I’m traveling again I’m afraid so i’m going to have to update this on the move.
The sell off was well flagged technically so, at the least, hedges were the order of the day on the reversal bar from last Tuesday.
For more aggressive price traders Thursday provided a weak bull response setting up the big Friday bearish move. (Its instructive to observe that when momentum and volume comes to the market price bar techniques work perfectly. The problem for traders is to understand that the technique only works when price has momentum and volume).
Technically on the short time frame we are oversold after yesterday’s session so it is likely that some sort of attempt northward to back fill should emerge here. If its weak it will be correct to aggressively short this market. For confirmation we must wait to see how weak the push northward is. The weaker the better! Europe is out performing, ex UK Ftse ie euro equity markets are in that sweet spot, for now, of displaying a negative beta to US indexes on poor days and a + beta on good days. The euro as the carry has been excellent but looks very stretched to me and ripe for some kind of short term reversal.
Anyway without more delay as I know many are waiting for their report, here the Swiss team’s technical run through:
Note the US T bond comments. From a macro perspective, with world growth so poor, if US interest rates on the ten year move to 2.9% you can kiss goodbye to any notion of a US domestic housing revival. You can also, most likely, kiss good bye to the high yield US$ bond market and many of the US$ pegs inc HK$. Anyway, much more on these issues later. I can’t wait for some of these scenarios to emerge but personally i doubt the Fed would want to see the 10yr rise so strongly given weak US and world growth and the strong US$. Like many market prices they will be forced to intervene, i suspect.
Here GS’s latest forecasts (and back nos) for SP500 cash expenditures:
The largest growth item is acquisitions, followed by share buy backs, again. Debt is cheap and so corporates are busy trashing their balance sheets to acquire competitors and buy back their own stock. Unfortunately for the global economy they are not increasing debt to invest in their businesses. Note, Capex spending has gone negative at -3% for the year, nominally. In official real terms around -5%. In real real terms worse. So much for the long fabled investment boom.
Here Fitzpatrick’s usual:
Note he lowers his target for the eurusd to 0.89 by end 2016! Following a shaky first quarter, his analysis over the last year or so, since we have been following him here on Capsyn, has been pretty much spot on. His reading of the US jobs data I’m less convinced on. The jobs created have been low skilled service jobs that can be cut tomorrow. More have been added to US disabled benefits than to the employment number. Housing transactions remain at extremely low levels. Capex and MV remain at extremely low levels that are not consistent with a ‘recovery’ at all. Its the most strange economic recovery in economic history we have seen. To ignore these data points is very dangerous. Technically we would call the macro recovery data full of data divergences, emphasis added! This implies it is structurally weak and therefore could roll over very easily. Lets see. For asset allocators, if it does roll over easily, then gold and 5 year treasuries are probably not a bad buy at the turn.
And here GS with their usual chart tech run through:
Published close of play Friday you can see many of their weekly targets have been met from eurusd to audusd to usdsgd. Two of the three trades I have been engaged in. They maintain their bullishness on the eurostoxx50, as do I. With the eurusd at sub 1.30 the euro area exports and trade surpluses will boom with most of the boom taking place in Germany. Industrial and manufacturing companies hedge forward out put typically 6 months ahead so the macro numbers should start to reflect the change in the fx positions any day now. The US trade numbers should also soon start to show the new fx levels.
I’m going to have to update this post with the remaining reports in the next 24hrs as a version 2, “V2″update.
As a tactical trade recommendation i’m watching the eurgbp for a reversal. I’ve allocated ahead of price but not aggressively until price shows. Its super extended at present but no loss of momentum so no confirmed price entry, yet.
And here, although i don’t agree with everything in this report, the regular excellent fx report from CS:
Many of their 3 month forward targets have either been hit or are so close to being hit that the target can be considered met. Even their 12 month targets are now close. In terms of cross asset correlations its worth commenting that periods of US$ strength have generally not been positive periods for equities. Lastly its worth noting from a chart perspective that the trade weighted value of the US$ is coming close too her secular bear market trend resistance. A secular trend that has endured since 1964. Ie I would be very careful to chase and over allocate here to the US$ here.
Here ML arguing the secular US equity market bull case:
Here ML adding some macro analysis to the case:
The rate cycle discussion interesting.
Here MS with their usual outstanding weekly FX update:
Lets examine their case here. The case is long US$, short the Euro and S.Amerian currencies. On the bearish euro case they make 3 arguments.
A) Hedging euro stock allocations. As I would call it “un-funded” stock allocations. This is the classic monetary debasement trade that worked very nicely on prior episodes of central bank monetizations. Ie in the US, UK and more recently Japan. The hope is the Euro area will be no different. II would point out that, due to the ECB signalling the monetization so far ahead of the actual monetization (only started this week in fact) the currency has moved far ahead of the ECB. Effectively I suggest the currency move is already priced in and has actually moved far ahead of the quantitative action. To remain short the euro and long the US$ from here is an extended and full trade. The risk of reversal is immense on any disappointment from the US.
B)Euro as a funding currency. The point here is that euro area companies or companies with euro currency incomes replace US$ and Yen credit for euro credit. The suggestion is that these companies then switch the funds into overseas currencies to fund investment overseas. The strategy works so long as the euro continues to lose value ie the debts become smaller in trade weighted currency and the assets worth more, ie overseas investment. Correct up to a point. I would strongly suggest at this extended level that few corporates would now use the euro as a funding currency on this strategy. Corporate treasuries should have used this strategy in the last 12 months. If they did they contributed greatly to their corporates bottom line. From here on in the chances for even lower rates and more currency debasement looks limited. The risk reward on this strategy has greatly altered. Again, the trade is full and ripe for, at the least, a short to medium term reversal.
Finally C) They make the case that off shore holders of euro credit will be sellers to the ECB. And the suggestion made that they will switch the proceeds into other world currencies. Although euro bonds have seen a great compression to switch the euro proceeds into foreign exchange now post the 25% debasement of the euro appears a strange strategy to me. Yes they may be sellers and they may cover their downside with options etc but they are unlikely to be physical sellers of euro cash. They would more likely buy euro stocks with the proceeds, for now.
I’d add, from a technical view point the pair has momentum and an obvious target of 1:1 appears likely, though warning on the reversal as above.
And here a good wealth allocation report from JP:
Here the ever fascinating flows report from JP
Here the outstanding chart pack analysis from CS:
Still many more to come, later today as a V3.
All the best
Richard