifested in line with macro valuations, with the German vs US yield spread hinting 1.16–1.17 targets. The agreement to put to bed the Italian budget saga is too cementing confidence to turn more Euro bullish, or less pro USD I should say, as the ECB still has plenty of negatives to contend with.
Let’s not forget, as a symbolic representation, that the wider DXY has cleared an ascending trendline capping the upside for months. These should all be signs that suggest the market is setting the stage for what appears to be follow through sell-side dynamics in the USD as we welcome 2019.
The market is playing its cards on the aftermath of the FOMC, which is going to be overly vigilant on economic data to determine its rate policies for 2019. For now, the verdict is no circuit breaker for stocks, no love for the US Dollar. I just can’t see the synchronized hammering to extend much further as sooner or later, the market may start to price in a more prolonged Fed pause, in which case, equities may find the love they so desperately require and breathe a sigh of relief while the USD stays on the backfoot as we welcome 2019.
Market Drivers
US Dollar hammered as the market finally comes to grips with the major macro valuation disparity, well telegraphed through yield spreads/flattening of the US curve.
Risk-off no longer equates to US Dollar as the bearish move in the USD is a concerted one, with a sufficiently dovish Fed the green light required for all hell to break loose.
US equities continue to be an absolute bloodbath. The usual culprits of trade, growth, government shutdown are attributed if only to try to justify falls and put a ribbon in headlines. The reality is that the sell-off seen this week is very much a result of a market with null confidence to catch a falling knife. The negative sentiment, once again, obeys the prognosis well telegraphed via the huge spike in Puts premiums observed in the last 24h.
After the longest 1 cent compression in the Euro/US Dollar rate in recent years — on a closing basis — , the acceptance above 1.14 does open the can of the doors for further USD weakness.
Crude Oil has another nefarious performance by dropping over 5% in value towards $45.00. Any expectations of a pick up in global inflation as a result of high energy prices feels like all but an abandoned case to make heading into 2019. It’s not supportive for G10 CBs tightening.
In an important macro development, the Washington Post reports that “the U. S. charges Chinese hackers in an alleged theft of vast trove of confidential data in 12 countries”. The accusations of espionage to steal trade secrets and know-how in technologies, does represent a stumbling block in the Sino-US/West relationships.
The Bank of England left its bank rate unchanged at 0.75%; votes 0–0–9. A non-event until the Brexit situation clears up next year.
The same could be applied to the outcome of the Bank of Japan monetary policy decision, with no changes in policies while Kuroda keeps harping on the idea that further easing could return as a top of high relevance if price pressure deteriorate. By the way, their pledge to buy 80tl yen of JGBs continues even if that target seems unrealistic. Uneventful overall.
The UK parliament is set to reconvene to debate the Brexit deal on 9 January again. We’ll all be grateful for some relaxation in the conundrum that the Brexit situation has morphed into.
In an attempt to keep the Chinese economy afloat, the government is said to be assessing more aggressive tax cuts amid the US trade war and slower demand domestically.
The Daily Edge: The Year 2019 Starts With A ¥ Flash Spike As Aperitif
The Daily Edge is authored by Ivan Delgado, Head of Market Research at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth look of market dynamics, factoring in fundamentals, technicals, inter-market, futures and options, in order to determine daily biases and assist one’s decisions on a regular basis. Feel free to follow Ivan on Twitter & Youtube.
Summary — Jan 3, 2019
If the vol or best put to make justice to the moves, the flash crash, witnessed in the Yen crosses during the twilight NY-Tokyo transition is any guidance for what’s to come in 2019, buckle up traders, it’s going to be a wild ride.
If it wasn’t enough with a VIX above 25.00 to start the year, how about a test of 105.00 in USD/JPY as potential pre-cursor for volatility returning with a vengeance in forex this year? With an increasing number of Forex pairs exhibiting implied vols breaking above its historical standards, the prospects of the market profile getting much more directional this year remain firm.
Find out more about the relationship between impl vs hist vols in the following tutorial: What Is Gamma Scalping & Why It Matters
Be warned, the overblown move in the Yen crosses has not translated in a move of the same proportion in other risk-sensitive assets out there. Yes, it’s still very precarious given the shoot up in the darling of risk-off currencies or the massacre of Aussie longs, but if we take a look at the internals of our risk model (more below), neither US equity futures (ES), US fixed income or the price of Gold suggest panic selling, hence it makes it clear that the move in the Yen should be treated in isolation vs risk deterioration across the board.
