Theres a Bull in a China’s Shop

With the China A50 index (CN50 on MT4/5) putting on a lazy 7.5%, while the Hang Seng, the index where we saw the bulk of client flow, rallied 3.8%. Things have settled down a touch today, but China is a truly hot market – For perspective, the A50 index has gained 24% in 16 trading sessions.

*Pepperstone clients can trade the A50 index (CN50) and Hang Seng (HK50), as well as USDCNH (yuan traded in HK). The A50 index being the top 50 Chinese mainland companies traded as a futures index on the Singapore exchange – it has a 96% correlation with the CSI 300.

Volume has been incredible too, with 40.58b shares traded through the CSI 300 on Monday – the most since 15 July 2015, with turnover some 212% above the 30-day average. Offshore funds were big buyers of Chinese equities, with orders through the HK to Shanghai (Northbound) ‘connect’ coming in at record levels ($45.12b). They were also big buyers of CNH too, as we can see in the daily chart of USDCNH, with price smashing through the 200-day MA. If USDCNH is trading lower, then it will subsequently put a bid in EURUSD, AUDUSD and NZDUSD too.

Watch this space, but if Chinese equities are going higher and offshore funds want to get exposure via HK, then USDCNH should trade lower.

Listed brokers are flying, as you’d imagine when we see such intense volume through the exchanges, and if we look at broker names traded in HK, we can see some outrageous one-day moves. Some chunky earnings upgrades from CICC are also helping, with the investment bank now seeing 25% y/y growth, although the absolute flow and appetite for equity is obviously the main rationale for buying brokers.

Monday’s one-day move in Chinese HK-listed brokers

Should the bulls be worried about excessive leverage just yet?

We can look at the level of margin debt used for equity transactions as a vehicle for leveraging up and speculating on financial markets, and here we see this figure hitting RMB12t on Friday – one suspects this would be higher now, although, it is still only half of below the outstanding balance in June 2015, when, of course, we saw rampant equity speculation. A relaxation of the rules governing margin trading ( in June from the CSRC (China Securities Regulatory Commission) is clearly in play and helping sentiment.

One consideration is that given the increase in the market capitalization of China’s equity markets is that margin transactions as a percentage of market cap is still only around 14%, where this reached 27% in 2015. We also see margin financing as a percentage of free float sitting at 4% vs 10% in 2015. Neither are at outrageous levels and this is a strong consideration for the regulator, who on one hand see advantages in higher asset prices but has a strong consideration for financial stability. It doesn’t feel like authorities will reign in speculation just yet.

  • Yellow – Total outstanding balance of margin transactions
  • Blue – A50 index
  • White – China CSI 300

Do we fade the rally?

If we look at any technical oscillator, such as an RSI or stochastic it will suggest the upside is limited and that the market is incredibly overbought. The move in the RSI is obviously a function of just how powerful and impulsive the move has been of late, but are we at a point where we think the market is simply going to roll over and decline 15%? My view is that any weakness in the next few days will likely be supported, and while there are risks a touch of the heat comes out of the move, traders will be taking the timeframe in and watching price to assess where buyers step back in.

Technicals aside, if I look at certain market internals, they are screaming euphoria – which in any other market would suggest looking very intently at one’s stop placement or even reducing bullish positioning. But China is a different vehicle altogether and when FOMO marries with the shared belief that authorities want higher asset prices we can see markets making new highs despite grossly overbought levels.

  • In order – top – China CSI 300
  • Number of companies > 20-day MA
  • Number of companies > 50-day MA
  • Number of companies > 200- day MA
  • Number of companies at 4-week high


Let not forget that retail participation in the Chinese markets is arguably far higher than anywhere else in the world, and somewhere north of 70% of the daily flow – so when local traders hear a message they act.

By way of catalysts, many have credited an article in China Securities Journal (from Xinhua) that detailed “support to a strong start for a bull market in A-shares will mark the beginning of new opportunities”. This is certainly positive when married with the recent relaxation of margin trading regulations. We also see monetary policy more broadly having been eased in recent times and the fact that China’s economic data has turned more positive is also a tailwind to risk appreciate –

China is hot

China is hot right now and is a market worth putting on the radar. With all talk of a tidal wave of retail participation in global equities, it seems China has firmly joined the party.

For a look at all of today’s economic events, check out our economic calendar.

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Chris Weston, Head of Global Research at Pepperstone.

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Trading Views and Key Event Risk to Navigate


US500 – Neutral in the ST, although a break of 3161 suggests a resuming of the bull trend and longs for 3200 and 3230 seem compelling. The 200-day MA (3024) contains the sell-off, so until price can close through here then the stance is neutral. NAS100 remains a trend-followers dream and is acting as a bond proxy – if real yields are falling then traders want growth at any price and the NAS100 fires up.

Interestingly, the Fed’s balance sheet declined for a third week, contracting by $73.2b. The bulk of this was due to $50b in FX swaps rolling off, and that will likely be the case again this week given $130b of FX swaps are due to expire – recall, these USD swap lines were put in place in March when global central banks wanted access to USDs.

