Article / 20 October 2014 at 1:33 GMT

The Macro Week Ahead: Get Rich Or Die Trying, Risk-On

Global Macro Strategist / Saxo Bank Group - Singapore Hub
Singapore
  • Seeing equities higher for the week, with the S&P and DAX to get back well over 1,905 and 9,000
  • Expecting to see a higher USDJPY, lower EURUSD and lower EURGBP for the week
  • Key macro points with 3Q GDP out of China on Tuesday, inflation out of the US, UK 3Q GDP on Friday as well as minutes from the RBA and BoE

By Kay Van-Petersen

KVP is back on board the mother ship in the Lion City. As I said in a trading seminar last week in Sydney, life is very similar to investing/trading, you end up with what you put up with – so set your standards high.

There's a lot to get through, let’s get to it and a profitable trading to you all – be successful.

Looking back - blood and volatility

October is living up to its reputation as month for bears and they’ve been out in full force. We’ve just seen the most volatile week of the year so far, complete with key yo-yo type swings across all asset classes and the VIX hitting a 4-year high of 31.06. While we got the USD pullback right on last week’s call, the bounce back in equities towards the second half of the week, was not enough for them to finish up on the week.

Credit:  Very big moves in credit this week, with the two most pronounced moves being seen in the US and the Eurozone’s Greece. I think we saw clear signals of capitulations in the price action in the US 10 year, that shot straight down to a week low of 1.86% before quickly recovering back above 2.00% and finally closing the week at 2.19% (2.28%). Meanwhile we are seeing a bit of Greek 2012 replay, as their 10 years blew out to 8.6% before closing at around 8%, these bonds were yielding about 5.5% just a few weeks back in early September.
 
So for the week, whilst we tightened in the US and most of the Eurozone, France bucked the trend as its 10 yearr yield went out for the week.

Key closes: US 10year at 2.19% (2.28%), UK 10 year at 2.19% (2.22%) and Bunds at 0.86% (0.89%).

And yes, finally the UK-US 10 year spread has closed, lets see what it does this week.

Lastly, we got the final pricing on the world’s biggest COCO bond offering, from Bank of China, a $6.5 billion exceptionally well received bond. The final book had $22 billion of orders (+200% oversubscribed), which bearing in mind that there was really only $2.3 billion free float, had it at almost 10 times covered, quite a statement especially given the week we had. SWF and insurers constituted close to half of the demand. This is a landmark deal for Asia, as well as Asian Credit and would have gotten a lot more time in the sun if it was not for the risk-off week we had.

COCO bond issuance

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 Source: Bloomberg
 
Equities:
One the most interesting data points on the equity asset class this week, was that the DAX took out the 8,500 level we talked about, hitting a 8,365 on Thursday before rallying around +6% to Friday's close of 8,850, leaving it +0.7% for the week. Very positive and constructive price action with very good volumes.

The rest of the Euro-zone indices and the US were down for the week. Bucking the red wall in Asia was the ASX 200 and the Jakarta Composite up 1.6% and 1.3% respectively for the week. The biggest losers were the Nikkei & Taiwans’ TAIEX, both down -6.1% and -5.1% respectively – the former no doubt linked to the yen’s pullback and the latter tied with global growth concerns.

Key equity closes for the week end Oct 17:
S&P 500:1,886.76, -1.0%         Nasdaq: 4,258.44, -0.4%
Euro Stoxx: 2,962.24, -1.0%     DAX: 8,850.27, +0.7%
Nikkei: 14,532.51, -6.1%           Hang Seng: 23,023.21, -0.3%
Shangai: 2,341.18, -1.0%         ASX 200: 5,271.71, +1.6%
 

Currencies: We got the tactical retreat in the dollar right this week, with key levels  being broken on USDJPY (107.00, 106.50, 106.00), Cable (1.59), EURUSD (1.2750, 1.2800) and AUDUSD (0.8800) to name a few. Its also worth noting that the Loonie has been making grounds, as a weaker oil has been read as negative for the Canadian Dollar - ie those looking to play oil through options and futures, should measure the skew, cost and risk-reward versus the same trade on the Loonie – albeit when I look at the chart of the Loonie versus oil, it seems like it had not come off enough to balance the drop we’ve had in crude.