A few culprits behind this disorderly snowball effect include the low liquidity period (exacerbated by holidays in Japan), macro stops taken out in Yen crosses, algo smelling panic, all within a context in which Apple warned about the sharp economic contractions in China, which was rationalized as the main reason they missed so badly on earnings and cut their Q1 revenue guidance.
The insights into the Chinese economy by a key player like Apple should not be underestimated and understandably, it promoted a sense of panic. Apple’s warning gives us an opportunity to evaluate the state of affairs in China as a true measure of economic activity without the intervention of stated-owned actors to massage the data. Apple was especially vocal on the slowdown in China since H2 2018 as the contentious trade tensions raged on.
The pendulum of risk used to swing left and right depending on the progress in the Sino-US trade war status back in 2018. However, the trade truce from early December and the price action that has followed ever since is sufficient evidence that we’ve transitioned into a whole new thematic…
One in which the market psyche is looking past the isolated tit for tat US-China trade dispute, to instead shift its focus towards a global slowdown in growth. China will continue to be a decent barometer, as the slower its growth gets, the more the rest of the world will pay the consequences given the amount of influence in global economic activity China represents.
The latest miss in the Caixin Dec Manuf PMI at 49.7 (first contraction since May 2017) coupled with Apple’s shocker has only worsened the pessimism around growth. It seems inevitable that the Chinese Central Bank will have to resort to a more proactive approach in order to contain the weakening of the economy by promoting expansionary fiscal policy and a moderated approach to easier monetary policies, with a sacrifice to the deleveraging process.
The one-way-street moves in risk-off from recent weeks continue to leave us breadcrumbs of information = 2019 is off with a market that is exceptionally worried about the sneezes of China, and the cold being caught globally.
There were signs written all over the wall in late 2018 of an ailing state in the global economy. From the magnitude of declines in Oil prices, the synchronized sell-off in global equities, the acceleration in the flattening of the US bond yield curve only to mention a few, which left us with a picture that speaks by itself. It’s been the most negative YoY performance across all asset classes, in USD terms, in many decades.
Another major driver this year, other than global growth, is set to be the potential shift in attitude by the Fed, rapidly moving into a cul-de-sac road with no easy way out. In other words, the massive tightening of financial conditions is doing all the heavy lifting for them. The Eurodollar futures, the Fed funds CME contract or the US yield curve all signal trouble is brewing ahead for the US economy, with the levels dealt clearly telegraphing that the market is not buying into the US growth story in 2019.
Later today, we will have yet another opportunity to analyze the anatomy of the US economy via the release of the US ISM Manufacturing PMI, a series that after peaking out at 61.00 late last year, it’s been unable to keep up the pace growth despite the latest number still showed a hefty 59.3.
The Daily Edge: The Global Slowdown Theme Cements On US ISM Big Miss
The Daily Edge is authored by Ivan Delgado, Head of Market Research at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth look of market dynamics, factoring in fundamentals, technicals, inter-market, futures and options, in order to determine daily biases and assist one’s decisions on a regular basis. Feel free to follow Ivan on Twitter & Youtube.
Summary — Jan 4, 2019
As we head into European trading, we find ourselves in an environment dominated by US Dollar weakness across the board courtesy of further evidence that the “global slow down” phenomenon is sinking in. The turnaround is a radical shift of dynamics from what just 24h ago in what’s been a very lively start of forex trading in 2019 due to the Yen flash surge.
The moves on Jan 3rd carry some important messages that should not be overlooked. First and foremost, it portrays the difficulty that any market will face finding any type of equilibrium when the rubber stretches as much as it did in the event of yesterday’s ‘flash crash’. Unless driven by a major geopolitical event such as the declaration of war or any other black swan-type occurrence, which wasn’t the case during the JPY crosses flash crash, the efficiency of a market will prevent the overextensions of the move to find sufficient players to maintain the overstretched equilibrium as seen.
However, and here is where the main message lies. In light of a US Dollar that ended the day weaker against most of its peers after a quantitative advantage in the hundreds of pips earlier on the day, we really need to question ourselves the outlook for the currency. The background noise in the form of a flattening US curve, 20bp of rate cuts discounted for 2020, the major miss on Thursday’s US ISM PMI sure will keep reverberating in Fed’s Powell head as the case to keep the path of further normalization weakens.