If the Fed’s balance sheet has been a key driver of risk sentiment, will this dynamic start to weigh on risk? It seems unlikely to cause too great a stir as we know the Fed have the capacity to turn the taps on any time.

An upside break in the AUS200 of 6112 takes price into the 200-day MA (6260), while its harder to look at shorts with any conviction in this index until price closes through 5758. Also, put China CN50 on the radar as this index is on fire right now, where we saw sizeable inflows into Chinese A-shares on Friday. Clear support in this index on dips, and it wouldn’t surprise to see a break of 15,000.


WTIUSD – the focus remains on a close through $41.05, which would open a move into the 200-day MA ($44.57), with clear support into $37.12. XAUUSD is similar to the NAS100, in that it needs real (inflation-adjusted) US Treasury yields to move ever lower – that said, despite gold sitting at $1774 if I look at options pricing and futures positioning sentiment is held incredibly neutral – a move through 1758 targets 1720, while a close through 1783 puts 1800 in its sights.


Neutral on the USDX, with price holding a 97.66 to 96.50 range. EURUSD is driving that USDX range trade, with the pair holding a range of 1.1190 to 1.1340. Leveraged funds have been reducing their EUR shorts of late, while real money remains long of EUR’s. Options traders are warming to ST EUR upside though, with 1-week and 1-month EURUSD risk reversals turning up – consider the ECB’s balance sheet is increasing week-on-week at a far great rate than the Fed’s and generally the market rewards CBs that stimulate.

As we see, there is limited data to drive EURUSD flows, although the focus will be on broad risk sentiment and the shindig of key EU personnel – at this juncture, the daily candles (on EURUSD) show little appetite for the pair to trend.

Put the NOK on the radar, especially if we see higher Brent crude this week, as the currency was a star performer last week and seems to be getting all the love from FX strategists for a variety of reasons – if USDNOK break 9.4395 then the pair tests the June lows. Small upside bias in NOKSEK for parity.

AUDNZD is getting renewed attention ahead of the RBA meeting – Holding small downside bias, with good bids into 1.0600, subsequently, if price cracks the figure then we should see 1.0537 come into play (both the 100- and 200-day MA). NZDUSD is held between 0.6535 and 0.6380, so a break here will define and should be respected.


Germany – Factory orders (16:00aest) – The market expects a 15.4% lift in May

Eurozone – May retail sales (19:00aest) – the market expects a 15% lift in May

UK – UK/EU negotiations resume in London – can we see the better tone in the dialogue spill over into these talks? The end of July deadline looms large but leveraged funds and asset managers are both short GBP, so any constructive dialogue may take GBPUSD into 1.2600, where I’d be fading the move (see Fridays volatility matrix).

US – June ISM services ISM (00:00AEST) – calls for the diffusion index to hit 50.0, potentially joining the ISM manufacturing in expansion in the month of June. This is an important economic metric, but for some time has failed to be a volatility event and markets tend to shrug it off. A reading north china of consensus will likely be good for USDJPY and USDCHF, but see the greenback underperform risk FX (such as AUDUSD)


Australia – RBA meeting (14:30 aest) – Deputy RBA Governor, Guy Debelle, recently gave a speech titled ‘RBA’s policy actions and balance sheet’, in which he gave a fairly rosy portrayal on the effectiveness of the Australian monetary policy. This sets a clear precedence for the meeting, and the strong probability is that there will be no changes to policy, and the board continues to be content – allowing them to leave the statement on policy relatively unchanged. While traders should always look at AUD exposures over a central bank meeting, the probability is this shouldn’t move the market too intently given the AUD’s far stronger links as a risk proxy.

China – June FX reserves (no set time) – the market expects China to build its FX reserves to $3.11t – typically a data point which comes pretty close to estimate and therefore shouldn’t be a market mover.

US – Fed governor Bostic speaks on the US economy


Europe – Shindig between German Chancellor Merkel, EU president Michel, European Parliament President Sassoli and EC president Von der Leyen. The tone of the meet may affect the EUR, with considerations about the full blessing of the EU recovery fund. It could set expectations ahead of the EU council meeting on 17-18 July.


China – June CPI and PPI (11:30AEST) – the markets expects prints of 2.5% and -3.2% YoY respectively. Unlikely to materially move USDCNH or any of the China proxies.

Australia – May home loans – AUD traders and RBA watchers do look at the Aussie housing market and credit metrics closely given the strong feedback loop into the wealth effect and broad financial conditions. The market expects a 6% decline in home loan values (MoM), with investor loans -7% and owner-occupier loans -5%. Unless the outcome deviates significantly from the consensus this data point Is good for 5-10 pips maximum in AUDUSD.

Europe – Eurogroup meeting – will we see any colour on a universal agreement on the EU recovery fund.

Canada – June housing starts (22:15aest) – the market expects to see 185,000 new housing starts.

