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? 

  • 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. 


  • 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). 


  • 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

  • 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.


  • 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


  • 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. 


  • 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). 


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


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