FX Majors: Analysis on Cycles, Vols, Correl, Levels

[IvanGlobalPrime]

What Is A Bond’s Yield Curve?

There has been so much talk about the inversion of the yield curves both in the US and in many other countries. In this article, I will explain what the yield curve really communicates and what are the potential implication depending on its slope.

The Basics — What’s A Bond And Its Yield

Governments or corporations around the world finance large portions of their expenses aimed at financing/maintaining projects or refinancing existing debt through the issuance of bonds also referred to as fixed income securities. A bond can be understood as an I.O.U (I Owe You) that includes the details of an agreement and conditions under which to return the principal capital borrowed plus the payment of interest to the lender. The interest rates in a bond transaction can be paid in variable or fixed terms.

Bonds can have different maturities. We call money markets those bonds with high liquidity and maturity or duration below 1 year for financing needs in the very short term. We could call the bonds in a portfolio that consists of average maturity of one year as short-dated fixed income. Then we have the medium-dated bonds with an average maturity of three years. Lastly, the long-dated bonds consist of average maturity six years or longer.

There are two core elements as part of the value of a bond. The first one is the pricing of the bond coupon. Below, I illustrate the 10-yr US government bond (candles), which currently stands at a value of 103 15’ 6. The higher the bond pricing goes, the more demand exists to own the bond, therefore the equilibrium between demand and supply must meet at a higher point. When a bond experiences high demand, the interest rate needed to be paid in exchange for the debt financing needs is lower in inverse proportion to the increase in the bond price. Conversely, if there is scarce demand for the bond, the price will adjust lower and interest rates will go up, as the bond issuer must provide a greater incentive through rates to attract new bondholders.

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[IvanGlobalPrime]

The Daily Edge: UK May Survives, Aussie Economy From Bad To Worse

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 17

The flourishing risk in financial markets extends as the ES founds a new leg up, led by financials after banking giants the likes of Bank of America/Merrill Lynch or Goldman Sachs reported upbeat earnings even as volatility in its FICC business is an undesirable event. In the currency market, the short-term low vol means low-yielding carry trades more appealing, as reflected by the falls in the EUR or JPY against the Greenback. However, be no complacent as the macro risk profile structure originated thru Dec still casts a shadow.

Even as UK PM’s May managed to survive the no-confidence motion by Labour’s Jeremy Corbyn on Wednesday, backed by the full extent of her conservative party and the DUP, the muted volatility in the Sterling reminded us that this was the main scenario being discounted. Nonetheless, the bullish divergence in the UK vs US bond yield spreads, the pause in the flattening of the UK yield curve or the fact that we saw premiums to own GBP Calls in a temporality of 1-month above Puts*, suggesting that the risks towards the Sterling keep building towards further upside price discovery auctions.

*Update: In today’s 25-delta RR, Puts trade above Calls for the first time this week. Cautioun is warranted as option traders price in potential setback.

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[IvanGlobalPrime]

The Daily Edge: Risk Boosted by China’s Trade Deal Hopes

The State of Affairs in Financial Markets — Jan 18

US stocks enjoyed a late-day boost driven by renewed hopes that the US is mulling the possibility of reaching a more protracted compromise with China on trade and further underpin the risk sentiment. The reports still remain a tad unsubstantiated by the absence of key policymakers. What we’ve seen so far is the market buying up in the rumors after a report via the WSJ/DJ.

If we take a look at the risk-weighted index, it’s printed a decisive bullish outside day with the 5-day MA still pointing to further gains ahead The broader spectrum of risk-sensitive assets monitored do offer an analogous sanguine outlook as a result. The ES has rocketed into the cycle highs, breaking and most importantly, closing above the major area of daily resistance at 2,623.00. Industrial goods and conglomerates were the industries leading the charge higher on Thursday.

Even the US fixed income market, which had shown some tentative signs of slowing down, has also found enough buying interest to keep the bullish tone in risk widespread. Meanwhile, the bullish outlook on the DXY is less clear as the index, as shown in the chart above, has entered range bound conditions in the last couple of days. In favor of the US Dollar is the support found at the 96.00, an area of critical resistance that has now turned support. The 5-day MA still suggests the general tendency is for the US Dollar to find further support, although in such a pick up in risk, gains should remain capped by the outperformance, especially from commodity-linked currencies.

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[IvanGlobalPrime]

The Daily Edge: Sino-US Trade Talks Keep Invigorating The Risk Rally

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 21

The unambiguous ‘risk on’ profile keeps on going with no end in sight so long as the US and China continue to signal that a more protracted trade deal is in the making or we get evidence that supply is returning back into the equity markets. We imagine the Fed Put is undoubtedly also working it magic too.

The offer by China to reduce the trade surplus to the US to zero by 2024 was enough for risk-seeking strategies to perform exceptionally well, even if significant uncertainties still remain as the US maintains its hardline stance by demanding more ambitious concessions if a deal is to be sealed. For instance, the US is looking to reduce the trade deficit it has with China over 2y.

For now, the net result is clear, as the bellwether for equities (ES) jumped by over 1.5% led by Industrial Goods with Technology also faring well.