Onto the US ISM. It wasn’t just a mere drop, but it has significance for 2 key reasons. Firstly, it was the sharpest MoM contraction since 2008 (GFC era), and secondly, it makes the case of a dreaded global slowdown more palpable and believable if last year’s poster child (US) is now also starting to limp.
Let’s not forget that this is the year of Central Banks’ date dependency. What this will equate to is that each data point will be taken with a higher degree of relevance to determine the path of least resistance when it comes to setting monetary policy. Countries that accumulate on aggregate a streak of negative economic reports, and it will not take long for considerations that may involve dovish tilts. From the Fed, ECB, RBA, RBNZ, BoC, PBoC, BoJ, BoE. None are in the safe camp when we talk of a context characterized by a global contraction.
I must say that after the poor ISM report (inventory build-up appears to have been the main culprit to keep it as high as of late), and with the US government shutdown still ongoing, the US is off to an ugly start. The cliff is getting steeper for the Fed to climb. While the upbeat ADP jobs report may give the false perception of acting as a consolation, be aware that this data is much more lagging in nature.
What the weak showing in the US ISM manufacturing does, too, is to further cement the view that the global slowdown in growth continues to spread, becoming a global phenomenon. From East to West, China’s industrial and manufacturing data earlier this week undershot and that keeps lowering prospects for economic activity in the whole Asian region, European PMIs have been underperforming for some time now, the UK remains a political mess, and now we get this US ISM. You get the picture.
The global slowdown so well-telegraphed in late 2018 via the decline in the prices of crude oil or the synchronized flattenings of the yield curves around the world is today, more than yesterday, a reality quickly sinking into the psyche of the market. Let’s not forget that the acknowledgment by Apple that China is a market in deep trouble where revenue prospects are no longer what they used to be, on its own, carries enough substance to be very wary. Even Kevin Hassett, Trump’s advisor, said today he predicts a “heck of a lot” of US companies to follow Apple in lowering its revenue guidance in China.
Shifting gears, in today’s report, I find no reason to revert the focus in the overall risk-off sentiment, which appears to have become a perpetual feature of my daily takes. It’s just what it is. We find ourselves with prolonged flatter yield curves globally (worsened prospects for growth), US bonds on an absolute tear as a preferred shelter amid the recent topsy-turvy movements, Gold continuing its majestic run to the upside as $1,300.00 comes into contact, and the ES rolling over.
In the next 24h, there will be 2 major events to keep in mind. The first comes in the form of the US NFP payrolls, where calls are fairly optimistic, including for a marginal pick up in earnings MoM. Equally, if not more important given the market context, is the speech by Fed’s Chairman Jerome Powell, due to participating in a panel discussion titled “Federal Reserve Chairs: Joint Interview” at the American Economic Association’s Annual Meeting.
No End In Sight For Risk-Off Conditions
The risk index remains under pressure circa 75.41 with no signs in the horizon of a sea change any time soon. The environment is dominated by US Dollar weakness with equities offered, hence why we are seeing risk still on the backfoot. The late 2018 risk-off theme stays for now.
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The bid caught by US fixed income accelerated further with ZN1! (10y US bonds) exhibiting the highest volume since Dec 6 of last year. The 10y now exchanges hands at 2.56% and given the sharp moves seen, I’ve drawn a more macro projected target, which means there might be further room for bonds to appreciate. Besides, most of the volume is now found trapped on the lower end of Thursday’s range. It’s not looking good for the US Dollar.
Akin to the surge in US bonds, Gold continues its stellar performance but with a much-needed caveat to be aware of. The precious metal has now met its 100% projected target + faces $1.3k overhead. The bullish rhythm is clear and you don’t want to fight it, but if there is an area in the entire trend where significant bouts of profit-taking may be present, around this periphery it is.
The bearish outlook for US equities continues intact, especially on the back of Apple’s poor revenue guidance. The sell-side candle on the ES mini closed near the lows of the day, and as in the case of the US bond dynamics, weak-handed buyers ended up finding themselves trapped long wrong-sided judging by where the PoC (Point of Control) is vs the daily candle close. More pain is possible and I am afraid that neither the VIX nor the HYG (junk bonds) gives us opposing signals.
In the US Dollar index, I am paying attention to the range structure 97.6–95.7 with a midpoint of 96.65, which is critical to help us understand the US Dollar outlook going forward. Ever since the range was established back in mid-October, the index spent the majority of its time on the top 50%. However, as 2019 got underway, we saw this critical mid-point broken. If the index can consolidate on the bottom-side of its range, it harbingers a poorer outlook for the currency. If it breaks higher, then we know what’s the next level of resistance as a reference (97.6).
