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From the Floor: Bond bears back as risk rallies — "#SaxoStrats

#SaxoStrats
   • Chinese trade balance data shocks to the upside
   • Trump tells Xi Jinping he will honour 'One China' policy
   • USDJPY rallies through key upside resistance
   • Reflation trades in charge as risk sentiment rallies
   • 'Long equities, short bonds, long USDJPY, long oil': Garnry
   • US earnings season sees big rebound in operating profits
   • Gold seeks support at $1,220/oz on sentiment spike
   • Treasury yields rebound, bund rally muted due to Greece

SaxoStrats
By Michael McKenna

“Long equities, short bonds, long oil, long USDJPY”. This, says Saxo Bank head of equity strategy Peter Garnry is the reflation trade that has been given a shot in the arm by US president Donald Trump’s hints of a forthcoming “phenomenal” tax plan.

Trump’s bombastic-yet-minimal quasi-announcement was matched by a stunning trade balance performance out of China and new comments from St. Louis Federal Reserve chief Bullard, with both developments boosting the risk sentiment rally seen across markets this morning.

Reporting from Saxo Bank’s Singapore desk, trader Hong Wei Lee says that the January data out of Beijing showed China’s USD-denominated trade balance coming in at $51.4 billion versus $48.5bn expected. Exports rose by 7.9% year-over-year, beating forecasts of a 3.2% gain, while imports rose by 16.7% versus the 10% expected.

The Chinese release saw Asia broadly rally with the Nikkei gaining 2.2% on the day due to a weaker yen.

Meanwhile, Bullard opining that interest rate hikes are “off the table” in the US due to Trump’s unpredictable policymaking only added to the risk rally.

“Bond yields are not dipping any lower,” says Saxo bank head of forex strategy John J Hardy, adding that resulting yen weakness saw USDJPY push through upside resistance to trade around 113.75 versus the 1.1225 levels seen during yesterday’s European morning.

USDJPY

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Source: Saxo Bank 

With multiple factors pointing to a renewal of interest in long stocks positions, Garnry reports that he is planning a move into the S&P 500 index “with a tight stop at 2,295”.

“We are moving into new territory north of 2,300,” says Garnry; “the Dax index could also test the 11,800-900 area”.

With 70% of US companies having reported quarterly earnings, Garnry states that we can now point to a meaningful rebound in operating profits that reflects the encouraging macro picture painted by recent US data releases.

One outlier to the downside, however, is Twitter, where shares lost 12% of their value yesterday following a major earnings disappointment that revealed revenue and user base growth to be “at a standstill”.

“"I would not be surprised if Twitter announces massive cuts," says Garnry; “it’s hard to see how the company can come out of this, but I see a push into sports as being a positive plan with ESPN a potential acquisition target”.

The pullback in bonds and the rise of the reflation trade has gold on the back foot after a recent rally, says Saxo Bank head of commodity strategy Ole Hansen. “We have broken the steep uptrend of recent days and are now looking for support,” he says.

In the Saxo commodities head’s view, the $1,220/oz level could see some buyers turn up to buoy the yellow metal.

Elsewhere, Hansen reports that crude oil traders are awaiting several key releases with today’s International Energy Agency report, Monday’s monthly Opec data, and the February 17 statement from the cartel’s compliance committee all having the ability to move prices.

While oil remains highly dependent on Opec and the success of its production cut deal, overall market sentiment favours crude as risk sentiment returns and investors flood the reflation trade. 

Perhaps the key indicator of this move is the V-shaped reversal in 10-year US Treasury bond yields which, as Saxo fixed income trader Michael Boye reported on today’s global call, “rejected the January low at 2.32% to reverse sharply north of 2.4%.”

In Europe, adds Boye, we currently see less enthusiasm for German bunds due to looming Greek bailout talks, but the sentiment shift remains visible and it would appear that for the moment, French populism and Grexit have been placed on the back burner by a market entranced by Trump’s spectral tax plan and, it must be said, a series of encouraging macro prints.

Will it last? Today’s calendar sees the UK reporting December’s trade balance, construction output and manufacturing production numbers, while the US will release the University of Michigan preliminary February consumer sentiment index at 1500 GMT.

None of these releases are likely to sway investors from the currently dominant trend, but we suppose that one could have said the same thing about a presidential tax plan announcement that essentially came down to a single strong adjective.

In 2017, it would seem that markets can move on the proverbial dime, or even on whatever two cents the US president sees fit to contribute.

Donald Trump
"It's just phenomenal, folks." Photo: Wikimedia Commons

Michael McKenna is an editor at TradingFloor.com
2y
ashrafj1 ashrafj1
in video you mention DAX TO test 10,800 - 10,900 an written 11,800 -119,00 ???? as it could mislead viewer

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