Dose of reality kicking in?
Having focused on the impact and outlook of FED policy tightening last week, I pay particular attention to Global equity markets as I think cracks are starting to show as a result of that outlook.
LAST WEEK’S ACTION
Equities Metals and Bonds are looking particularly bearish reversing from prior week’s highs. ZAR performed exceptionally well last week, and somewhat surprising given EMFX’s tendency to be negatively impacted by rising US rates. In G10FX, the best performing currencies tended to be ones with the most hawkish central banks e.g. USD GBP CAD (ignoring EUR).
EQUITIES
Broad sentiment finished on a softer note led by the weakness in US equities where MSCI World ex-US (ACWX) finished dead flat after a strong start. Recent equity corrections has left Indian and Swedish equity indices at the top of the leaderboard — I like to track the strongest indices as a broader sentiment gauge, more on this below.
US equities rejected recent highs and closed below the prior week’s low producing a bearish signal. Value stocks were more resilient with higher-highs particularly large-caps (IWD) via strong performances in Energy (XLE) and Financials (XLF), and against the deep selling in Growth stocks. Broader sentiment seems to stifling gains however.
S&P500 is finding some support around the 50dma ~4675 marking the Thursday low and Friday close after extending below the 50dma.
Nasdaq100 also finding support in the low-end of the recent trading range just above 15500.
Despite those support areas holding, momentum is still firmly down with technically strong bearish signals on the weekly charts suggesting there is more downside to come — NDX completes an evening star pattern, SPX confirms the prior weeks reversal bar with a bearish engulfing pattern, DJIA printed a clean reversal bar after showing tentative signs the week prior, RUT also printed an evening star pattern.
Outside the US, Asian equities have not been exhibiting much strength recently and will probably take their cues from US markets. Interestingly Australia’s ASX (XJO) printed a weekly long-legged doji and double-top off the August high of last year.
NIFTY and OMX found resistance at relevant technical areas after making a structural breakout, and the latter printing a convincing weekly reversal bar. It should be worth keeping an eye on how these markets trade to gauge broader sentiment being the strongest performers yr/yr.
RATES
Long CAD and GBP are probably good biases to keep when selecting FX pairs due to tailwinds from market implied rates (chart is slightly out of date):
- CAD pricing in as 125bps
- GBP ~110bps
- AUD ~75bps
- USD ~75bps though this should be closer to 90bps
US yield curve continues to shift higher — though global yields tend to move in tandem at the moment, assets have much higher beta to US yields than others and I expect the impact to continue weighing on risky high-beta assets like HY and EM’s as discussed last week.
TRADE VIEWS/IDEAS
US equities could have an ugly start to the week and should we get a deep sell-off, tactical longs in DJIA comes to mind on (a potential turnaround) Tuesday either before or shortly after the open. I’ve had to square my original Nasdaq shorts to cover losses in cross-JPY positions but have reloaded at 15800. I am half anticipating a bounce however and will scale out as I don’t think there much more downside left on this leg.
Gold is having to negotiate a big band of chop around the 1800 handle and while it hasn’t really budged despite the big moves in yields, this chart may put things into perspective — i.e. it could simply be playing catch-up.
I continue to hold my short positions from 1825+ given my view on higher real rates I discussed last week. There was also a very interesting anecdote share by @mark_dow:
“The parallel to 2013 is that so many people loaded up on inflation hedges and 2013 was the moment they realized inflation wasn’t coming as they feared. Very likely at a similar point now.”
ASX200 (XJO) showing a fairly convincing reversal signal (long-legged doji and double-top) makes for an interesting short setup with a bearish bias below 7440. I still retain a negative China outlook and weaker demand for Aussie exports, while the commodities complex could lack upside due to rising US yields and stronger USD. As for the Growth>Value rotation — I don’t think this should be mistaken for being a reflationary theme with inflation expectations getting suppressed by policy tightening, but rather a defensive theme from high to low-beta assets.
AUDCAD still trading around a core short position from 0.92+ and intend to continue but I have some concerns… The Loonie benefited from Oil having a strong week and will be watching whether it can hold up at the least, for a run above the 80 handle. Also last week’s payroll data didn’t disappoint and could justify the 5 hikes priced in for this year, whereas IVEY PMI came in well short of consensus expectations by 19.3 points (45 vs 64.3 expected)! For Aussie, I think it will continue to suffer on relative value basis on wider rate differentials from a much more hawkish BOC, negative China outlook and Australia being fairly early in their battle against Covid compared to other regions.
Generally I remain bearish on risk but will be looking to trade to the upside as well as I think there will be some decent 2-way action for the nimble trader.
Have a good week trading~!