US – initial and continued jobless claims (22:30aest) – This weekly data point is getting increased attention, but unless we see the claims deviate by a wide degree it fails to move the dial. Continued claims remain stubbornly high and should stay elevated until we hear more on the CARES act and whether unemployment benefits expire, are tapered, or extended.


China – Monthly credit data (no set time) – M2 money supply is expected to remain at 11.1%, while new yuan loans should rise in June to RMB 1.8t (from RMB 1.48t), taking aggregate financing to RMB3.092t.

CanadaJune payrolls – the market expects 550,000 net jobs to be created, with the unemployment rate due to fall to 12.5% (from 13.7%). While holding positions over a jobs report is never advised, into the release I hold a net bias for USDCAD downside, with price holding below the 5-day EMA with a potential test of the 200-day MA on the horizon.

For a look at all of today’s economic events, check out our economic calendar.


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Chris Weston, Head of Global Research at Pepperstone.

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A View Across the Markets

Equity traders have largely ignored the negative news and there were a number of reasons to have expected price to follow-on from Friday’s bearish price action. On a brief scan this morning I see that New Jersey have put plans to open indoor dinning on ice, and NYC is looking to do the same. Florida has reported 5266 new cases and Houston ICU beds are running close to full capacity, with ICU admission rates growing at 3.5% a day. We also heard from the WHO who detailed that the “worst is yet to come” given the lack of global solidarity.

All sobering indeed but the markets have moved on. Perhaps this is a reflection of the US economic data which continues to improve (the Citigroup US economic surprise index sits at 167, which is an all-time high), where there is a belief that we’re at a trough in US earnings and perhaps consensus estimates are about to start being revised higher. The fact that we’ve seen solid buying in crude and copper largely reflect a better economic tone on the floors.

For the equity traders out there, I’ve put together a matrix of key company reports that I expect clients to focus on, with some stats you might find useful. Many of the reporting dates are yet to be confirmed and are Bloomberg estimates – I’ll update when all are confirmed.

*Stocks highlighted green denote a superior pedigree over earnings.

Pending homes sales up a lazy 44.3% and the Dallas Fed manufacturing index in at -6.1 (vs -49.2 in May and vs consensus of -21.4). The fact Boeing closed up 14.4% after US aviation regulators approved the company to start test flights on its 737 Max from next week put in 24 Dow points alone. Or perhaps it’s just because we’re into the final throws of the quarter and its some last-minute window dressing before reporting your numbers back to clients.

Either way, we’ve seen small caps firing up, with the Russell 2000 +3.1%, while the Dow Transports gained 2.3%. Cyclical stocks are generally working, but its value (as an equity factor) that has outperformed within the S&P500, where we’ve seen the index close 1.5% higher on turnover 20% below the 30-day average. Price is holding below the 5-day EMA and we failed to materially threaten Friday’s high, so despite the positive move on the day, it’s hard to see this in too bullish a light, and we really need the index to move through 3160 to get me excited about a resumption of the bullish trend.

The idea that we’re seeing the index in a distribution phase has been brought up by a number of traders and that generally needs work to play out before a move lower. This picture still needs time, but the battle lines are drawn.

Another interesting theme has been the calls that EU equity indices are due to outperform US indices. This weas accelerated with Blackrock downgrading US shares and upgrading European shares. Certainly, the clouds are clearing in the EZ with headlines that the German parliament are to back the ECB’s bond buying program. If I look at the DAX/S&P500 ratio, we can see the German index outperforming of late and perhaps that can continue – long GER30/short US500?

FX markets have done very little, despite the move in equities, with AUDUSD largely unchanged on the day.

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EURUSD continues to track the 1.1350 to 1.1180 range it’s found itself in, with EURGBP finding good interest given the resumption of the bullish trend we’ve seen since the start of May.

USDJPY pushed into 107.87, matching the 10 June high before supply kicked in – momentum is to the upside it seems, and a daily close above 107.76 would signal a move into 108.40 in my opinion. USDJPY probably a good pair to focus on as we head into the last session of the month and quarter.

Consider on the data side we get US consumer confidence (00:00aest) where the market expects a lift in the index to 91.4 (from 86.6), while Fed chair Powell and US Treasury Secretary Mnuchin speak before the House Financial Panel (02:30aest), which will get focus from traders. Expect Powell to push for more fiscal measures.

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Chris Weston, Head of Global Research at Pepperstone.

Gold Finally Breaks out with $1800 now in the Sights

I have 10,500 (trend resistance and R3/pivot) as my upside target here, although there is signs of divergence between price and the 9-day RSI, which puts the index on alert for potential fatigue.

What’s driving this? Positioning, systematic funds drip feeding further capital into the market chasing the trend and perhaps more from retail. As detailed in yesterdays report (and video) the bond market holds the clues and it’s the same reason why gold has broken out to the highest levels since 2012.

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As a gold bull I would have liked to have seen WTI push through $41.15 (the March gap), and more of a bid in copper, which would have lifted inflation expectations even higher. However, as it is, we still see US 5- and 10-year breakevens up 3bp apiece. However, again, we saw no move in the US 2 through to 10yr Treasury curve (UST 30 did move up 3bp) – so once again we see real yield moving deeper in negative territory.

