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 / 20 April 2015 at 1:48 GMT

KVP's Macro Take: China eases rates - so it's equities risk-on

Global Macro Strategist / Saxo Bank Group - Singapore Hub
  • China cuts reserve requirement ratio by 100 basis points to 18.5% 
  • Before this, China US-listed ETFs were tanking, on potential financing pressure 
  • RBA, BoE minutes key this week and AUD over 0.7800 is short addition territory 
By Kay Van-Petersen (KVP)

Live from the Asia Pacific! 

Quick snapshot of last week: a pullback in developed market equities, especially in the Eurozone (EZ), with a few emerging markets Asia markets such as the Shanghai Composite and Hong Kong bucking the trend; the USD weakened for the week and sovereigns generally tightened given the correction in equities mainly linked to Greek jitters – again.
US Federal Reserve: Lift-off in 2H15 is still very much on the cards; did you see that second consecutive grind-up in core CPI (me likey). Still, we do need the economic data to start picking up now that we are out of the first quarter, weather or no weather. Also, April 29 and May 8 … get ready for those dates (see key macro data points below) .

xxxx China's surprise is the biggest cut we’ve had since the GFC. Photo: iStock

USD: The death of the USD has been greatly exaggerated, we are still in a multi-year bull market – albeit the past few weeks have thrown more swings than a boxing match. I am still a very big USD bull, yet weeks where we have pullbacks of -1.83% on the dollar Index (DXY), albeit after a +2.9% pop the week before, can be a little shaky from a volatility standpoint. In cases like this, it's good to have a structural position with a large tactical component that you trade around to monetise volatility.

Equities: As an asset class for the balance of 2015, risk-on, with best performance to worst by year end most likely being: Eurozone, China, Japanese, Indonesia, then US. Not saying you cannot make money on US equities, but it’s no longer a tide-raising-all-ships trade … the skew is very much to the downside. So short US equities versus potentially long markets such as Australia (easing bias), SK (chart is breaking out, ETF is EWY, we’ve been in a fairly tight range for a while, there is a short bias against JP), JP equities (hedge the FX) and obviously EZ equities (hedge the FX).
The healthy pullback we had in the EZ last week was much needed: DAX 11,675, -5.5%, Euro Stoxx 3,836, -3.7%, PSI20 6,002, -4.9%, etc. Greek jitters and any Greek exit is going to provide an excellent entry point for those waiting to play or add to the long side of the port in EZ equities. Even a Greek exit would not change the call for +40-60% on EZ equities by the end of the year. Yes, we’d have very sharp near-term correction, but in many ways it may actually be better for a lot of other things – Ukraine, focus on other EZ countries, etc  –  I still believe the Greeks are a lot worse exiting the union, but the fact that this has now been dragging on for months does not help that case.
Interestingly enough on China equities, their ETFs tanked massively in the US session, e.g. FXI and MCHI were down around -4.2% and -3.5% on the back of what I thought we’d see coming sooner or later, i.e. rhetoric about clamping down on margin financing. This would have spelt an obvious blood bath this Monday morning in Asia (just how euphoria can cascade on the way up, well it actually always accelerates on the way down).

100 basis points RRR cut: However, we got a surprise BIG cut over the weekend with 100 basis points being taken off the reserve requirement ratio (RRR). What I’ve been tending to notice is: these cuts that we are having in China, while effective in pushing up / supporting mainland shares, have been a little more muted versus the AUD and Australian equities in comparison to the past. This is the biggest cut we’ve had since the GFC (2008) and it will apply to all banks from April 20.

More loosening can be expected to follow, whether in the form of stimulus spending packages or reduction in the key rates, etc. The usual suspects should fly on this: Chinese, Hong Kong and Australian equities … AUD and NZD… etc. Except on the Aussie. Soon enough people will remember the RBA does not want a strong Aussie in a world of falling commodities, so I’d be positioning aggressively for downside above 0.7800 / 0.7850 /0.7900 – and by those ranges I mean you are building your position.
For those that like to take a contrarian view, this week could be an excellent week to pick up puts on some of the HK equity names or the China/Hong Kong indices – at some point we are going to have a massive correction, especially if it's as retail-driven as it seems to be. I mean, look at 388 HK!

