Macro Monday: Deconstructing Friday - what was that all about?
- Friday saw both the VIX up 39.89% and sell offs in the S&P and US bonds
- We are starting to get very concerned with the higher lows in the G3 yields
- Bunds are back in positive territory and JGBs are not far behind
- Asiam equities and bonds are being hit hard today in mid-late trading
The very colourful previous week, including the “Where did that come from?” moves on Friday in both the VIX +39.89% and S&P -2.5%, whilst US bonds as well as gold/silver also sold off.
- It was the 11th biggest jump in the VIX (Brexit # 5), from a very low base in what we knew to be record shorts as the market kept selling volatility.
- So is it a one off technicality from over positioning in the market or the sign of something more to come? Honestly, hard to say. I think the market grasping for a potential Federal Reserve hike, a Donald Trump win being the cause for Friday’s move are spurious at best – that’s nothing new.
- At the same time, we are starting to get very concerned with the higher lows in the G3 yields (lower lows in bond prices) – which now technically and judging from the price action look like they can correct a lot further. We have bunds back in positive territory and JGBs are not far behind.
- Meanwhile US 10 year Treasuries at 1.637% seem very wide to me, yet I was also saying that when they were at 1.60%. Nothing has really changed fundamentally, if anything inflation had degraded globally (Japan and Eurozone).
- It is worth bearing in mind that irrational valuations and stretched yields as a result of unprecedented loose monetary policy globally, will lead to irrational price correction.
- Why did equities also correct – because lower bond yields have been the one true driver of higher equity levels, the yield justification falls apart once bonds are yielding just as much or more than equities – so the potential for both asset classes to structurally sell-off is very high.
- Either way, the fact that it primarily only the VIX (volatility) and USD that were up on Friday, we need a few more data points from how the market trades. Asia has opened up as we would expect, weak. The key is to watch how the Eminis trade, they are the key for turning around any risk-sentiment, but it will most likely be driven from Eurozone/US sessions.
- Next week’s Macro Monday will focus on the upcoming Federal Reserve and Bank of Japan meetings with the latter being perhaps the more interesting of the two meetings. We’ll talk the effect of further negative rates, as well as potential use of helicopter money.
Thoughts on near-term tactical positioning
Tricky one this week as laid out above. However for the week we’d look for upside risk across: GBP (into BoE), NZD, EUR, US equity indices, G3 yields. Whilst downside risk across: VIX, DXY, Nikkei, Hang Seng and ASX200.
Commitment of Traders (COT) report highlights:
- FX: Big reversal in USD positioning, as net-longs increased by 65% to $10.1 billion from 6.1bn. GBP still at very elevated short levels. Yen saw a -14% reduction in net-longs.
- The NZD meanwhile went from a few bulls to a herd, as we saw a +224% uplift in kiwi net-longs (something that we mentioned was going to come through). There was also a reduction in EUR shorts, whilst MXN saw a big +76% increase in net-shorts.
- Commodities: The second week continued reduction in commodity longs. Metals, bucked the trend seeing an almost 10% increase, whilst grains turned from bullish to bearish positioning, alongside big reduction in energy. Metals saw decent bulls picking up in gold and silver, up 17% and up 11%. Whilst a big increase in copper bears by 55%.
- NS in wheat hit a new record high, despite prices seeming to level off.
- Coffee which we flagged was looking interesting and hit new one year record NL. Other big positional changes are also occurring in cocoa and soybean meal.
- Economy: CH: AUG growth data; IP, FAI & RS US: RS, PPI, PPI, Cap. Util. CPI & sentiment JP: PPI EZ: GE ZEW Econ. Sent., IP, Final CPI UK: CPI, PPI, Avg. Hrly, Jobs data, RS AU: Jobs data NZ: GDP +1.1%e +0.7%p.
- Central Banks: BoT 1.50% e/p (14) SNB 0.75%e/p (15), BoE 0.25% e/p (15), CL 3.50% e/p (16), RU +10.0%e 10.25%p (16).
- Fed speakers: Lockhart (12), Kashkari (12), Brainard (12). Other speakers: Draghi (13)\
- Other: SG hols (12), CH hols (15/16), HK hols (16), JP hols (Mon 19) BIS Conf. (13/15), EU-27 on Brexit (16).
James Kim on the charts running through a number of names across the different asset classes.
A replay of the call is available here
Also please find our Q3 Essential Trades can be found here
- A September hike, iced cold. USD liquidated but then reversed late Friday.
- Fed speak not assertive enough, although hike probability in September marginally higher. Although is history repeating itself, 2015 probabilities look similar to 2016 now.
- ISM Services weaker than expected.
- G20, a lot of nothing.
- North Korea 5th nuclear test.
- BoJ becoming less clear.
- What happened on Friday: S&P -2.45% a significant move versus relevant history. Vix explodes higher from a low base.
Last week's COT report
- Big reversal in USD net-longs with a 65% increase in long positions from prior week.
- Slight reduction in GBP, given GBP moves that makes sense.
- NZD longs massive increase in long exposure.
- GBP, JPY and MXN the elevated positions.
- Commodities: Wheat 1 year lows and coffee 1 year highs. Gold & silver longs added.
Week ahead: Data dependence
- Fed and BoJ come into focus for next week. Post the European Central Bank last week, does this move extend as a result of no delivery.
- Central banks: BoT; SNB; BOE; Chile & Russia.
- China data dump this week, important.
- US: retail sales, PPI.
- Fed Speakers: last 3 before the blackout period. Lockhart, Kashkari, Brainard.
- Others: Draghi, BIS Conference and EU-27 on Brexit.
Looks like some positions breaking out. But Fridays moves take us back to the range. Waiting on clarity for Fridays moves and what really was the driver.
Upside risks: GBP and BOE higher. NZD; EUR and USD Equity futures.
Downside risks: Vix lower, DXY, Nikkei and Hang Seng.
Technical picture from James Kim
- USD: false break below support trend line in prior week. Target 200 DMA above this week. Weekly chart shows resistance at 97.
- EUR: look for a lower retracement over the week, support comes in at 1.1138 which is the 200DMA.
- GBP: Gives up gains from earlier in the week and some more. May look test the support just below here and a bounce could be a bullish signal for GBP to move higher.
- AUD: Can’t catch a break, look for further downside to test 0.7386. Then a bounce there after.
- JPY: Still caught in its downtrend channel. The test of the week is the upper channel trend line, a break of this opens 104.9, then 106.
- Nikkei: Struggled last week, trading against noisy levels. Support this week is June low trend line, then look for test of 16900 levels.
- Hang Seng: Pull back points to further downside on the week. 23329 first support
- S&P: Closed last week on key support levels from 2015 highs and pre-Brexit highs. Expect here down to 2100 as heavy support.
- ASX: Another week of underperformance. To be supported at 200 DMA.
- Copper: Failed to break the trend line from earlier in this year. Big test is the multi-year trend line below.
- Gold: Bias is to the downside with ultimate support offered around the 1300 down to 200weekly moving average at 1289 -this should be strong support.