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Video / 02 May 2017 at 7:42 GMT

From the Floor: Yen drops as markets switch to risk-on — #SaxoStrats

#SaxoStrats
  • JPY weakens dramatically, reflecting widespread risk-on sentiment; Garnry
  • With JPY weaker, USDJPY climbs above 112
  • Quarterly earnings are strongest in years, with global tech sector reaching new highs
  • Apple due to report Q2 results after the market close
  • Tech sector's 30-35% premium to overall market can be justified: Garnry
  • Oil challenged by Libyan and US production rise ; Libyan output highest since 2014
  • WTI needs to stay above $48/barrel before potentially targeting $50.30/b: Hansen
  • Oil stockpiles are draining, but not fast enough
  • Gold lower and testing $1,257-54/oz band of support
  • US blizzard lifts grain prices; CBOT wheat surged more than 5% on Monday 
  • Treasuries drop after Mnuchin again hints at possible ultra-long bond issuance: Boye
Saxo Strats banner
By John Acher

The Japanese yen has weakened "dramatically" as global markets have gained confidence and switched to risk-on mode, and strong corporate earnings are stoking the good sentiment, Saxo Bank's strategy team says on Tuesday.

The yen is conventionally seen as a safe-haven currency, and demand for the JPY rises when investor worries run high and falls when anxiety in the markets eases.

“The yen is weakening quite dramatically,” says Saxo Bank’s equities strategy chief Peter Garnry. “We have moved from 108 to above 112 in USDJPY, and it has happened in tandem with rising risk-on sentiment in global equity markets.”

The new-found vigor is also seen in the strong rebound in Japan's Nikkei index, which has pushed up towards the 19,500 level and is approaching its highs from March. "So sentiment is very strong,” Garnry says.

Saxo's head of commodities strategy Ole Hansen says: "The yen is weakening again, and that is also driving gold weaker.” 

Tech outperforms

“Other areas of the equity market where it is unbelievably strong is the tech sector,” Garnry says, pointing to the solid outperformance of the MSCI world information technology sector index to the overall MSCI world index in recent weeks.

“It’s all due to the earnings season,” Garnry says. “Earnings coming in from technology companies have been remarkably strong and surprised to the upside on both the top and bottom line.”

MSCI world information technology index outperforms MSCI world index
MSCI world tech index vs MSCI world index
Source: Bloomberg 

Garnry acknowledges that valuations in the global tech sector are high, with a premium of about 30-35% to the overall market. “But I think it can be justified at the current time, given the return on capital and the growth trajectory of the tech sector,” he says.

Second-quarter results from Apple are awaited after the US market closes today. 

“It’s the whole replacement cycle of iPhones that is driving the result,” says Garnry. (Read also Garnry’s preview of Apple and Facebook results from last Friday here.)

Quarterly reports are also due from Gilead Sciences, Merck, Pfizer, Altria, Mondelez, ConocoPhillips, CVS Health, and others.

Banking stocks could be dented by news that the Trump administration is looking into reviving aspects of the 1930s Glass-Steagall Act that separated consumer and investment banking, but was repealed by President Bill Clinton in 1999.

“That could be bad for sentiment, and obviously the large diversified financials – Bank of America, Citigroup and JPMorgan Chase – are the most sensitive to this news,” says Garnry.

“Earnings continue to be strong. We have seen 10% growth in operating profits here in Europe; it’s the strongest earnings season in more than six years. We have seen revenue growth just north of 4%, and I think it could get higher as we get more earnings, so it just keeps getting better and better,” Garnry says. “And it is offsetting the weak GDP and consumer spending figures that we got a while ago from the US.”

“But overall the macro numbers are confirming what we are seeing in the earnings figures,” Garnry adds.

Weather drives grains

Although trading in commodities overall was relatively light on Monday due to the May 1 labour day holiday, one segment that took no notice of that was grains where CBOT wheat prices leapt more than 5% in brisk trade as a weekend blizzard in west Kansas has left risk of crop damage, says Saxo's Hansen.

“We’ll only know in a few days’ time the extent of this,” Hansen says. “It’s also generally supportive for the other crops, corn and soybeans – it’s been a very wet spring so far, so planting has been delayed.”

“The global supply glut in key grains, which has kept the market under pressure, is now being slightly reversed because of the current changes in the US, and the main driver of this has been the speculative community,” Hansen says.

The strength of the current market reaction is largely explained by the record speculative short position in the grains market, Hansen says. “So there is potential for the market to go higher.”

Libyan supply surge weighs on oil

Oil is trading lower, struggling against persistent signals of higher production, including significantly the resumption last week of production at Libya’s biggest oilfield, which has boosted Libyan output to its highest since December 2014, Hansen says. 

“This added some additional selling pressure to oil yesterday,” Hansen says. “The market basically needs time [to rebalance], but clearly it is not really getting that time. Stockpiles are draining, but they are not draining fast enough when we are seeing Libyan production come back online like this and we are also seeing US production rise.”

The oil market is keenly awaiting weekly inventory figures on Wednesday. 

“This will be a challenging couple of days until we get past the inventory report tomorrow,” Hansen says. 

Oil prices are holding above $48/barrel in WTI -- “a bit of a line in the sand” -- but, if it holds above that level, the price could next target $50.30 initially, Hansen says. 

WTI crude oil price clings above $48/barrel
WTI oil price
Source: Saxo Bank

Gold is trading lower, but testing a band of support in the $1,257-54/oz area, Hansen says.

Mnuchin dents Treasuries

US Treasuries slipped in an otherwise quiet session on Monday after US treasury secretary Steven Mnuchin hinted that the US could issue an ultra-long bond.

“We have seen several Eurozone countries this year issue 50-year debt, and we have even seen Ireland and Belgium issuing new 100-year bonds this year," says Saxo Bank’s fixed-income trader Michael Boye. "In the US dollar space I think the record is currently held by Mexico which also issued a 100-year bond a few years ago.”

The Mexican ultra-long bond currently yields around 5-1/2%, and the longest US Treasury is the 2047 bond, which yields about 3%. “So a potential 50 or 100-year bond from the US would probably price somewhere between that, but that is something the market is expecting to hear more about in the months ahead,” Boye says.

Bunds opened slightly weaker, and the French spread expanded slightly with some minor gains in the opinion polls for the far-right candidate Marine Le Pen, Boye says.
 
Japanese yen
 The yen has plunged to its weakest levels in more than a month. Photo: Shutterstock


John Acher is a consulting editor at TradingFloor

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