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From the Floor: Funds offload commodities as rate hike looms

  • Funds are cutting record commodities exposure as US rate hike looms
  • Silver slid 4%, with heavy selloff below $18.30/oz and finding support at $17.73
  • Gold falls after failing to break 200-day MA; key support seen at $1,220/oz
  • Oil has swung from a 7-week high to a 3-week low in just a few days
  • Commodity and EM currencies falter on latest US rate surge; USD strength broadens
  • EURUSD probes 1.0500 as March rate-hike odds climb
  • Equities retreat; Saxo stays overweight in equities vs bonds
  • In FX options space, volatilities trading lower, even vols for French election easing
  • Treasuries have reached upper level of trading range
  • Markets await Fed chief Yellen's speech in Chicago on Friday

SaxoStrats banner
By John Acher

Precious metals prices, especially silver, slid on Thursday, while the US dollar extended its gains as a March US interest-rate hike has grown increasingly likely, the Saxo Bank strategy team said on Friday.

US equities were also sold off overnight, correcting lower from the "Trump bump".

The market holds a record long speculative position in commodities, but the Bloomberg commodities index has been trading sideways for the past month.
"That started to catch up with the market yesterday when we saw some of the commodities with the biggest bull bets being exposed – particularly oil, silver, copper, and sugar has been weak over the last week,” says Saxo Bank’s commodities strategy chief Ole Hansen.

Silver whacked

Silver grabbed the headlines, slumping 4% on Thursday, which was the biggest drop since the last time the US raised interest rates. Before the selloff, silver had been in a steep uptrend, with funds continuously increasing their exposure to the metal for the past eight weeks.
"So we got to the point where it was struggling to retrace more than 50% of the selloff since last July, and once we broke $18.30/oz yesterday, the floodgates opened, and we have initially found some support here at the $17.73 area,” Hansen says. (See also Hansen's new story on silver's plunge here.)

”But looking at a retracement level of this latest rally, we could actually fall as low as $16.71 without breaking the uptrend, but in the short term there will be focus on $17.38 as the major level of support, that is provided that we fail to hold on to $17.72, which is currently being challenged.”

Silver prices plunge
Silver prices

Source: Bloomberg and Saxo Bank

Gold also fell, as it has previously in the run-up to US rate hikes.

"We are seeing the same happening once again. The market is firmly of the belief that we are seeing a rate hike coming in March, so we are seeing some ofloading of positions at this stage,” Hansen says.

There is still quite high correlation between real yields and gold, so yields are driving precious metals prices in addition to equity market developments.
It’s not only the prospect of a US rate hike causing jitters. The market is also fraught with political worries, for instance, over the Dutch elections which will be held on March 15, the same day as the Fed meeting. "There is underlying support -- investors like to diversify ahead of these events,” Hansen says.

Oil remains stuck in a range, but the price has fallen from a seven-week high to a three-week low in just a few days.

Opec’s agreed production cuts are increasingly being relying on Saudi Arabia’s leadership, while Iraq, United Arab Emirates and especially Venezuela are sitting on the fence and are behind on their cuts, Hansen says. "So it’s all up to Saudi Arabia, that is creating some nervousness in the market as well."

On that basis, Saxo maintains a short bias, looking for support at $52/barrel for WTI and at $54.45/b for Brent over the day. "But again the market has showed a big willingness to stay range-bound, so I don’t expect any big selloff. But if we start to see these level challenged, there is a big position in the market that is losing $1 billion per $1 move, so that can and will have some additional impact to the downside, ” Hansen says. 

USD strength gains breadth

For the first time in a while, the euro and yen began taking a back seat relative to the weakness in commodity emerging-market currencies on Thursday.

Levels  were maintained in USDJPY and EURUSD, but the Aussie and kiwi dollars and some of the emerging-market currencies were seen collapsing against the US dollar – which could be a reassessment of the reflation trade, but "an interesting development and one we need to watch,” says John J Hardy, Saxo Bank's FX strategy chief. (See also Hardy's FX Update here.)

”This was accompanied by a big fall in gold, so you’re wondering if the whole focus on commodities is running off a little here,” says Hardy. "Regardless, it is interesting to see this move in dollar strength broadening out."