Canadian Dollar has been losing ground with the sliding oil price

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 Source: Bloomberg

Sterling: Over the last two days, its actually looking like sterling is getting its tail out from between its legs and looking to find its feet. This currency seems to have really lost its way post the whole Scottish scuttle, not to mention the bipolar rhetoric we keep getting from the Bank of England – I am not even on the board and I am a dissenter already.  

Key FX closes for the week ending on Oct 17:
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Geopolitical Risks and Conflicts:  The US has become obsessed with Ebola and the analogy is very much like the markets, it’s not the practical/tangible risks of an outbreak (very low) but the fear mongering that is occurring and that can really take off (higher probability).

One has to think with oil prices having come off so hard, chess master Putin and a few Middle Eastern autocrats are starting to get very uncomfortable as their revenue streams drop.

Whilst the crisis in Syria and Iraq rages on, the markets/media seemed less focused on events in that part of the world this week. It never ceases to amaze me how quickly the market gets numb to information and how sentiment (positive or negative) can overwhelm any set of data points – at least in the near term.

Hong Kong: I touched on this last week, yet feel we are now definitively out of the inflection point with the demonstrations, it’s all petered away. With all that said, I’d expect Hong Kong chief executive CY Leung to be gone within a year, perhaps even six months. We saw some concerns around the lack of a firm launch date for the Shanghai/Hong Kong North-South link yet it should not be surprising that something on this scale is delayed – its obviously been a massive, if not the main driver of the strength we’ve seen on the Shanghai Composite.      

Marketing colour from Downunder trip: I had a great as well as intense agenda Downunder earlier in the month, gracing Melbourne and Sydney, both were quite a treat as it was my first time in Australia. Net-net, all I can say is that they have it good Downunder, plenty of space, clean air, good education and health care system, amazing food and did I mention I could actually run and breathe freely – something that was always a bit hit and miss back in HK. Yes, it’s a 40% premium with the tax that one pays, but you tend to get what you pay for.

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 Australia is a great place to run and breathe easily in - but you have to pay a high price in tax. Photo: Thinkstock

Most people were obviously very concerned with housing prices as well as the changing dynamics of China slowing down and hard commodities structurally becoming a smaller lever of the economy. Out of the two big public speaking seminars that I was part of, no one said they would buy property yet at the same time, everyone agreed that prices would be higher 12 months from now – again people focusing on trying to be right, as opposed to trying to make good risk-reward decisions even if they may seem uncomfortable.

I am still surprised they have not put in cooling measures, similar to moves we’ve seen successfully implemented in Singapore. Over 95% of the participants expected that when the RBA does eventually move, it will be a hike – no one anticipated a cut. In regards to where Australian equities and the AUD were going to be a year from now, the votes were less skewed, with a slight majority expecting equities to be higher one year from now and a slightly bigger majority expecting the Aussie to be lower against the US Dollar a year from now.

Special thanks to the entire Dream Team Aus Crew, we have a very sharp, savvy, client-focused and positively driven team down in Sydney – and man, they know how to throw a barbeque!

Trade/Investment Ideas: Long Allianz / Short Axa trade: Successfully closed this blue chip mean reversion trade as we hit our final profit taking target for the balance of the position. The total return was +4.5% grs / +96% ann, with very little drawdown and spanned 13 trading days – this was a great trade.  

We also initiated a divie. Technical momentum long/short call on the Aussie banks, as we approach Nov dividend seasons for NAB, ANZ, WBC which we are shorting against CBA – which already paid out its div in Aug.

Also for those twitterhollics @KVP_Macro, I put out a second tweet on picking up the S&Ps on Wednesday for another 25% after we broke 1,850, looking to target 1,800 for the next level. Will we get back down there, now that we closed +3.7% off the week’s 1,813 lows? I think the probabilities are skewed to the upside and I’d look to buy the balance once we clear 1,905 if there is no further pullbacks. Let's look ahead…

Looking ahead - risk on


So this is what is going to happen, people will come in on Monday and realise the world is not coming to an end? Yes Europe is a risk to slowing down global growth, but actually that probably means even more extended low rates from the US and the rest of the globe. And after all economics 101 says you want low inflation and higher growth… hmm last time I checked that was the world we lived in. Oh and oil a lot lower? That’s great for US consumers and it's great for forcing ECB president Mario Draghi’s hand for QE as lower energy prices increase the risk of deflation in Europe as well as increase the pressure for real structural change on the fiscal side of things.

