Article / 29 January 2018 at 14:53 GMT

House View: Volatile week ahead? — #SaxoStrats

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USD rout set to continue with possibly volatile week ahead

USD: Easy to argue that the move is stretched, but it would take enormous momentum shift to derail USD bears.
USD: Big focus this week on PCE inflation Monday, Trump State of Union Tuesday, Federal Open Market Committee Wednesday, Jobs report Friday.
USD: as indicated last week, it's ominous that the entire US yield curve lifting higher is not supporting the greenback.
USD: Does recent action mean that data this week don't particularly matter as we have a long-term US current account deficit focus?
JPY: From a positioning perspective, if the market continues to ignore relative yield spread indicators, JPY could rally hard.
AUD: full pull in AUDUSD to top of multi-year range; next test is CPI on Wednesday. Not much resistance until 0.8600-plus on break higher.
NOK and SEK: Smaller European currencies gaining on the euro, EURNOK has broken downside pivot and EURSEK not far (9.75).
TRY: has sat out much of the recent emerging market rally on geopolitical concerns. If these can ease, TRY could offer outsized gains.
Asian EM FX: aggressive appreciation partly linked to CNY going higher into Trump speech, partly fear of currency manipulation charges; note THB and MYR.

Tech levels on watch for developments

EURGBP selloff stopped hard at the range low just below 0.8700; a rise back above 0.8850 could threaten 0.9000 again.
EURUSD: 1.2500 is the end-of-day level of note on this latest run higher, then 1.3000 is the focus as this was a massive sticking point in years past.
RUB: USDRUB touched its 2017 low last week so we are watching whether Russian officialdom accepts lower levels.

Trade themes

Short GBPCHF via put spreads as market reassesses CHF and GBP (Brexit woes to continue).
Short USDJPY for breakdown toward 105.00, stops above 110.00.
AUDNZD long: half a position until Aussie CPI and full position if it clears 1.1050-plus after Wednesday's CPI for try toward 1.1300-plus.

Can rising interest rates kill the equity rally?

Countries

Remain neutral US equities; potential earnings season momentum remains the key upside risk. Valuation is a negative.
Remain positive on EM equities driven by continued strong sentiment in China and weaker USD; valuation is a concern.
Remain positive on UK equities driven by strong momentum in the mining and energy sectors.
Remain positive on European equities as sentiment remains strong despite a stronger EUR; Q4 earnings potential upside.
Remain bullish on Hong Kong equities on strong Chinese sentiment but falling USDCNH should be watched.
Remain neutral on Japanese equities as JPY strengthens.

Sectors

European banks have outperformed the STOXX 600 year-to-date but QE tapering will not lead to sustained outperformance.
Preferred industries: software, semiconductors, technology hardware, consumer services, consumer durables.
Least preferred industries: energy, telecommunication, media, food and staples retailing, utilities.
Mergers and acquisitions activity is picking up (most notably in biotechnology and consumer companies).

Themes

Earnings season kicks into gear this week with 500 releases; focus on Apple, Alphabet, Amazon, Microsoft, and Facebook.
Q4 earnings season is showing strong results with 8% and 11% year-on-year growth on revenue and profit in the S&P 500.
Inflation and rising interest rates remain the most dominant themes in financial markets.
G10 Economic Surprise Index continues to go down, albeit from high levels.
Investors are beginning to ask whether the strongest start to equities since 1988 is too much?

US Treasuries continue to slide, Germany's five-year yields are back in positive territory after two years, and high-yield and EM remain well bid

Government

US Treasuries continue to slide and 10-year yields have topped 2.72%.
The US yield curve is still alarmingly flat; two- and five-year yields have increased rapidly, placing their 10-year counterpart at risk.
Germany's five-year government yields turned positive for the first time since 2015.
Greece is looking to issue seven-year notes followed by three- and ten-year issues.

High-yield

Noble Group reached a in-principle deal to recostruct debt.
European HY still sees spread contraction despite risk of higher yield spill over.
Volume of junk debt issued is up compared to last January, but the number of deals has decreased. 30% of this year's junk bonds have been issued by the utility and energy sectors.

Investment grade

Shorter maturities in US corporate bonds are starting to look ripe for portfolio allocation.

Emerging markets

While US Treasury yields are rising, EM remain well bid. This may change soon as investors will see the spread against Treasuries squeezed to a minimum.

Fund appetite for commodities supported by a weaker dollar

Energy

Hedge funds continue to add length onto every new high in the market; this is being driven by a weak dollar, capped supply, and a bullish growth outlook
A record long above 1.1 billion barrels and a pickup in US shale production are the biggest risks to bullish sentiment.
Balanced supply and demand outlook leaves no room for Opec and Russia to increase production.
Higher prices raise the risk to global demand growth while supporting non-Opec production.

Metals

Gold supported by a weaker dollar and increased inflation focus. Safe-haven against stock and bond market correction.
Political and economic news out of Washington continues to provide a key source of support.
Synchronised global growth and China's pollution fight are supporting industrial metals, but China growth concerns into 2018 risk capping the market (HG range: $2.95 to $3.30/lb).

Agriculture

Weaker dollar gives the grain sector a boost driven by the reduction of a record fund short.
Risk of additional short-covering ahead of the often volatile spring planting season.
Cotton looks stretched on a near-record fund long and a slump in US exports.

Well the VIX is well bid relative to equities, the MOVE index is moving up - how is FX vol ???

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