EQUITIES
Some important US data this week, ISM and employment data and CPI the week after. Equity markets appear to be at point where the recent rally could come to a pause, or conversely — see just how resilient equity sentiment might be for the month ahead. Personally I have turned bearish on equities and have been a seller of S&P500 above 4200 where a close above the 4220 shoulderline would have me exit and reassess. Particularly of concern is volatility getting crushed with VIX back to the lows where I look for volatility metrics to pick back up as a measure of confidence in my above position.
Also the war against Covid still looks somewhat in the balance as new variants keep cropping up and only time will tell how long-lasting and effective current vaccination efforts will be. This might be a much more difficult and longer war against Covid than is assumed by markets.
Looking at various equity index charts:
Bullish continuation from prior week’s bullish reversal bar. But last week’s slow ascending rally is imo looking vulnerable to a rollover.
Other developed markets is worth attention atm as it has been outperforming the US and therefore a good gauge of broad sentiment. Looking out for a potential false break here…
EM equities, which has been trading sideways for most of the year has shown much stronger sentiment last week and being back to the top of the recent range makes it worth looking at to gauge sentiment also.
Also some interesting analog charts making the rounds on twitter, the above from @SethCL. Considering that June is seasonally weak for broad risk and the potential for a false breakout in ACWX, if confirmed, June seasonality may very well play out.
Commodities
CRB commodities index has shown a classic consolidation pattern in May, which has ended with a daily breakout last Thursday.
Probably should be expected that upward price pressures will remain given supply chains are still looking congested while Covid doesn’t look like its going away anytime soon (https://asia.nikkei.com/Spotlight/Coronavirus/New-Vietnam-variant-threatens-further-havoc-to-supply-chains).
Bonds
Last week I’ve tweeted that inflation expectations may have overshot coming into May. Even the beats in PCE in both m/m and y/y basis did little to change 5year inflation expectations (orange line being 5yr TIPS based inflation).
I think we will need to see some very strong beats over the coming weeks to see inflation expectations run hot again and some research I’ve seen from banks and economists suggests this to be likely. If true, we could see nervousness on inflation and early FED tightening unsettle markets again. In view of this week’s NFP, I note this commentary from Renaissance Macro:
Interestingly, the TLT bond ETF chart (from @pivotanalytics who was a Quant Analyst for the legendary Vic Niederhoffer) also signals potential selling and therefore upside to yields.
G8 FX
It’s been challenging to have a strong conviction on fx directionally, and personally speaking — fx trading has been very frustrating at times with continuation moves being very short-lived making me leave a lot of pips on the table, or worse — come away with a loss after being healthily in profit! Thus my trading strategy will be leaning towards being content with taking more nibbles from the market than to try and profit on bigger moves.
USD ~ produces another week of indecision and support at the potential shoulderline suggesting a potential base and coiling for a move higher. Based on the scenarios that could play out on strong economic data coming in this week, I’m leaning towards an upside break in the USD this week.
EUR ~ looks like it may have been finding the top of the range for the near-term with rallies repeatedly stalling into the above pivot area. I also see risks to the positive sentiment towards the European rebound as it seems as though the marginal improvements in economic data are getting incrementally smaller (as can be seen in the CESI chart below).
For now however, I do like EURCHF longs which appears to be one of the most favoured trades by the banks to ride on the positive sentiment and the overbought CHF, but if I see some weaker data and a whiff of risk-off I would consider EURUSD short.
JPY ~ still prefer to avoid long JPY ideas being in a rising rates environment, and being fairly oversold I have very little interest in JPY pairs atm unless we see some solid risk-off signals.
CHF ~ shorts favoured to start the week. The rally has been rather surprising given the positive sentiment in the Eurozone but could finally be on the turn after putting in a bearish candle last week off the 50 fib retracement level with price action in CHF pairs also looking more convincing of a trend change, e.g. CHFJPY showing a weekly DeMark turn signal, EURCHF looking like its about to breakout of its bull flag, and USDCHF price action showing signs of basing over the past two weeks.
GBP ~ For weeks I’ve been frustrated by trying to hold onto GBPUSD shorts only to come away with a loss or a decent amount of pips left on the table, on the idea that we will consolidate below this brexit optimism area as EU trade uncertainty remains and UK inflation and growth not convincing. But in fact, UK inflation has picked up last month and a BOE member last week said they may hike rates as early as next year! Directionally, I’m fairly clueless on GBP for now and would be more inclined into trade the ranges on extended moves.
CAD ~ mentioned last week that CAD could be exhausting into this key supply area and though we did eventually get some decent selling early last week, it has recovered the whole move. I still like the idea of USDCAD for intraday scalps as long as 1.2050 holds, and intending a “very small” tactical long USDCAD bet for Friday’s Payrolls data from both sides of the border.
AUD ~ continued to trade softly last week, but AUD is starting look oversold on various crosses and I am seeing some support levels it could lean off for the bounce. Furthermore, Dalian Iron Ore prices made a decent reversal last week (chart below) and is up more than 3% today as I write this.
With broad risk sentiment being somewhat positive, I am looking long AUD for the early part of this week.
NZD ~ continues to struggle into the shoulderline but as RBNZ was very hawkish last week, I think NZD should stay supported and could be trading back towards those levels above again. Thus I favour NZD on dips on intraday trades for the early part of this week.
Wishing you a good week of trading~!