Last but not least, if we look at the tendencies of the yield curves out of Germany, the US, or Japan, we can extract a clear message. The market envisions an environment of poor growth, which again, should keep the reflationary profile at bay and the overall outlook for risk dire.
The Daily Edge: Risk Soars As Powell’s Blinking Is What Counts
The Daily Edge is authored by Ivan Delgado, Head of Market Research at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth look of market dynamics, factoring in fundamentals, technicals, inter-market, futures and options, in order to determine daily biases and assist one’s decisions on a regular basis. Feel free to follow Ivan on Twitter & Youtube.
The State of Affairs in Financial Markets — Jan 7, 2019
It didn’t take long for Fed’s Chairman Jerome Powell to cave in by sounding more dovish during last Friday’s joint interview alongside former Fed Chairs Bernanke and Yellen. The hint that the Central Bank is prepared to adjust its course on QT (quantitative tightening) should market forces continue to determine — via the sell-off in equities — that the rubber has stretched too much, is the theme at play igniting an abrupt reversal seen since Friday.
Also, make no mistake, Fed’s Powell has walked back all this…
Not because Fed’s President Trump has added pressure on the Central Bank’s policies, as much he tried, but because at the end of the day, no one, even Central Banks, can fight the market. It’s been well-telegraphed through the contraction in Oil prices, US asset valuations through the roof, Apple’s downgraded revenue guidance, depressed manufacturing PMIs, an unprecedented global yield curve inversion in many countries, and the list goes on… that the Fed was reaching a plateau in its cycle.
Headlines of the following caliber: Fed will be “patient, prepared with flexible policy” or “wouldn’t hesitate to change balance sheet policy if needed” were music to the ears of bulls and for the overall recovery in risk sentiment.
Will it last? The comments came directly from the horse’s mouth, so I believe they must be respected and they add credence to see further legs up in risk.
After all, one wonders how long was the Fed ready to delay the inevitable “blink” given the obvious disparity between their rate hike dot plot estimates (3 for 2019) and the Fed fund futures (none).
Source: MacroTechnicals
So, while Powell’s hint for concessions in the Fed’s shrinking balance sheet in case of further disruptive market movement is the overarching dominant theme in markets, there is another major development worth noting.
I am talking about the outstanding US payrolls report. It was simply incredible after an increase of 312k jobs, an upward revision of 58k the previous month, an increase in participation (led to a tick up in the unemployment rate) all while wage increases jumped to 0.4% MoM for an annual rate of 3.2% YoY. The take via bank researches was unanimous, it was a big positive.
Source: ING
However, there are a few caveats that are worth outlining for traders not to get ahead of themselves on their bullish views on the US Dollar. Firstly, the US jobs report tends to be a lagging indicator vs other leading measures of which we already had a sour taste last week after a massive decline in the US ISM manufacturing PMI. Take note. Secondly, with no end in sight for a resolution to the US government shutdown, the prospects for the US job figures in Q1 are far from promising. Thirdly, the market is currently emboldened by a sense of renewed risk appetite, even if the cycle is going to be short in nature, and that places currencies the likes of the USD or JPY on the back foot against beta plays the likes of the Aussie, the Canadian Dollar, the Kiwi, EM FX. Fourthly, the US Treasury is about to add liquidity into the system by reducing its cash holdings due to an anticipated debt ceiling suspension, hence this technical liquidity event is another temporary negative risk for the USD.
Andreas Steno Larsen, Senior Global FX/FI Strategist at Nordea Markets, comments on this underlying risk for the USD in Q1: “The likely upcoming debt ceiling excess liquidity surge is interesting, as liquidity developments will then be at odds with Feds balance sheet trend.” You can access the latest Nordea weekly market research by clicking the following link.
I want to emphasize that as strong as the US NFP may have looked for December, there is a clear risk that the markets, as a discounting mechanism, will gradually be dismissing this positive input, to instead be eclipsed by the underlying signs of a significant contraction in the US economy in H1 ‘19.
This quote, by Nordea’s Andreas, highlights the overwhelming signs of a top reached in the US economic cycle and should be a great reminder that the focus will be firmly maintained in the global growth slowdown front in 2019 and how the US may continue to “catch down” on trends seen elsewhere.