It’s a bird, it’s a plane, it’s the Hong Kong Stock Exchange! (388)
 Source: Bloomberg
Credit: Again, apart from the US (and now perhaps Canada for the near-term), it's very much a yield compression game – just look at German 10-year bunds – as I’ve said before, they will become negative (9 year bunds already hit this last week). We are not that far off with bunds at 7.6 basis points, yes that's $760 for every $1m of German 10-year bonds that you hold.

US Treasuries at 1.87% – classic tightening given equities pullback and still overall poor US economic data. US Treasuries not at 1.865, again it's very much on the shorting list … yet you want to be tactical about the positioning off and on, i.e. it's a combination of levels and moves … saying that if we get to sub 1.80%, c’mon!
Macro: Most excited about India, people still thinking way too near-term; 6-12 months is nothing when you are talking about baby China. India is where China was 10 years ago, this is multi-year layer cake of macro and structural investment themes – all the structural, fundamental and long-term investors should do the work on India.

ETFs are the easiest way to play this (INDA, INDY, SCIF). See my previous work on India here, or drop me a mail/call if you want more of a walk through on why this will become the hottest market over the coming decade. Rest of the world: dislocations to continue; easing bias in the Asia-Pacific and Eurozone; slight tightening in the US.

Commodities: Again, as an asset class I generally do not like swimming up river against the USD – great piece last week on the world being short $9 trillion.
Oil at $55.74 - that's 7.9% over last week. It continues to go from strength to strength, fifth consecutive week where it closed higher. If you’ve been on the long side of this, well done. About $60 is obviously the level to break, I am still holding on to us breaking $40 by the end of the second quarter, yet every tick up dampens the probability of that happening. And yes, I’m fighting the trend and the trend so far has been Mike Tyson – not a good idea. I’ve spoken enough about oil recently, but do read this brilliant recent piece from Ole Hansen, our commodities specialist, which came out late on Friday. WCU: Beware this false dawn in oil markets.
Gold at $1,203, -0.1%: To be honest, I was surprised gold was not more robust towards the end of the week, especially given USD pullback and Greek fears in Europe.

Volatility: VIX 13.89, VDAX 24.48. Tactically speaking, I think its worth picking up some VIX anytime it dips sub 13.0, in increments of thirds to fifths. Big pop-ups on volatility measures on the S&P and DAX last week, both up, around +11% and +40%. Meanwhile, ML’s MOVE 74.37(bond volatility measure), actually came off by about -5% for the week.

Mark your calendars and potentially position the tactical parts of your portfolios

On the horizon: Last week of April and first week of May will be kryptonite – May 8 baby! 
Apr 29: FED, US 1Q GDP (no estimates yet, but I think +1% is the number I’ve heard floating around)
Apr 30: Reserve Bank of New Zealand 3.50% existing, 3.50% predicted (consensus is probably for no change and more kiwi talk down – ‘cause clearly that has been sooooooo effective – not!). If you want to short this, the chart is looking strong; you need to be able to hold versus a move to 0.7811 (Feb 38.2%) or even better 0.7865 (200 Day moving average). NZD 0.7678, +1.9%, and AUD 0.7782, +1.3%, continue to be my favourite shorts versus the USD, except there are just more clear catalysts on the Aussie.

 Source: Bloomberg
NZDUSD monthly chart

Source: Bloomberg

May 5: Reserve Bank of Australia 2.00%e, 2.25%p. What happens if they don’t cut as they will be expected to? Or if they cut by 50 basis points? Anyway I look at it, AUD is a short and getting shorter and ASX shares are going higher. I think the Fed hikes in the second half of the year and if they don’t the RBA will still be forced to do more of its own heavy lifting. So I still think we have possibly 50 basis points left for the RBA this year and more will depend on whether the Fed moves or not this year.