When gold is viewed by the market as a zero-coupon bond, when real (or inflation-adjusted) Treasuries head lower, the relative attractiveness of gold increases. This chart tells the story of gold:

  • Upper pane – we see gold (inverted) vs US 5yr real yields. For the stats heads out there, a 2-year regression shows the correlation coefficient between the two variables at 0.904. That being, 90% of the variance in gold can be explained by the inflation-adjusted US Treasury – incredibly significant.
  • Middle pane – the construct of real yield. We see 5-year inflation expectations moving higher, yet nominal bonds remain anchored. The perfect backdrop for gold, albeit, the absolute level of inflation expectations will in no way trouble the Fed.
  • Lower pane – the total USD value of bonds (globally) that has a negative yield. While the correlation with gold comes and goes, if global bond yields head lower then gold will find buyers as a hedge against diminishing returns in fixed income.

We can also marry the moves in the bond market with positive market semantics, which has caused the USD to weaken on a broad basis, with capital repatriated out of the USD. That is all we need to know for gold and precious metals more broadly.

The USD is important because while you can trade gold in USD, EUR, GBP, CHF and AUD with Pepperstone, we naturally want to be long an underlying asset in the weakest currency (or conversely to be short in the strongest). For perspective, the NOK was the strongest currency on the day, and gold priced in NOK is flat.

What I also like about the breakout in gold is that there are very signs of euphoria and gold is not over owned. Let’s look at the evidence for this call.

Gold futures

as per the weekly CoT report, managed money holds 105,000 net long gold futures contracts. The blue line represents the average from 2006 (when the CFTC started to compile the data), where we see 1 & 2 standard deviation moves either side of the mean. As we see, gold is below the average.

Sentiment in the options market

Upper pane – Gold 1-week implied volatility minus 1-year implied vol. If traders were betting on an impulsive rally, we’d see this spread moving markedly wider, with traders’ bigger buyers of ST volatility, just like we did in March.

Middle pane – Gold 1-month risk reversals (RR). RR take 25-delta call volatility and subtract put vol. The higher this is the greater the demand for bullish options structure. So, we see call vol trading at 1.8 volatility premium to puts, which shows the market is bullish, but I’d be concerned at euphoric conditions above 4. All very neutral.

Lower pane – Gold 6-month risk reversals. A similar set as above but using 6-month options.

Gold ETF flows (GLD ETF) – this is where we can see some signs of euphoria, with the estimated money

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Chris Weston, Head of Global Research at Pepperstone.

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Having Suggested the Markets Lacked Inspiration and that Risk Assets would Look to Chop Around in the Short

If I look cross-asset it feels like the bulls have just won a small battle here, with equities working fairly well, especially in the small end of town (the Russell 2000 closed +1.1%) while tech worked nicely (the NAS100 +1.2%), with cash volumes somewhat in line with the 30-day average.

I continue to look at the chart of the NAS100 and see a thing of beauty – Flip to the daily and see a bullish outside day reversal, although the weekly shows the pure rhythm and flow – it’s one where we’ll look back forget valuation, forget any traditional fundamentals and just hold the thing…less thinking, more profits.

The S&P500 lagged a touch (+0.6%), held back by financials (-0.5%) and health care (-0.4%), with the outperformance seen in tech, utilities, and consumer names. Everyone loves a spurious overlap of the current tape versus a key period in time, and this from Bloomberg makes me question if what we’re seeing is really a re-run of the move post-2009 – if this continues to track then equities have far more juice in the tank.

Lower equity volatility ahead?

Vols have been offered, with VIX pushing down 3.38 vols to 31.74%, while on the VIX futures (which is what our price is derived) we see a bearish outside day, and if we see follow-through selling we could see a re-run into 27%. When we consider that the daily implied S&P500 move (higher or lower) portrayed by the VIX index is 2%, then it feels that anecdotally that there are downside risks to the vol index.

Commodities are hot

Our flow in commodities has been strong, with gold getting a strong working over, notably in USD-terms (XAUUSD). We pushed into 1763, although the breakout is not as convincing as I would like to have seen and the 18 May highs are seemingly a tail barrier. It’s hard to be anything but long gold here, especially given the dynamics in the bond market, with 5- and 10-year breakevens (inflation expectations) rising 5bp (0.05%) a piece, and nominal Treasury yields up 1bp across the curve – this has resulted in ‘real’ yields moving lower, and at -79bp (on UST 5yr real) we’re not far from testing the March lows of -84bp.

Real rates are core to markets right now and if yields are going lower then gold will find buyers on weakness and equity will continue to trend.

It’s not just gold, but crude has caught a bid and our XTIUSD price (which basically tracks front-month futures) is not just testing the top of its range, but closing the 6 June gap at $41.05. Traders react to behaviour around gaps, it’s a science in trading, but a break here takes us to the 61.8% fibo and 200-Day MA ($44.18 and $45.47).