I can’t foresee how the Q4 2018 risk-off profile gets unwound from a macro perspective, hence why we should remain in an environment where all types of asset classes stay under pressure (risk off) in a theme fairly analogous to what’s been the norm in the last few months. In between, we will obviously have to contend with short-term hiccups of risk appetite, as the one currently underway, on the back of the Fed’s stark change of stance in the monetary options that will be on the table during 2019.
It’s important to remember that there is still a lot more room for the Fed to stay sidelined under a thoughtful waiting mode until the day of reckoning comes to announce a radical reversal back into full-fledged easing mode again. They now have some ammunition ready after the completion of a tightening campaign back towards near neutral levels, while also having the comfort of waiting, courtesy of lagging US NFP numbers that are disguising the true forward-looking direr state of the US economy.
Bottom line, the day in which the Fed goes back into full-blown easing mode is still far from materializing, that’s why we should be mindful that short-term, this run on risk should be a bleep or a drop in a red macro ocean. It may last days, but the environment remains a dangerous one and the trend is clear.
The following chart by the Financial Times, speaks volumes about the attractiveness of short-term fixed-income allocations, a reminder that the market is non-committal and the growth outlook severely disregarded.
The Daily Edge: USD Feels The Pain As Fed’s Blink Effects Linger
The Daily Edge is authored by Ivan Delgado, Head of Market Research at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth look of market dynamics, factoring in fundamentals, technicals, inter-market, futures and options, in order to determine daily biases and assist one’s decisions on a regular basis. Feel free to follow Ivan on Twitter & Youtube.
The State of Affairs in Financial Markets — Jan 8, 2019
The risk rally ignited by the blinking of Fed’s Powell and further supported by the easing in China after the PBOC announced a 1% RRR cut to its banks, continues to underpin risk assets. The underperformance of the Japanese Yen, now well below its pre-flash crash levels, portrays the improved picture, even if the cynic within me, still tells me we are far from being out of the woods.
The reason I am adamant to place too much weight on a protracted relief rally is that I still have very present in my mind where we come from in late 2018. One of the ugliest Dec equity sell-off ever, US companies’ earnings estimates to follow Apple’s downgraded guidance, an Oil exchange rate that still screams a low growth/deflationary environment, a record-high move into US money markets, just to name a few. As an analogy, the current recovery in risk assets still feels like too minuscule and with a few major hurdles to overcome before a more convincing phase can take shape.
Fed’s Powell has caused technical damage to overblown risk-off extensions, but as I argued in yesterday’s report, the Fed will still need to transition from a mere dovish stance about its readiness to act and adjust its balance sheet to more dovish action. Even if the market buys into the idea that the Fed tightening campaign is clearly over (no more hikes priced in this year), the Central Bank needs to follow up with the type of signals that will keep the market’s hopes of a slowdown in QT alive. If you check today’s 25-delta risk reversals updates (provided below), it should be concerning that the premium to buy Puts on the E-mini S&P 500 keep rising as the correction higher continues. Similarly, the Calls in US fixed income seem to be reverting back up, now more expensive than the Puts again, after a brief spell in which Fed’s Powell interview caused the pricing to even out.
The weak US PMI, which follows a broader negative theme worldwide, Apple’s miss unlikely to be an isolated incident, recently extreme equity valuations, a housing market in trouble… must still contend with residual strong US economic data emanating from the jobs market or consumers’ consumption. So, while we’ve been offered the first catalyst courtesy of Powell to see risk premiums come down, the process of reckoning the true risks of a deterioration in the US economy may end up being a slow process, with the pendulum swinging from optimism to pessimism.
The Daily Edge: Residual Risk Appetite Persist After Friday’s Fed Put
The State of Affairs in Financial Markets — Jan 9, 2019
The US Dollar saved the day by regaining some of its strength, especially against the European block, allowing the DXY to move gently away from a key area of support circa 95.70 as the chart below shows. The residual bouts of risk appetite on the back of Fed’s Powell dovish tilt last Friday are still feeding through, with the S&P 500, as the bellwether of the overall US equity complex, extending its technical correction, while the US fixed income market found another leg down, with the 10yr bond yield creeping up to 2.73.
