26 September 2016 at 5:16 GMT
- We are entering what will potentially be the weakest USD regime so far this year
- Don't expect the ECB (Oct 20) or BoJ (Nov 1) to ease further anytime soon
- We are now at the point where a December hike is super-questionable
- The key risk is obviously yield reversal
- So it's risk-on, as we are expecting a rally into month/quarter end
By Kay Van-Petersen
Welcome to Macro Monday, your cross-asset weekly call on global markets. For a replay of the call please click here
For week 39 we take a look at the following:
- Full-court press today, so super concise and very top-of-mind format
- We are entering what will potentially be the weakest USD regime so far this year, with the next "real" US Federal Reserve meeting on December 14 being c. 80 days away – a lifetime in these markets ...
- At the same time, don't expect the European Central Bank (Oct 20) nor Bank of Japan (Nov 1) to ease further anytime soon – the first will wait for the Italian ref. to go through (keep powder dry), the second will not be so quick to move after the third consecutive cock-up on easing measures. DXY was c. 94.77 pre-Jackson Hole (i.e. potential Fed hike in Sep).... USDJPY will enter new 90-100 range
- Further, we are really now at the point where a December hike is super-questionable. The current 55% imp. prob is way too high. We need some time decay to get closer to the event. But you have to think, this Fed started 2016 postulating four hikes (at the time I said I would quit Global Macro if the Fed hiked four times this year) so if they only get one in this year, or even fail at that ... you cannot help but postulate the probability of a Fed hike/s in 2017 should be much lower than the market is pricing. Not to mention we are long, long overdue for a recession in the US – let alone globally.
- The key risk is obviously yield reversal. Last week's closes were great price action for risk on ... yields significantly tighter (US10-years got to about 1.75% at some point, last is 1.6132%), with VIX collapsing by 20% ... we were sub-12.00 at some point ... before closing at 12.29. However, KVP is sleeping a lot better post-last week’s tighter yields.
- Only two banks on the agenda this week, Taiwan and Mexico. We have a platoon of Fed speaks (14 in all, with two talks by Janet Yellen on 28 and 29), plus hearing from Jordan, Mario Draghi and Kuroda later today, and Poloz tomorrow and Draghi and Olsen on Wednesday.
- Also kick-off of the first big US presidential debate is today, between "Hilarious" and "Trumpet"...
- Econ-wise, we get CH PMI this Saturday, final GDPs from US, UK and CA, a few flash PMIs, plus US personal spending/income.
Kick-off of the first big US presidential debate is today, between "Hilarious" and "Trumpet". Photo: iStock
Thoughts on near-term tactical positioning
- Risk-on, as we are expecting a rally into month/quarter-end: So pretty much copy-paste of last week where we got most things right.
- We favour USD shorts and longs in AUD, NZD, INR, RUB, IDR (think EM yield/ CMD yield)
- On CMDs, we favour the precious metals, silver price action is still better than gold, and think sentiment in WTI is still constructive.
- FI yields starting to come in, good for risk. With that said, I don’t expect 10-year JGBs to go back to making new lows if the communication from the BoJ is anything to go by.
- EQ still loving US price action, I’d still be Eminis heavy. VIX got crushed last week, down 20%. I’d pick up some 12.00 strike 3 to 4-month calls and look to get +15-30% premium (i.e. trade the vol. rather than waiting for an epic move up). Potentially leave enough dry powder to pick up another clip if VIX get to about 11.00 (low last week was 11.76).
COT report highlights
- FX: Big reversal on Aussie longs. Kiwi went from net long to net short positioning. EUR, YEN and CHF little-changed. MXN at new one-year record low given short exposure. First big reduction in GBP shorts, about -30%. Overall increase in USD positions by +14%.
- CMD: Overall reduction in exposure from HF in the commodities space.
- Coffee and natural gas continued to make new record one-year highs in bullish positioning with coffee attempting to break out last week (the weekly chart is showing a potential Cup & Handle).
- Big positioning reductions in WTI, down 28%, and ULSD (151%). Plus continued reduction in gold and platinum longs including a c. 50% pullback in copper shorts.
- Wheat’s KCBT saw a very large 37% reduction on top of a 21% reduction last week (interesting as wheat has been in the dog house for a while).
- Econ: CH: PMIs (Sat) Manf. 50.5e, Serv. 53.5p, Caixin Manf. 50.1e US: 2QF GDP +1.3%e, Flash Serv. PMI 51.1e, Durable goods, House data, Personal Spending/Income JP: CPI, RS EZ: CPI & u/r UK: 2QF GDP +2.2%, CA AU: Light NZ: Trade Balance, Biz. Conf.
- Central banks: TW 1.25%e 1.375% p (29), Mex 4.25% e/p (29), BOJ Summary of Opinions (30)
- Fed Speakers: Tarullo (26), Kaplan (27), Fischer (27), Yellen (28), Bullard (28), Evans (28), Mester (28), George (29), Harker (29), Lockhart (29), Powell (29), Kashkari (29), Yellen (29), Kaplan (30)
- Speakers: Jordan (26), Kuroda (26), Draghi (26), Poloz (27), Draghi (28), Olsen (28)
- Other: Trump/Clinton big presidential debate kicks off today. Also, please note for our Australia-based clients, this coming weekend will be daylight savings shift, so the Macro Monday call will be your 11:30am (as opposed to the usual 10:30am).
- James Kim on the charts running through a number of names across the different asset classes.
- Edmund Liu walks us through the chart of the week, with a gold/silver ratio trade view.
– Edited by Susan McDonald
Kay Van Petersen is Global Macro Strategist at Saxo Bank. You can follow him on Twitter: @SaxoStrats, @KVP_Macro. Please join us live again next Monday at: 0830 [SG/HK], 0930 [TOK], 1030 [SYD].