Copper is now +1.2% at $2.65p/lb – there seems to be a clear message we’re getting from the copper market because the moves I am seeing on the daily look bullish. As suggested yesterday, whatever copper is seeing is not shared by the bond market, which doesn’t seem to be buying the recovery play just yet, with yields unaffected and perhaps that is moving full circle into the risk sentiment.

The secret sauce

Consider this – Commodity prices higher, inflation expectations up (5yr breakevens +5bp at 1.12%, 5y5y forward B/E +4bp at 1.53%, 5y5y swap +4bp at 1.83%), high yield credit 2bp tighter, yet nominal bond yields unnerved. This is where I see the bulls winning a short-term battle.

FX moves – the USD sell-off resumes

We can’t leave out FX markets, because the USD is lower by 0.6%, and the dynamics mentioned above have resonated in a bid in risk FX. The lower USD would have fed back into commodity buying and again into lower real yield – it goes full circle. We’ve seen bullish key day reversals in CADJPY, AUDJPY, and EURJPY, so the move to sell JPY shows the bulls are back in the driving seat.

EURUSD stopped shy of printing a bullish outside day, as price failed to make a lower low, but did close firmly above Fridays high – a similar effect. The USDX (USD index) closed through the ST uptrend and we’ll watch for how Asia and EU trade the move – as follow-through will confirm a potential change in structure in the FX market and perhaps allow further USD selling.

For those running EUR or EU equity exposures do consider the key event risk on the docket is the EU PMI data. You can see expectations, and for the EUR to build on the move an upside surprise would clearly help.

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Chris Weston, Head of Global Research at Pepperstone.

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An Unease in Markets, but will COVID19 Really Derail the Risk Rally?

Former national security adviser John Bolton released his new book, in which he claims Trump asked the Chinese for help in his re-election campaign, and this seemingly caused some wobbles in markets – clearly there is going to be some real dirt produced as we head far closer to November and it’s going to get pretty grimy.

However, it feels like the world is starting to watch China more intently again after the breakout in the Xinfadi food market, with schools being closed and 1200 flights cancelled. This is also true in the US, with Texas reporting a record 11% level of hospitalisations and new cases in Florida reaching a record. Certainly, if we look at the daily case count across the suite of Republican states there is a worrying trend, where a number of recent surveys show people reluctant to wear masks, which is less the case in the blue states, which show a falling trend in the case count.

Trump has an incredible balancing act

Trump has made it clear that he is strongly against a second lockdown, and is hell-bent on opening the economies as he needs an economic snapback to use as a pitch for his re-election campaign. US recessions that play out two years before an election are very seldom won by the incumbent, and we can see plenty of case studies to back this case, with Hoover, Ford, Carter, and Bush senior examples.

Trump knows he must balance a stronger economy with increased hospitalisation rates. If the voter base get a stronger feel that Trump has no plan to look after their welfare, and is myopically focused on getting the economy firing solely for political gain then he could lose moderates, and that may backfire….so he needs to find the right balance.

As I argue in my morning (video) rant, the market had been seeing COVID-19 as old news. Where the focus put squarely on what the Fed and global central banks more broadly have been doing with policy and effecting broad money supply. Economics are improving and beating expectations, and this is playing into the idea that companies may start looking at future cash flow improvements and review its dividend policy.

As we see here, US dividend futures are on the rise, and whilst I question the liquidity in these instruments, we can see expectations of dividends for 2021 (blue) and 2022 (white) are rising and offering backbone to the S&P500 (orange).

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Credit spreads have also been at the heart of everything – as we see here, it’s all just one big trade. The Fed acts, credit spreads tighten making it ever cheaper for corporates to issue debt, the USD falls, and equities head higher.

  • White- High yield credit index
  • Blue – Investment grade credit index
  • Orange – USD index (DXY)
  • Purple – S&P500

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The question then is will COVID-19 wrestle back some market concern and promote greater volatility? I think we must consider economics most intently here. On one hand, with a low risk of a second lockdown then we’re likely to see the case count increase but whether this truly impacts the trajectory of the economic recovery is the point of debate – if consumer behaviour is unaffected despite a further rise in the case count then it may not turn into a vol event at all. Economics are key here.

With the Fed buying credit ETFs and select individual investment-grade credit instruments it seems unlikely that we’re going to see a material blow out in spreads, which, if this did play out, and this correlation stayed true, would see the USD rise and global equities lower.

One to watch. But, it does feel that there is enough in the COVID-19 headlines to limit traders from putting new money to work on current valuations and this suggests we chop around in the near-term and price action could get messy.

Keep an eye on GBP, EUR and AUD exposures

Also, on the radar, we have an eye on the BoE meeting today (9 pm aest/12 pm BST) with a focus on increased QE and possible more clues on negative rates. Here is a preview we put together –

Also, we’re testing some decent levels in EURUSD – one to watch with the ECB due to publish its economic bulletin (18:00aest) and US jobless claims due (22:30aest). We should see solid support of the 1.1230/10 area, but if this gives way then it will incentives further covering of USD shorts.