Under lingering risk-on conditions, which were further supported by Trump’s tweet that trade talks with China “are going very well”, flows into the US Dollar should have, in theory, receded on Tuesday. However, the weakening trend in the Eurozone economic data is no longer an aberration but a clear pattern that sooner or later the ECB must take note by adjusting its overblown growth estimates. And because of that, alongside Brexit risks, the US still becomes a safe house to hide when overstretched vs the EUR or GBP.
The reason we ended up with limited demand to lift the Euro can clearly be explained by the atrocious German industrial production, which plummeted way below consensus, and as Daniel La Calle, an acclaimed economist at Tressis notes, “while consensus keeps impossible EZ growth expectations.”
Source: @dlacalle_ia
To put things into perspective, the fall in Germany’s industrial production on a yearly basis was 4.7% n December, which means it’s by far the largest since December 2009. To make matters worse, the European Commission’s economic sentiment indicator (ESI) for the Eurozone fell from 109.5 in November to 107.3 in December, which makes 12 out of 12 months in declines. These latest data points have led to starting to see calls of a technical recession in Germany in H2 2019.
Carsten Brzeski, Chief Economist ING in Germany notes: “ At face value, today’s industrial production data has clearly increased the risk of a technical recession in Germany in the second half of 2018. Watch out for tomorrow’s trade data. Another disappointment, combined with the high inventory build-up in 2Q and 3Q, would clearly increase the likelihood of a technical recession. On the other hand, private and public consumption still have the potential to offset recession forces. Looking ahead, however, even a technical recession should be nothing to be too worried about. It should be technical, without any significant marks on the labor market.”
Meanwhile, Eurozone corporate spreads and sovereign spreads keep rising even as the environment continues to be relatively stable since the Powell Put. On corporate bonds, what’s even more worrying is the fact that, as Asif Abdullah, Strategist at Scotiabank, explains, “unlike the Fed, the ECB holds corporate bonds. If ECB actually winds down its QE and starts reducing assets, these spreads would rise even further.”
What the above observations translate to, in layman terms, is that the ECB won’t allow this tightening of economic conditions to keep on going. That’s why we are progressively moving towards a phase in which the ECB is entering a state of virtual reality if they so believe they can wishfully think the normalization of its policies can occur anytime soon (read 2019).
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The Daily Edge: The US Dollar Enters A New Bearish Phase Near-Term
Quick Take — Why The USD Bearish Outlook?
The US Dollar is set to extend its weakness against the Euro in the following weeks towards its next projected targets at 1.1550 (hit on the breakout) and ultimately complete its bearish cycle as the currency is dealt at levels circa 1.1750 up to 1.18. In this article, I will lay out all the reasons that have cemented and continue to make me bearish the world’s reserve currency.
Drivers — What’s The Current Story?
The debacle of the US Dollar from its peak in Nov-Dec ’18 can be explained, rather than by the merits of the Euro per se (far from it), which accounts for 57% of the DXY basket, as an adjustment of expectations over the Federal Reserve’s inability to raise rates any further. The most fascinating part about the walk back in the Fed hawkish rhetoric in a matter of weeks, however, is the fact that the market has been the ultimate culprit forcing the Fed to re-think its normalization path, even if the unwillingness by the Fed to hear the screaming market signals amid a roaring economy was clear.
The re-calibration in the language by Fed’s Chairman Powell, now publicly admitting that the Central Bank is finally open to hearing the signals the market is sending by considering potential tweaks in its QT (quantitative tightening) down the road, was the ultimate evidence of a market that was setting up to near a resolution of its protracted range.
In the last 24h, multiple Fed speaks have left no stone unturned, providing further backing to the view that the era of tightening has come to an abrupt halt in the foreseeable future. Fed’s Bostic, Evans, Rosengren, Mester, all seem to now be defending the same camp, one where ‘patience’ and ‘flexibility’ has become the norm. This dovish tilt was further confirmed by the Fed minutes, where the statement read that “the committee could afford to be patient about further policy firming” with risks to the outlook highlighted.
By and large, that’s been the story driving the current weakness seen in the US Dollar. A narrative in which the shift in focus from a clearly hawkish stance in early Q4 ’18 to where we’ve come to be today is quite radical, regardless of whether or not the market has been the culprit forcing them to ‘blink’.
It was precisely the market, via the German vs US bond yield spread, which had been telegraphing for quite some time that the capital flows into the US were set to recede as the yield advantage was rapidly on the retreat. Again, it wasn’t as if the German or the wider Eurozone could carry enough credence to justify higher yields, but it was more to do with a rubber band in the US yields front that had seemingly stretched a bit too far.