So it's risk on, probably more prudent to wait until the last week of October, but there is a chance that we will not see further significant pullbacks, and baring any systematic events, it’s an equity bull market up for the rest of the year. There is the risk that I am a week early on this call, but fortune favours the brave and whilst I may not be that, I am pretty damned lucky.

Equities: Despite the negative closes for the week, given the swings and shake outs we’ve had, I think we’ve seen some very positive price action on the equity front. The small cap barometer the Russell 2000 closed up strongly at 1,082 +2.75% on roughly +43% greater than average volume for the week.

It led on the way down and I believe it will lead on the way back up, with a key close needed above 1,100 (a +1.6% move). Meanwhile the US third quarter earnings season is looking very healthy with companies that have reported so far around 59% had a positive surprise on the top-line growth and 77% with a positive surprise on the bottom-line growth, indicating that corporates ability to earn is still quite robust in the US.   

Russell 2000 and S&P 500 - the Russell led on the way down
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 Source: Bloomberg

So I am looking for equities to end the week higher, with the S&P getting back over 1,906 (probably 1,925 to 1,960 for the week) and DAX back over the 9,000. The Nasdaq which has been the leader this year has to crash through 4,302 (100D MA) and could possibly breach 4,400.

I don’t have the real estate to touch on as much as I’d like, but a lot of key names out there not only look overextended to me, but are also sitting at very key levels. For instance the Nikkei at 14,532 and down over -6% last week, I think has a very good probability of taking out 15,000 this week, a +3.2% move (hedge the FX). Yahoo Japan (4689 JP) at the 400 level, Softbank (9984 JP) at 6828 level, etc.  

Currencies: Whilst I still think we possibly get a few more days on USD weakness, it is not going to be across the board as per our call last week – you’ll have to be a lot more strategic in picking your tactical shorts.

For the end of the fourth quarter as a whole I’d expect USD will most likely be stronger across all the majors with new levels being seen, such as EURUSDr south of 1.24 and USDJPY north of 110.

For the week if I had to pick three crosses to play tactically it would be long USDJPY (106.88), short EURUSD (1.2761) and Short EURGBP (0.7928).

Long USDJPY: Entry on Monday open. Targeting 107.90 (25%) / 108.40 (25%) / 109.40 (25%) and the balance at around 110 level. I’d put stops below last weeks lows at 105.10, as I still believe this 104/105 level is the floor of the new trading range as per our September bullish USDJPY call. To be frank, 110 calls are looking interesting on an end of November to end of December time-frame, potentially to be funded with nearer term lower strike puts.  

USDJPY set to rise

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Short EuroDollar: Entry on Monday open. Targeting 1.2710 (25%) / 1.2660 (25%) / 1.2610 (25%) and the balance at around 1.2560 level. I’d put stops above last week’s highs at 1.2890.

Short EuroSterling: Entry on Monday open. Targeting 0.7890 (50%) / 0.7855 (50%). Stop 0.8050. Again, would be great to see a few more days where sterling is showing a bit more swagger but the euro feels a little overextended and once again fundamentals are needed here for a sustained euro rally and there is still a very long dark tunnel before we see any Eurozone fundamentals coming back.

Credit: As I am banking on a risk-on call, credit should loosen for the week – probably best to play against shorting the US 10 years (should be back in the 2.30%-2.40% camp), as Eurozone credit has a lot of technical factors embedded in it, that makes it a trickier market to tactically play but a lot easier to structurally play - ie long-term, weather the volatility, full QE has to come to the Eurozone. Those yields will get even tighter. As I said before, we will see bunds south of 50 basis points before the Eurozone gets out of its negative spiralling. It's worth paying attention to Greek 10 years this week.