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Chris Weston, Head of Global Research at Pepperstone.

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Playing the FX Cross in the Wake of the FOMC

The Fed aren’t going anywhere

There is little doubt the Fed was dovish, and the gravy train is going nowhere with future asset purchases continuing at the current pace of $80b p/m and MBS $60b p/m, which should underpin risk for some time. Judging by the bank’s economic projections (and dot plot) interest rates are not going up well past 2023, and the conversation on yield curve control (YCC) was certainly explored a few times, something Powell said was still “an open question”.

One suspects if they are going to announce YCC it will take place in the September meeting, and that meeting will be a biggy as it will give them a decent stretch to see how their many programs, not to mention economics, are evolving and the impact they are having on getting them towards its mandate.

When we consider YCC, I would expect the Fed to focus on the 3-5-year Treasury curve, more akin to what the RBA is doing than the BoJ, although there are a ton of questions around its commitment and of course what level (of yield) would they target.

Real Treasury yields promoting a bid in gold

For now, though we see a solid move lower in nominal yields, with the Fed importantly managing to generate a positive move higher in inflation expectations, with 5-yr Breakeven rates moving +3bp and above 1% for the first time since 9 March. This has resulted in US 5-year real Treasury yields collapsing 11bp to -70bp. For gold traders, this is all that matters and for gold bulls, it is the perfect storm, especially when married with such as the bearish trend in the USD.

Gold has been happy to track the 1750 to 1650 range since mid-April, and I have argued many times, the answer lies in the bond market and it appears to be playing out – Is this the time we finally see a solid break of the range?

Daily gold chart

The move in bond yields has propelled the NAS100, which will feed off lower yields every day, with the Fed keeping the punchbowl in the mix for as long as it takes. On the other hand, the dour economic projections have really made it clear that the Fed sees the prospect of a V-shaped recovery as incredibly low, so we’ve seen the Russell 2000 lower by 2.6%, while the S&P500 fell 0.5%, held back by financials (thanks to the flatter yield curve), and energy (crude fell 2.2%). Asia is feeding off these leads and risk is under pressure, with traders taking a bit off the top.

The USD is heading lower longer-term

If we consider the Russell 2000 is more reflective of inward factors and the US economy, it perhaps tells us why the USD is also being further shunned. The US is no longer the standout and almost isolated destination for global savings that it has been in recent years, and investors now have a choice and have redistributed capital accordingly. Lower yields are certainly incentivising an offer in the USD too, especially with raised prospects of YCC the months ahead. Why? Because if the Fed is going to add an extra measure to further increase its balance sheet through unlimited bond purchases, to fix a specific parts of the Treasury curve at a given yield, then it just increases the prospect of deeper negative real yields and an ever bigger balance sheet.

After a big move in the USD – Trading FX from a tactical standpoint

From a tactical perspective, the USD may still in the doghouse, but if the S&P500 is looking at the Fed’s dour economic projections, the index could find a few headwinds in the near-term. Despite liquidity, if the S&P500 tracks lower then global growth proxies such as AUD, CAD and MXN may also struggle near-term. It makes the currency crosses become a more attractive trading vehicle.

I am watching EURCAD. After some messy price action, the buyers are starting to get a better say here and should crude come off further and we start to see a few more sellers in the S&P500 then the funding currencies (EUR, JPY, CHF) will outperform. Whether this starts to trend is questionable, but the battle lines are drawn.

If playing the USD, AUDUSD is looking more vulnerable, but EURUSD is still strong and would be a preference if keeping the USD in play.

We see price still holding the 5-day EMA and there are few reasons to be short with any genuine conviction on current price action – happy to stay bullish here, where a close above 1.1383 would open up 1.1500. Will turn more neutral on a break of 1.1321.

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Chris Weston, Head of Global Research at Pepperstone.

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The USD is the Ugly Child of G10 FX

Five consecutive days of selling is not something we’re used to, but the greenback, at least for now has morphed into the ugly child of G10 FX.


A focus on positioning

 The first consideration behind the USD move is positioning. The financial system may be structurally short of USDs, but market participants had filled their boots with long USD exposures. That long USD position (certainly as a percentage of open interest) seen in late Feb/early March has now been scaled back, with asset managers (such as pension funds) now actually holding a large USD short, having built a large EUR long exposure. While leveraged funds (such as hedge funds) are now only modestly net long USDs.

The USD was a Mecca for global capital

The fundamental reasoning for the move lower in the USD in March. I think we need to take this back to March (point 1 in the above chart), and the world’s insatiable demand for USDs, driven by a rapid tightening of financial conditions, resulting in global capital flocking to quality and the world’s premier reserve currency. In times of stress, the market will head to the JPY, but when we start to talk about a meltdown in the financial system everyone heads to the currency where 80% of global payments are made on any given day, the USD.

Since late March, because of central bank and government stimulus, we have seen equity markets flying, where increasing levels of excess liquidity has driven risk assets off their respective lows. This has been complemented by a re-opening of economies, in many cases far more intense than anticipated, while higher frequency global economic data has been improving on a synchronised basis, albeit off incredibly depressed levels.

