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#SaxoStrats
Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 02 April 2018 at 2:43 GMT

Macro Monday — Credit spreads, Nonfarm, US earnings, FANGs #SaxoStrats

Global Macro Strategist / Saxo Bank Group - Singapore Hub
Singapore
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  • China's Manufacturing PMI posted its first gain since November last year
  • Nonfarm payrolls will be in focus this week
  • We are at the tail end of a bull market for Wall Street
  • This may be the final year of the bull market or we could have 2-3 years to go
  • Trade friction and trade war fears pose a risk to equities

By Kay Van-Petersen

Summary of the prior week
  • Choppy week: Equities are rallying, wait a minute we are selling off, no actually we are rallying again!
  • US GDP: Final Q4 US GDP beats at 2.9%a 2.7%e 2.5%p, again underlying growth robust from this $20trn economy.
  • China PMIs over the weekend: In-line on services at 54.6 with a beat on manufacturing. 51.5a 50.6e 50.3p. Quite a healthy beat & bullish on leading indicators, wait for confirmation on Caixin manufacturing.
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 China's largest city, Shanghai .... China's manufacturing PMI has come in above expectations, as the sector puts aside concerns about fallout from trade friction with the US. Photo: Shutterstock
 
  • Fixed income: 10s much tighter from 2.81% to 2.74%, bunds break 50bp at 0.497% (0.527%).
  • Forex: USDJPY the big mover at +1.5% for the week, as the equities risk-on plus covering from the previous week reversed the cross from ¥104.56 lows to current ¥106.28.
  • Commodities: Mixed, yet energy was up despite the DXY climbing +0.60% for the week.
  • Equities: Mixed bag on equities with European indices outperforming their US and Asia. Nikkei +4.8% for the week. 
  • Vol: +20% on the week with the VIX back at 20 levels. 

VIX chart

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The COT report

  • Forex: Largely unchanged on USD exposure but EUR longs continue to build to 95% of 52 highs. Net shorts in JPY and GBP longs at 52 week highs.
  • Commodities:  -5% reduction in speculative net long exposure across the major commodity futures space. Big add to Gold longs, energy continues to build longs, coffee and sugar at yearly highs for short positions.
The week ahead
  • Key Focus: RBA and Q2 start/earnings countdown, and Final PMIs | US Nonfarm payrolls
  • Central banks (Singapore times):   RBA 1.50%e/p (3) NG 14.0%e/p (4) RBI 6.0%e/p (5)
    Fed Speakers (Singapore times):   Kashkari (April 3, twice), Brainard (April 4), Bullard (April 4), Mester (April 4), Bostic (April 6), Powell (April 7), Evans (April 7)
  • Other (Singapore times): Hong Kong, Australia, NZ, UK, Germany, FRA out on Easter Monday bank holidays (April 2) BoR’s Nabiullina (3), Carney (2315, April 6), Olsen (April 6)
Economic data
  • US: ISM manufacturing. 60.1e 60.8p Serv. 59.2e 59.5p, Mkt PMI manufacturing. 55.7e/p Services 60.1e 60.8p, ADP, Nonfarm payrolls 190,000 e 313,000 p Average hourly earnings 2.7%e 2.6%e
  • China: Caixin manufacturing. 51.7p Serv. 54.5p
  • Eurozone: Mkt manufacturing. 56.6e/p Serv. 55.0 e/p, CPI CORE 1.1%e 1.0%p
  • Japan: Tankan, PMI manufacturing. 53.2e/p .
  • UK: Mfg 54.8e 55.2p Services. 54.2e 54.5p .
  • New Zealand: Dairy auction .
  • Australia: MI Inflation, RS, TB.
Thoughts on market positioning
  • Markets next focus: Assuming no new game-changing headlines on tariffs, focus should shift to upcoming US earnings, which fully kick off in about two weeks. Remember US earnings have a big lift up YoY for 2018 given tax stimulus package, consensus view for S&P is for about +25% earnings growth in 2018.
  • This is huge for developed nations like the US; it is normally emerging market territory. So good chance that earnings can steady/lift this mkt. Obviously we are seeing a change in market regime with equity volatility being back, tighter credit conditions & very poor price action – for the first time in close to a decade – in the Facebook, Amazon, Netflix, and Google (FANGs) collectively.
  • There is pressure on Facebook, recent downgrade on Tesla’s credit rating, regulatory eagles potentially circling Amazon.
  • Strategic view: We are in the tail-end of what if not already – will be – is the longest business cycle in the US and are in the blow-off top of the US equity bull market, where the majority of the gains are captured in the final few years. Whether this is the final year or we have 2-3 years to go, is up for debate. What is not up for debate is that it’s definitely going to be a more tactical market to play. The only thing that can give this business cycle a multi-year extension is if Trump & Co can somehow put together a comprehensive infrastructure bill for the US – that would most likely bring new all-time highs on the equity market, as well as inflation, as well as a tighter Fed etc.…
  • The most likely scenario for now is that global economic growth is intact for the next 6-12 months. The bar for earnings will be high for 2019 to beat, i.e. US tax stimulus effect, earnings growth run across the globe, less accommodative central banks, etc. Still think the pathway is intact for rates to move on higher led by the US.
  • Tactical View: Use any rallies to put hedges back on, through downside expression from puts and put spreads on equity and high yield indices to particular baskets such as Tech & the FANGs, or US healthcare with the upcoming midterms (surprised we’ve not seen more noise here). I would trade these hedges quite aggressively, as I feel we could be in for some choppy markets rather than a one-off -20% to -30% unwind in equities – that comes later, but is obviously a key risk with trade war fears.