From mid-December, it’s when we started to see the real cracks in the German vs the US bond yield spread, which firmed up my bullish conviction to start buying Euros on weakness as the preponderance of evidence mounted.
I must confess that even if my view has been to support the long-side bias all along, I wasn’t that convinced by a breakout of the 1.15 vicinity due to the horrendous set of weakening economic indicators in the Euro area. Even if my endorsement has always orbited around buying at discount vs strength.
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The Daily Edge: Risk Underpinned By Fed Put, China Trade Talks
The State of Affairs in Financial Markets — Jan 14
Following the overstretched pessimism in which we started the year, the short-term relief rally in financial markets keeps on going. A combination of factors keeps supporting the overall risk. The constructive headlines coming out of the Sino-US trade negotiations remains an important development stimulating the risk on tone, with further signs that both parties aim to find a more protracted compromise after the confirmation that the Chinese Vice Premier plans to visit the US by month-end. More to latch on for risk seekers?
The lingering positive effects on the back of the dovish turn at the helm of the Fed continues to play out in favor of risk as well. The wait-and-see narrative is feeding through, sustaining risk. The immediate consequences ever since Fed’s Chairman Powell caved in to the market’s demand for a pause in the normalization process has been to drive the US Dollar lower as the expectations for a long pause in the Fed rate hike cycle and a potential adjustment of its shrinking balance sheet is being factored in the markets.
Besides, there is no doubt that all Fed members are now undeniably on the same camp, pinning words such as patience, flexibility, prudence, on top of their minds when addressing the press. A market-imposed unifying view.
The latest shoe to drop for the dovish rhetoric to go full circle came courtesy of Fed’s Vice Chairman Richard Clarida, who recognized the need for a sustained pause, the moderate improvements in global growth, the tightening of financial conditions or the possibility of shifting course in the Fed’s balance sheet strategy should it be warranted by market events.
Risk appetite conditions have therefore solidified even if we are far from being out of the woods. It’s become obvious for quite some time now that our risk-weighted index has been commanded higher mainly by the recovery in the S&P 500 as the correlation indicates. That’s why one must be mindful that the ES is fast approaching the key make or break point that led to the liquidity event last year. It implies that should sellers find enough value to create a supply imbalance off this area, risk off conditions looks poised to deteriorate again. The behavior in Gold prices also promotes the notion that the market has scaled down its fears, even if the poor performance in the US Dollar means that the bullish trend is far from experiencing a technical compromise. The yellow metal has taken a pause on its bullish momentum after reaching its 100% projected target ahead of $1.3k.
The Daily Edge: It’s Brexit Day Amid A Sustained Risk Climate
The State of Affairs in Financial Markets — Jan 15
As we move into Brexit vote day, the thematic landscape driving FX valuations is in rapid expansion. We are swiftly morphing from a narrowly centric China trade/Fed dovishness macro theme into a much broader plethora of issues.
On top of investors’ minds for the next 24h is the Brexit vote, where all 40 economists polled by Reuters agree on one outcome (UK PM May will lose). It doesn’t mean a defeat is a certainty, as a marginal loss gives UK’s May some leeway to make certain tweak before an ultimate deal goes through.
When all things considered, it does suggest the chances are very slim, perhaps up to 10–15%. May is expected to succumb by a margin of over 60 votes even if that’s just a vague rule of thumb type of number and it may vary quite wildly. The vote is due to take place between 7 and 9 pm UK time on Tuesday.
It seems that even before the vote, and well telegraphed via the bullish price action in the Sterling, markets are looking past the risk event and trying to figure out what options lie ahead in case of an outright defeat. The EU has been very clear that they are not willing to change their hard-line stance on the withdrawal agreement/backstop hashed out last year. The mother of all ironies here is that even if the vote has been delayed, here we are over 1 month later with the exact same conditions faced.
Moving on! The latest Chinese trade figures were a rude awakening for those still sleepy to the fact that the economy engineering half the global growth in the last 10y since the GFC, continues to slow down at an alarming rate. As the chart below exhibits, the data was atrocious, missing expectations by miles.
Source: @Trinhnomics
The deterioration in imports signals a weaker domestic economy while the reduction in exports activity tells us that the ripple effects of a slowdown in China, tighter global monetary conditions, higher domestic spending, are starting to be felt at a time when evidence of a global slow down mounts just as aggregate G4 central bank balance sheets continue to shrink.