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[IvanGlobalPrime]

The Daily Edge: Risk Off Deteriorates, More Work Must Be Done In Equities

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 23

Tentative signs of a crack in this year’s ‘risk on’ conditions appear to have returned, even if it’s still quite premature to place too high one’s bets on follow through tendencies off the bat. Even if the flows have clearly reverted into a short-term ‘risk off’ mode, one should exercise caution as all we’ve seen is a break below the 5-DMAs in most risk measures.

There is still more work to be done to orchestrate a true turn in the constructive market rhythm present in 2019 by a fracture in the short-term bullish cycle in US equities, combined with a downward slope in the 5-DMA. This pattern should then morph into US fixed income, vol, US credit (junk bonds) to strengthen the ‘risk off’ notion.

Nonetheless, there are some reasons to be concerned about Tuesday’s price action as the S&P 500 suffered its worst losing day this year, down by more than 2.5%, as investors flock back to the safety of US bonds, bid up volatility and dump credit (junk-type). The spike back above the 20% mark in the VIX won’t be a welcoming event to appease the growing signs of unrest in the market place either.

The outperformance of the Japanese Yen, leaving aside a strong Pound as a worst case ‘hard Brexit’ scenario is rapidly being removed from the equation, is also a reflection that the market is worried where the Sino-US trade talks stand. Flows suggest the negotiations have reached an impasse.

I’ve argued that a deal may eventually come to fruition as it’s in both countries’ interest to create economic stimulus, which is precisely what the market has been discounting judging by the rapid recovery see in the risk profile this year. However, negotiations in contentious issues at the core of China’s strategic vision (telecommunications, technology) were always going to create more friction. The two countries are walking through a tight rope trying to project messages of calculated optimism even if the levels of trust between the two countries is at all-time low levels.

We all know the story driving markets in January orbits around a prolonged resolution in the US-China trade stand-off, so it is no surprise that the pendulum has swung back into the risk-off side in the last 24h after a flurry of negative headlines. It all started to turn ugly when in the Asian session we learned that the contentious issue with Huawei’s CFO Wanzhou Meng is not getting any better after the Canadian press revealed that the US will proceed with a formal request to extradite the executive and daughter of Huawei’s Founder, China’s largest technology company. Ever since the case came to the public spotlight, the market has been quite sensitive, treating Ms. Meng’s related headlines as a proxy to gauge the possible evolution in the US-China relationships, hence a satisfactory deal in trade.

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[IvanGlobalPrime]

The Daily Edge: Jittery Risk Sentiment, ECB Next Catalyst

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 24

I’ll start the day analyzing, as usual, the RORO (risk-on risk-off) conditions in the marketplace, even if we must keep at the top of our minds that is Central Bank day, with the ECB next in line to update its monetary policy outlook following the ‘Fed Put’ by Chairman Powell earlier last year.

The price action in the RWI (risk-weighted index) is by far the most unstable and jittery it’s been this year, with a big red sell-off candle followed by a topside rejection, which has led to the 5-DMA to start flattening its upward slope since the double bottom found earlier in the year.

By looking at the individual components of the RWI on a 60-minute perspective, we’ve seen back-to-back sell off days in the ES, an indication that supply is returning. Notice both pushes were characterized by impulsive movements. The cluster of bids circa 2,630.00 is still keeping the upside potential intact, even if the 60-minute structure has now shifted into a consolidation mode. The same profile can be observed via the long-dated US 30-year bond yield, stuck in a 5bp range.

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[midwest]

Ivan, I watch the DXY and trade the USD crosses.
After today’s black eye when do you think there will be a retracement if any?

[IvanGlobalPrime]

The Daily Edge: US Equities Roll Over On Earning Woes

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 29

The narrative in financial markets is quickly evolving from a state of relative stability on lingering positives from an anticipated deal between the US and China on trade, towards the cruel reality of the cyclical macro risk-off trend established in US equities since last year. The disappointing earnings by Caterpillar and Nvidia, the former seen as a bellwether of the global industrial sector, comes to show that US companies were not immune to the Chinese trade tariffs.

Not only we see G10 economies, with the US the maximum expression, suffering from late economic and business cycles, but the Sino-US trade war has exacerbated, if anything, the underlying weakening trends in economies such as the European Union, the United States, and especially in China, with the domino effect expanding elsewhere. I focus on these three countries in particular as they account for most of the globally generated growth.

The temporary re-opening of the US government after a record-long shutdown should really be perceived as a short-term risk removal but far from acting as a catalyst to influence market movements for a protracted period of time, as clearly seen by the price action in equities on Monday.

The concurrent negative outlook in China by heavyweights such as Caterpillar, NVIDIA, Apple, and the list goes on, is the byproduct of an economy that is walking a tightrope with clear symptoms of a slowdown. There is an excessive reliance towards China, which is no surprise as the country has single-handedly orchestrated over ½ the global growth in the last decade.

In FX, the USD continues to trade on the backfoot after an off the cuff massive sell-off last Friday, in which no single driver could be attributed. The Aussie and the Kiwi have been well supported in light of the weakness seen in the US Dollar. One currency that remains relatively cheap if risk-off were to pick up further is the Japanese Yen, which has corrected a decent portion of its Dec-Jan rally. Wherever equities go, the Yen crosses will most likely follow. The CAD traded offered as Oil came under pressure.

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