The change in sentiment has largely focused on the lead played by US equity markets, such as the US500 or NAS100, although there has also been strong moves higher in global equities, notably, the Nikkei 225 and it seems like we may start to see outperformance from EU markets. Risk FX, such as the AUD, NZD, CAD, and EM FX have largely followed in the wake. We’ve also a resurgence in crude, iron ore and copper, while corporates are issuing debt at a rate of knots.

The role of the bond market in USD returns

The bonds market I think are key here and I would credit a large portion on the risk rally to the fact that US ‘real’ (inflation-adjusted) Treasury yields have dropped to -57bp. This has been a huge driver in the lift in US equity markets, with the positive effects spilling over into global markets more broadly. Regardless of valuation, if the real return on offer in the bond market is comparatively unattractive then investors have no choice but to keeping bidding up equity and credit. And consider, if you use this the bond yield to discount the future cash flows of the corporates in order to obtain a present value, then lower yield makes the expected corporate cash flows just that bit more attractive.

Equity loves lower real yield, but it has become apparent that this is supporting risk appetite at a time of better synchronized global data flow. So, the fact is, there has been a feel-good factor pushing through markets and the US is no longer the stand-alone island it once was. Global capital which that was directed to the US as the only game in town has been and can continue to be re-distributed.

US-specific concerns

In a world where the US was the outstanding destination for investment capital, we are seeing situations idiosyncratic to the US. Notably, with US-China tensions, while the George Floyd protests are likely to have an economic impact at a time when the Atlanta Fed’s model is estimating US Q2 GDP will fall -52.7%, although this will likely be walked back a touch.

The news flow is having a political impact, with a Sunday ABC poll putting Joe Biden ahead of Trump by 10-points, while betting site Predictit has Biden out in front for the first time. The Senate is a close call as well and one that could be just as important. A Biden victory is considered as the less friendly path for markets as he is considered more hawkish on tax policy.

What will it take to see a sustained reversal of this trend?

The recent USD bear move may reverse, but to do this on a sustained basis the USD bulls will need to see the S&P500 sell-off, married with higher implied volatility – look for the VIX index to push above 30% again. A rise in US ‘real’ bond yields, which would feed back into a move lower for equity and would be the trigger for a sustained reversal in the USD. However, for now, though, the world is healing, and the USD is not the mecca for capital is was in March.

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Chris Weston, Head of Global Research at Pepperstone.

How Volatility can be the Center of your Trading

This can be incredibly useful to define position sizing, which, to any trader who has been in the markets for a period will attest is one of the key variables/considerations within any trading plan.

It marries well with our assessment of risk, not just as we enter a position but throughout the full journey of that trade being ‘in the market’.

Vol defines our risk, our position sizing, but also the strategy. It is not just a major consideration for discretionary traders, but systematic (automated) too. In fact, if you’re running an EA and don’t have a vol variable in the code then I’d say the chances of doing some damage to the account longer-term increase markedly.

Volatility can be defined as realised or implied and both can be handy, you just need to find the right tool to assess vol. Realised is straight-forward – we can all see it, be it through the use of Bollinger Bands, ATR, pivot points (PP), envelopes and I can go on – there is a wide range of vol tools in the Metatrader platform.

Bollinger Bands as a vol guide

Bollinger Bands (BB) are a classic vol indicator, where we can see the bands moving wider or tighter, depending on how past distributions relate to the mean (in most cases the 20-day MA). Most retail traders don’t have a Degree in statistics and therefore have a limited understanding behind the logic behind distributions, be it normal as we see below, or one-sided. The logic in the case on BB’s is that 68.2% and 95.4% of distributions/price moves (respectively) are contained within one and two standard deviations from the 20-day MA, which is typically our mean.

Range bound (or mean-reverting) traders will use this to good effect when a market is moving sideways, especially when married with an oscillator, such as a 9- or 14-Day RSI, which will likely be trading around the 50 mark, or the mid-point, in a side-ways market – Buying into moves through the lower Bollinger Band or fading strength on moves above the top Bollinger band can be a strategy to focus on in this dynamic.

A normal distribution curve

Traders will look at the ATR (Average True Range) to get a quantifiable understanding of the recent trading range, with a view to leaving a stop loss 1 to 2x ATR. This is an effective way to manage position sizing, depending on the type of trade you are. In most cases, we need enough scope that should the trade turn, we have some ‘breathing room’ before ‘hopefully’ the tape turns and does what it is supposed to do. I say this in a somewhat cynical view, as hope is not a word we use in trading, and we react, and it’s how we react that defines the trade.

Pivot points married with implied volatility

I will often use pivot points (PP) on an intra-day basis, and as a guide to assess areas where we may see supply or bids come into the market after a move in the price – combining PP with the daily implied move derived through options pricing increases my conviction. For example, if I see the daily ‘straddle’ is pricing a 65-point move in AUDUSD (that move being higher or lower) and that move is close to the R2 or S2 (on the pivot points) then it gives me some belief of where the daily move should be contained, and because the options price is based on one standard deviation, I can hold a near 70% level of confidence here.

