What goes down, must go up…?
LAST WEEK’S ACTION
Mean-reversion after the sell-off seemed to be the theme. Equities made a full recovery as did higher-beta currencies and Crude. Metals looks to have been impacted by higher real yields.
EQUITIES
Solid recoveries… Would be interested to see how leading benchmarks do from hereon to get a sense of global risk appetite given my neutral to mildly bearish view into year-end.
Global equity market charts completed the reversion move towards the middle of the Year’s range and cluster of moving averages. Charts are bullish with the indecisive price action over the last two sessions likely to signal coiling, but I wouldn’t expect too much deviation to the upside considering the amount of event risk we have on calendar this week.
US equities has been peaking in the shoulder area and price action beyond their 20dma’s has been devoid of momentum.
Profile of sector performances is looking less healthy with Utilities and Consumer Staples leading this month, while Techs and Inflation themed sectors (barring financials) are trailing behind.
Vols have puked, the extent of which has surprised me but as I tweeted below, I think we need some fresh catalysts this week to get vols up again after that reset.
COMMODITIES
Was a good week for Energy related assets and major Equity index futures, but will it continue…?
As we have seen in Equity index charts, CRB commodities index has also done the natural reversion move back to a pivot area. If price action stays below the 20wma and 20/50dma’s however, the consolidation is probably not over from a technical standpoint.
Crude rallied nicely off the lows which I’ve been involved with if you’ve been follow my tweets. Squared most off at the first major resistance and may take off or tighten up the rest heading into this week as I’m finding it difficult to see risk (including commodities) getting a big boost into year-end with the potential for an even faster Fed tightening looming.
Metals under pressure as US real yields (10yr inverted in faint grey) have bottomed out… With yields continuing to rise and inflation expectations getting reined in on the Fed’s hawkish pivot, real yields may have truly bottomed and therefore difficult to bullish precious metals.
RATES
Yields got a boost last week while Eurodollar is now pricing in 80bps next year - I’m surprised how well Nasdaq is holding up…
FX
USDJPY and EURUSD 5yr rate differentials (yellow) has turned away from it’s widest point seen last month and USD negative if continues. US real yields coming off the lows coming off the lows may negate that however and lead to some choppy trading vs low-yielders.
Higher-yielding ZAR and particularly MXN trading strongly vs the JPM EMFX benchmark. EMFX is particularly sensitive to US rates and continued rise in yields and a hawkish message at this week’s FOMC can hurt EMFX. I see good risk/reward buying USDMXN on this dip to play that bet, as well as having a mildly bearish view on risk.
One major part of the short AUDCAD thesis was the relative performance of related commodities - Dalian Iron ore is starting to find decent buing interest and the ratio vs WTI Crude Oil (bottom) is turning up and is cause for concern. AUD move looks overshot after last week’s positioning squeeze.
WATCHING…
- AUDJPY full reversion back to the 20wma
- Bitcoin trapped between the 20wma and 50wma last week
- HYG unable to progress further beyond near-term pivot level
- AAPL…
TRADING VIEWS/IDEAS
I prefer to be on the bearish side of risk with this week’s event risk in mind and prefer to express it via AUDJPY short and USDMXN long. For equities I like Nasdaq short particularly if it hits 16600 while Gold short may be an idea if good levels presents itself from some initial risk-off. For the longer term book, I still like Crude on dips and NOK CAD ideas I’ve been discussing over many months for extra RV themes to play on.
Overall, risk appetite could prove resilient with potentially a tad more upside room to follow on from last week, but I don’t see it being sustained…
Have a great week trading!