AUDUSD monthly chart


Source: Bloomberg

May 8: US April nonfarm payrolls. May 8 has now become the mother of all nonfarm payrolls numbers.
Key macro data points to watch over next week
Central Banks
Speakers/Other: Sun Apr 19 – Sun Apr 25 
Fed Speak – Dudley (Apr 20)
Other Speakers – ECB’s Draghi (Apr 19), BoC’s Poloz (20), RBA’s Stevens (21)
Meetings/minutes this week: Apr 19 – Apr 25
RBA minutes (Apr 21), BoE Minutes (Apr 22), Turkey 7.50%p (Apr 22)
Next week: Apr 25 – May 3
BoT 2.0%e, 2.0%p (Apr 29), FOMC 0.25%e, 0.25%p (Apr 29), RBNZ 3.5%e, 3.5%p (Apr 30), BoJ (Apr 30), BoR 13.0%e, 14.0%p (Apr 30)

Economic Data Flash:
  • China: RRR cut by 100bp to 18.50% from 19.50% (Apr 19), HSBC Manf. PMI 49.4     
  • Japan: Tertiary Industry Index -0.7%e +1.4%p, Markit Manf. PMI 50.7e 50.3p, All Industry index -1.0%e +1.9%p     
  • Australia: CPI YoY 1.3%e +1.7%p, Westpac Leading Index MoM +0.3%p, RBA Minutes (Tue Apr 21)     
  • New Zealand: CPI YoY +0.2%e +0.8%p, CPI QoQ -0.2%e -0.2%p, Credit Card Spending YoY +5.8%p     
  • UK: House Prices, Retail Sales     
  • EZ: Apr ZEW survey 62.4p, Consumer Confidence -2.5e -3.7p, Markit manf. PMI 52.6e 52.2p     
  • US: Existing Home Sales 5.03m e 4.88m p, New Home Sales 510K e 539K p, Markit Manf. PMI 55.6e 55.7p, Durable Goods orders +0.6%e -1.4%p  
  • Canada: Wholesale trade sales MoM +0.5% -3.1%p  
*Source: Bloomberg and Saxo Capital Markets as of Sun, Apr 19, 2015.

Some interesting reads

Just think about that for second, you lost $1,000,000,000 and the world knows … would not wish that on my worst enemy. Losing money is never a fun thing, losing the equivalent GDP of the Solomon Islands (IMF 2014) is beyond words. 

WCU: Beware this false dawn in oil markets  – Ole Hansen on TradingFloor.Com

Lastly, life is very similar to investing/trading, you end up with what you put up with – so set your standards high, focus on the process and a profitable trading/investing to you all – be successful and don’t forget to enjoy the journey.
The effective use of our time is the most valuable commodity we have.
Have a great week everyone!
-- Edited by Susan McDonald

KVP (Kay Van-Petersen) is Asia Macro Strategist at Saxo Bank, the home of social trading. In addition to, please follow him on twitter @KVP_Macro 

KVP has a number of firm beliefs, including:
- Everything in life is a trade, hence he is always long oxygen, water, food and his girlfriend (not always in that order).
- If you take care of the downside, the upside will take care of itself.
- A good trader has a trading plan. A great trader sticks to that trading plan.
- Position sizing and risk management are what separate the exceptional from the great.
- To win in the game, you have to stay in the game - no matter what.
- There is a big difference between being right and being profitable, they are not always the same thing.
- Always assume that anyone talking about a trade has a position in that view.
- Everyday he contemplates starting Hindsight Capital, a hedge fund with near-perfect returns, except for the times that even hindsight was unclear.
Serge Berger Serge Berger
Kay, enjoying your style


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