”It does appear there is a coordinated effort to talk up this March rate hike, which is becoming an odds-on event,” Hardy says, noting that Federal Reserve chief Janet Yellen and Fed vice chairman Stanley Fischer are both scheduled to speak on Friday.

EURUSD probed 1.0500 on Thursday, trading very briefly below, but without breaking that level. "That’s the key trigger point for a move to the 1.03, sub-1.0350 lows," Hardy says.

AUDUSD at critical levels

"Everyone trading Aussie needs to be focused on the 0.75 area in AUDUSD," says Hardy. "It was the previous high back in December, it is also the location of the 100 and 200-day moving averages and the 38.2% Fibo, all within this area. So, if we are getting down towards 0.75, it needs to find support or we are talking about a capitulation.”

The New Zealand dollar is also in interesting territory, with AUDNZD probing 1.0750 again this morning. ”It’s one of my favourite to look for shorting opportunities,” Hardy says. ”It’s a possible trigger area for a 500-600-pip rally. […] We are long AUDNZD.”

NZDUSD - the kiwi dollar is also worth watching
 Source: Saxo Bank

The ISM non-manufacturing index is due from the US, and the February Markit/CIPS services PMI from the UK today. The final data set-up for the March 15 Fed meeting is the February US jobs report due next Friday.

Sea of red

US stocks fell overnight in a broad retreat from their recent lofty levels attained on the back of the "Trump bump."

”We are retreating here in equity markets since the melt-up in US equities on Wednesday post the Trump speech to Congress, and we are seeing a sea of red across Asia, Europe and the US,” says Saxo Bank equities strategy chief Peter Garnry. “But, nevertheless, we stay overweight in equities – that has been our stance since Trump’s victory.”

“Basically the technical picture is still very strong – all the major equity markets are still in a solid uptrend, although the Hang Seng is looking increasingly weak as flows from the mainland China are slowing,” Garnry says.

Japanese equities “got what they wanted” overnight, with core inflation back in positive territory for the first time since December 2015, which is a positive signal confirming the Bank of Japan’s policy trajectory, says Garnry. “Japanese equities are still interesting, and on forward valuations definitely attractive vis-à-vis US and European equities.

“As an overall macro take, we are still overweight on equities versus bonds,” Garnry says. “We like the cyclicals, specifically the financials given the current Fed’s rate trajectory, which will help the big banks in the US, also the European banks which have broad exposure to US markets.”

Saxo Bank remains underweight on the energy sector, and prefers European to US equities on valuations and 2017 earnings growth prospect, Garnry says.

Shares in Snap Inc, the parent company of the picture-sharing social media app Snapchat, jumped 44% in their trading debut from the $17 IPO price. 

The stock is trading at almost 13 times its enterprise value to sales on a 24-month forward basis, Garnry says. (See also Garnry discuss Snap's valuation in a video update here.)

On the same ratio, Facebook’s traded at an aggressive 9.1 times at its IPO in May 2012. ”That really shows you the big premium that the market is placing on Snap shares,” Garnry says.

"I’m a little worried here on the valuation,” says Garnry, adding that there could be a repeat of what happened with Facebook – a big splash, short-term momentum, and then weakness towards the company’s first earnings releases as the market begins repricing. "There are very, very steep expectations here with the current valuation.”

Bonds calmer

US Treasuries are back up to the upper level of the trading range, but government bond markets are generally looking a bit calmer.

In Europe, the rally in Bunds has faded, and the French bond market is certainly calmer, says Saxo Bank’s fixed-income trader Michael Boye.

The French spread to Germany is trading below 60 basis points for the first time since January, on the back of no further support for the right-wing populist candidate Marine Le Pen in opinion polls ahead of France's April-May two-round presidential election. "As long as that is the case, we should continue to see support for Bunds fade,” Boye says.

In the FX options space, vols have traded lower this week, says Saxo Bank FX options trader Jeppe Norup. The high end of the vol curve is still around the French election, but also there vols have been trading lower this week, he adds.

 Silver prices were thumped on Thursday. Image: Shutterstock

John Acher is a consulting editor at Trading Floor

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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