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Technical Outlook
  • S&P 500:  Bias is for further gains this week, as we get 2nd weekly close above the 200 day moving average. Key is that if 2600 holds, sellers should place at 2750 and 2800 for 2380.
  • Dow Jones: Although we achieved upside target, bias is that further upside could be on the cards this week
  • Gold/Silver Ratio: Multiyear highs. Market favours long gold vs silver as per COT report. Pullbacks have historically be vicious.
  • AUDUSD: Towards bottom of multiyear channel, with the 100 weekly MA at 0.7690. Two consecutive closes sub that, should open us for 0.7500 to 0.7100 range
  • USDJPY: Long term down trend intact, however short term picture points towards more upside potential near term with ¥107.5 to ¥109.5 range insight. This should be viewed as selling zone.
  • Facebook, Amazon, Netflix, and Google (FANGs): Big pullbacks on the FANGs names which remain epicentre of whether or not the equity market heads up or down over the near term. Facebook the only of the names to be trading below its 100 WMA.
  • Credit Spreads: “What we are witnessing is a deterioration of Credit, where credit spreads such as the TED spread, the Libor-OIS Spread and US BBB spreads are continuously going up and they have now reached levels last seen pre-crisis” – Althea Spinozzi (see Weekly Bond Update: Time's up – credit spreads are under pressure).

Credit spreads

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Macro Monday Portfolio (Tactical and Strategic book)
  • Stopped on AUDNZD longs, added to AUDUSD shorts at 0.7750
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Please click to enlarge tables and charts.

 For more on forex, click here.

A replay of the call is available here.


– Edited by Robert Ryan

Kay Van Petersen is Global Macro Strategist at Saxo Bank. You can follow him on Twitter: @SaxoStrats or @KVP_Macro. Please join us live for next Monday's Macro Call at 0830 [Singapore/Hong Kong], 0930 [Tokyo], 1130 [Sydney].


1y
Morris Morris
On the Technical Outlook the S&P could test and break the 200mva to complete the A or C in the ABC corrective pattern! If Elliott's wave is anything to go by. Thanks for the Article.
1y
Logich Logich
The charts in the video are not visible. - The cursor is seen, but no charts.
1y
Logich Logich
Sorry, work on 2. loading. - Strange, but so it is.

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