Article / 07 September 2016 at 9:00 GMT

From the Floor: Fears swing from rate hike to recession

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  • Gold retests $1,355/oz as fears swing from rate hike to recession
  • USD hit by surprisingly weak Aug ISM non-manufacturing data
  • US equities near record highs suggest need for "shock insurance": Garnry
  • Asian stocks buoyed by general risk-on sentiment in APAC region
  • Crude oil supported at $43.88/b
By John Acher

The US dollar's pain keeps getting worse and gold is retesting highs as fears have swung from a US rate hike to recession, senior Saxo Bank analysts say.

Asian stocks, however, took advantage of the weakness emanating from the US and rose on Wednesday on widespread risk-on sentiment in the Asia-Pacific region.

“No doubt, we have seen quite a bit of a change in sentiment since Friday. We have gone from rate hike fear to recession fear, and yesterday was the biggest spike in the [gold] market since Brexit,” says Saxo Bank’s commodities strategy chief Ole Hansen.

Gold got another boost and the dollar was knocked on Tuesday by a surprisingly weak reading for the US non-manufacturing sector (see below). In addition to the weaker dollar, gold has also been bolstered by lower bond yields.

That leaves gold testing prices just below the trendline at $1,355/ounce. “If we take that out, then we will be looking to the $1,375/oz area,” Hansen says.

Gold looking at $1,355/oz, then $1,375/oz
Gold prices

Source: Bloomberg

“There was a good fight going on last week, and quite a few weak longs were taken out of the market, and that has left the market in a better position to respond to data as it starts to come in,” Hansen says. 

“So some of the staleness that we saw building up in the previous couple of months could now give way for a new move, but obviously we need continuously weak data to support it,” Hansen says.

Silver has been leading the way and will continue to outperform if gold breaks above the $1,355/oz area, Hansen says.

Trifecta of weak US data

The Institute for Supply Management's non-manufacturing index dropped to 51.4% in August from 55.5% in July and below expectations of 54.9, the ISM reported on Tuesday.

“The trifecta of weak US data is now complete,” says Saxo's head of FX strategy John J Hardy, referring to the latest ISM manufacturing reading below 50%, weak US jobs report and yesterday’s “very ugly surprise” in the August ISM non-manufacturing data.

After Tuesday’s weak non-manufacturing ISM data, the implied likelihood of a US rate hike in September fell to 24% from 32% and the dollar was weaker across the board, says Jeppe Norup on Saxo Bank’s FX options desk. “So that’s a pretty significant move.” 

One-month USDJPY volatilities are up 0.25 vol, and especially yen calls are very bid now, with two-week expiry rolling to the Bank of Japan’s September 21 meeting, Norup says.

And the unexpectedly weak data also undermine the Fed's most recent statements.

“Once again the Fed completely lost in the woods and horrible timing on guidance, really trying to pump the credibility of a potential September move, just to see the latest batch of data disappoint,” Hardy says.

“So we are back to Square one," Hardy says. "We are back to the huge reach-for-yield theme as the really key thing for a stronger dollar was interest rates heading higher, not only for the Fed, but also at the long end of the curve. That has certainly not happened after yesterday, with the long-end yields also getting crushed back lower there.”

That all adds up to more reach for yields, stronger risk-on currencies, while hopes that the yield-widening would favour the dollar over the yen also got crushed, Hardy says.

The FX market is now entertaining the idea that the Bank of Japan is going to focus on yield curve steepening at its September 21 meeting, laying off or reducing purchases at the long end of the curve.

"So there’s some yield to extract there for, I guess, pensioners and lifers and for investors in bonds at the very long end, while also making banking more profitable while crushing the short end back to very low and negative yields going further negative with more rate cuts into negative territory at the September meeting,” Hardy says.
So far, the market is unimpressed, perhaps thinking back to the first move into negative rates back in January. "So the combination is USDJPY lower,” Hardy says.

In USDJPY, Hardy says 101.35 is an area to watch. “This is sort of the last gasp for dollar-yen bulls hoping to see it back higher technically in the near term. Capitulation brings that 100 to 99.50 zone into focus.”

USDJPY - 101.35 is an area to watch
Source: Saxo Bank 

The European Central Bank's meeting on Thursday is not expected to bring major fireworks.

Overnight EURUSD is trading at 14 vols, which is at the lower end of what has been seen ahead of recent ECB meetings, where the average was around 17 vols for the past five meetings, Norup says.

“The market expectation for tomorrow’s ECB is that there is not going to be any huge changes to their policy,” he says.

US stocks rangebound

“We are in this range-trading environment in the US equities market, constantly banging into the ceiling of record levels across the US indices,” says Saxo Bank’s head of equities strategy Peter Garnry.

One way to get protection and exposure to potential downside, Garnry says, is to sell US investment group BlackRock as “shock insurance”.

“We have very, very low implied volatilities in the options markets, so put options with expiry at the end of the year are quite cheap. Another way to get exposure, and something we will do today to change the overall risk profile of our [model] portfolio, is selling BlackRock.”

“BlackRock has a very high beta to the downside, so whenever there is a correction in the market, BlackRock is forcefully sold by investors. So we are adding a short position in BlackRock [to our model portfolio] when US equity markets open today,” Garnry says.

Saxo is also initiating in its model portfolio a short position in the Australian equity index S&P/ASX 200 via the Cfd with a stop at 5,620 and a take-profit level of 5,200 points, Garnry says. “So that’s a little more strategic, not so short term."

“I think the overall technical picture for Australian equities is still weak,” Garnry says, noting that China’s macroeconomic picture, though it has improved somewhat from the lows of nine months ago, it is still at very weak levels, and there’s potential for spillover effects from a weak Australian banking sector into real estate and other sectors of the economy.

Crude oil rally lacks power

Crude oil is settling down and trading in the middle of the range established in the crazy trading days of the past week.

“We did see a bit of a setback yesterday,” Hansen says, pointing to Saxo’s entry target at $44.40/barrel, but adding that WTI crude found support at $43.88/barrel – a 76.4% retracement of the latest rally.

“So the idea is still intact, though not as strong as it was,” he says. “We are looking for a retest of $46.50/b with a stop below $43/b.”

Crude oil traders await fresh inventory data from the American Petroleum Institute later today and from the US Energy Information Administration tomorrow, with expectations of a rise of 500,000 barrels, Hansen says.

 US dollar's woes boost gold. Photo: iStock

John Acher is a consulting editor at

Editor’s note: From the Floor takes advantage of's unique real-time access to Saxo Bank’s various trading desks around the globe to put our community in touch with the developments that matter to their portfolios.


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