Article / 13 November 2017 at 14:36 GMT

House View: EM currencies on the move, crude oil bid

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G-10 FX at a loss for catalysts while EM on the move

  • Emerging-markets currency volatility has picked up dramatically as EM bond spreads have widened.

  • So far, pick up in EM volatility muted as equity markets have been strong - if equities sell-off, too, volatility could spike badly. 

  • Specific stories in EM driving volatility in some of large EM's:

          - RUB: fear of further sanctions from US and a weak Russian sovereign auction

          - MXN: End of NAFTA talk and fear of elections next year in Mexico 

          - ZAR: Political worries and budget discipline has slipped further 

          - TRY: Diplomatic showdown with US - strong regional concerns 

          - CNY: China keeping things very quiet 

  • US tax reform: still stuck in neutral - likely to prove a massive liability for GOP in 2018 elections whether passed or not 

Tech levels on watch for developments 

  • 1.1675-1.1700 area in EURUSD (head-and-shoulders neckline). A close above this zone sees risk that USD rally within G3 is over.

  •  AUDJPY sniffing at 2-month lows and vulnerable if complacent equity markets roll over. 

  • Pivotal level in USDJPY around 113.00 might point to JPY working stronger if risk appetite fares poorly this week. 

Trade themes 

  •  Reluctant to commit risk in USD until we get sense of EURUSD direction; a close above 1.1700 would promote upside interest 

  •  Short AUD and NZD: interest in downside NZDJPY and AUDJPY if JPY gets upper hand versus USD in days ahead (short vs. USD if not…) 

Two down weeks since August?


  •   Still bullish US equities, but if 2,562 level is broken, downside risk could accelerate 

  •   Cautious on EM equities sitting at highest levels since 2011. For MSCI EM Index 1,119 points is key support 

  •   STOXX 50 has key support level around 3,667 

  •   Positive on Hong Kong equities as long as Hang Seng stays above 28,830 

  •   Remain positive on Japanese equities as long as Nikkei stays above 22,000 


  •   Remain overweight cyclicals and underweight defensive sectors 

  •   Our top-three preferred industries: banks, semiconductors, technology hardware 

  •   Our top-three least preferred industries: staples retail, telecom, media 

  •   Switched to neutral on energy sector following massive breakout 

Themes / Trade ideas 

  •   Key earnings: Home Depot (Tue), Tencent (Wed), Cisco (Wed), Applied Materials (Thu), Wal-Mart (Thu) 

  •   Global equity markets are consolidating and could add another down week 

  •   US Oct CPI data on Wednesday is last big data point before December FOMC 

  •   Continued USD strengthening could set in motion a correction in EM equities 

  •   Alibaba Singles' Day sales record shows consumer confidence is very high globally

Emerging markets and high yield bonds remain vulnerable


  • European bonds rally supported by Gilts and Belgian bonds as next week bond auction is cancelled 

  • Spanish bond yields are getting lower as Catalan leader turns himself in and an independence vote looks less likely 

High Yield 

  • More HY new deals may be priced this week for $1.7 billion as Navios Maritime, SRC Energy, Welltec and GNC are considering tapping the market 

  • Signs of weakness among junk bonds as investors are selling off the telecom and healthcare sectors amid bad earnings reports 

Investment Grade 

  • More IG deals to tap the market with Huawei Technologies, Toyota, Porcter & Gamble 

Emerging Markets 

  •  EM remain vulnerable as EM FX continues to get weaker. This could trigger volatility in this space 

  • Lebanese 10-year bond yields seems to retreat around 8% after shooting above 9% last week, however, the situation remains unstable as prime minister has not yet returned the country 

  • Debt restructuring talks in Caracas start today


Bullish oil momentum at risk of outpacing fundamentals


  • Crude oil remains bid on raised Middle East geopolitical risk and strong demand 

  • Strong momentum and rising backwardation have attracted a record long, now exceeding 1 billion barrels 

  • Upside remains limited from an expected pick-up in US shale oil production 

  • Focus: market impact of Saudi Arabian purge and the rally's impact on non-Opec production growth 


  • Gold remains range-bound with a clear driver currently absent 

  • Downside risk limited due to multiple uncertainties, not least on the political stage in the US

  • Maintaining end-of-year forecast of $1,325/oz

  •  Synchronised global growth supporting industrial metals, but… 

  •  China growth concerns into 2018 risk capping the market


  • WASDE yield and production upgrade hurting soybeans and corn 

  • Wheat troubled by falling prices in Russia as they try to offload a record crop

  • An already elevated fund short in wheat and corn likely to limit downside risks


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