Oil: The correction is overdone and it seems to predominantly be an oversupply, as well as fears on global growth slowing down story. I am not in the latter camp, so I’d expect oil back to the $85-$95 range before the end of the year. Whilst we cracked the key $80 level, the fact that we got only as far as $79.78 before very strongly bouncing back is an indication of good price action. See more on oil from our commodities baron Ole Hansen, who put out this piece recently. For those that stick to the equity class but are interested in playing oil, some math and CFDs exposures to Bakken, Eagle Ford and Permian may be in order – as they are US shale gas names that have come off hard in the recent few weeks.

If I was Alibaba’s Jack Ma or Softbank’s Son, what am I thinking? Why doesn’t Softbank or Alibaba buy Yahoo? It’s a great way of picking up BABA US shares on the cheap – for that matter why not a few HFs and PEs band together. Here is the back of the envelope math that even our temperamental trading cats – Buffy and Cricket – could do.

Yahoo on Friday’s close of $38.45, was valued at $38.5 billon, yet if one takes its combined values of 35.5% in Yahoo Japan ($7.6bn) and 15.3% stake in Alibaba ($33.8bn) plus the $10bn in cash it received from selling shares from the IPO, one gets a value of $51.3bn. This implies that Yahoo is trading at a 25.5% discount to the sum of its parts and it does not even take into account the value of Yahoo’s core business (which is probably another $5-10bn or c. 35% discount) – this is a very big dislocation in pricing that I believe will be solved one way or another within a years’ time.

So if I was Jack Ma, before looking at even one big multi-billion dollar acquisition, I’d buy back my own shares through yahoo. And if I was Softbank’s Masayoshi Son - who has made it very clear that Alibaba is a strategic stake - I’d do the same and solidify my already large stake in Yahoo Japan.

I might also add that technically, Yahoo's price action has been very encouraging as its bounced nicely back from its 200D and 100D moving averages of $37.02 and $37.21. Further, even if we do get another extended sell-off of -5 to -10% (unlikely in my view), I think that Alibaba is going to be very well bid – I struggle to see its share price getting anywhere close to the $68 IPO strike. So this in effect acts as a buffer or soft floor of sorts for Yahoo given that, Yahoo’s stake is Alibaba represents around 88% of its current market cap.

I’d look to be long either though 3-6 months call options, CFDs or equities with an entry at current $38.45-$40.50 levels (VWAP on Mon Oct 20), stop $35.90 with $41.90 and $43.90 being the profit targets for 50% clips of the position. The icing on the cake could be any corporate action that focused on extracting this mispricing and undervaluation in Yahoo. For those looking to arbitrage and box out the trade, please see Peter Garnry’s commentary on this on Oct 2.

Key macro data that I am looking at this week:

(Note dates/times are Hong Kong / Singapore based)

Central Banks: Kuroda speaks at central bank meeting on Monday, RBA and BoE minutes are out on Tuesday and Wednesday respectively, RBA’s Glenn Stevens speaks on Thursday at a payments conference (KVP’s year-end bonus?)  

Main focus in Asia macro data will be China’s September FAI, retail sales, IP and most importantly third quarter GDP figures – the world will be tuning in on Tuesday for that figure. In Australia, it's about third quarter inflation, conference board and Westpac’s leading index. In Japan we have September trade data as well as October preliminary manufacturing PMI.

Europe: In the euro-zone, we’ll be getting preliminary October PMI figures as well as consumer confidence data. In the UK, even more interesting than retail sales, house prices and BoE minutes will be third quarter GDP figures on Friday – current market expectations at +3.0% (3.2%) YoY, +0.7% (+0.9%) QoQ.

US: September inflation figures will be key alongside preliminary October market PMI data. There is also quite a bit of September housing data on the cards.


Macro Calendar Link: https://www.tradingfloor.com/calendar
Source: Bloomberg & Saxo Capital Markets


-- Edited by Adam Courtenay

Kay Van-Petersen is Asia Macro Strategist at Saxo Bank


In addition to TradingFloor.com, please follow him on twitter @KVP_Macro

He has a number of firm beliefs, including:
- Everything in life is a trade, hence he is always long oxygen, water, food & his girlfriend (& not always in that order).
- A good trader has a trading plan. A great trader sticks to that trading plan.
- Position sizing & 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 & being profitable, they are not always the same thing

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