In the options world, this makes even more sense because market makers will have a vested interest in price not moving through the straddle price or ‘breakeven’ levels, as the buyer of volatility will be in the money.

Some will effectively combine Bollinger bands (BB) with pivot points. In fact, while the logic is wholly different, PP are similar to BB’s, as often you will see price contained intra-day by R2 or S2. Unlike BB’s, I am not sure of the statistical probability with using PP, but it would be high, at least on an intra-day basis.

With PP’s we can get information about who is deemed in control of a move, i.e. the bulls or bears, simply by seeing if the price is above or below the PP (pivot point). Naked chartists or pure price action traders would argue this is argument is clear from the candles anyhow, but it is nice to get a helping hand.

In the current AUDUSD set-up, we see the BB are narrowing, telling us realised vol is falling which we also see from the 5-day ATR (below)

In the above example, the price is only just below the PP, so not giving too much away.

However, I like the fact price is holding the 5-day EMA, which is trending higher and until price closes below here then I would also expect buyers to work order into S1. The top BB intersects with R1 and R2, but we can also see resistance at the TDST resistance at 0.6612 – For those who use ID sequential would understand a closing break here be bullish and suggest the pair will resume trending higher, with the price likely hugging the upper BB, with selloffs defined and contained into 5-Day EMA. One for the radar, although I guess I’d want to see a break higher in the US500.

I won’t go into the TD sequential indicator, but we can use this indicator effectively for timing reversals and/or understanding where we are in a trend. But it also has risk control elements that can be useful.

Here’s a good video on using this indicator

Implied volatility

Implied volatility (IV) is a consideration that gets less attention from retail FX traders, well, outside of those who trade options – Mostly as its harder to get the intel. Changes in IV is driven by options pricing and will give a sense of what the market believes is the expected movement in an instrument.

Volatility is set as an annualised (standard deviation) return, so when we look at monthly vol it looks at 1-month options which tell us the expected percentage move in spot (up or down) in the coming 12 months from current prices. We can break that down into daily, weekly, or monthly moves, by dividing the IV level by the square root of that period (time). For example, to get a daily move from 1-month vol, we know there are 250 trading days in a year. The square root of 250 is 15.8. So, if the 1-month AUDUSD implied vol is 10.86%, we know the implied daily move derived from the monthly expiry is around 0.68% (10.86/15.81).

Trading volatility is a science in itself, but I use it to understand how the market perceives future movement in an instrument over a pre-defined time frame. It will take in an element of historic/realised moves, but importantly looks ahead at all known events and makes a judgment call on the degree of movement in the underlying. I did a webinar on the subject:

– it is tough going, but hopefully, it can steer.

What interesting for me right now, is vols in major FX pairs are falling hard and IV has been radically suppressed. Of course, this is down to central banks and the incredible measures they have announced, and the fact that they are moving in alignment albeit with slightly different degrees of actions – the wash-up is vols have been shot to pieces.

For me, this has big implications not just on position size, but generally lower vol and positive equity markets mean carry positions tend to work far better – we often see increased flow in the MXN and TRY for example, as clients look at swap rate differentials.

But if I am looking at my AUDUSD example, and I am looking levels to fade the move intra-day, I can see this implied daily move also sits just below R2, the top BB and TDST. I am a willing seller into here, with a view to reverse the position on a daily close through 0.6611.

I often look at weekly IV and the implied move again, which may help with your perception of movement, which can help with position sizing. For those who are interested in this subject, I will cover off more on it in future.

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Chris Weston, Head of Global Research at Pepperstone.

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Negative Interest Rates – LIsten to the Markets

This doesn’t just concern rates or fixed income traders, but the flow-on effects are being felt in FX and equity markets too. The interesting aspect here is that this is not just the US, but the markets are close to pricing a negative interest rates policy (NIRP) from the BoE, while the RBNZ has also said they are talking to their banks about NIRP.

The two main considerations

There are two ways to look at this argument – the first being whether the market sees negative rates as a positive or a negative for risk assets. The second is the prospect of it happening, just how dark the world would have to be, and importantly, what role could the financial markets play in getting us to the point of negative rates.

In terms of the second consideration, other than Fed chair Powell, and perhaps Richard Clarida and Lael Brainard, I will take my cues on NIRP solely from the market on this matter. When the market has a vision they can influence whether NIRP materialises – just as we saw in late 2018 (Fed balance sheet taper) and in the leadup to the global COVID-19 crisis (rate cuts) – when the markets go after an idea and want change in monetary policy the moves in markets can be prolific.

Negative rates pricing came from nowhere

It is a little strange how the conversation of negative rates suddenly sprang into life, as there was no one smoking gun. Granted, noted economist Kenneth Rogoff’ well-known views on negative rates have been regurgitated, and we saw ex-Minneapolis Fed president, Narayana Kocherlakota, putting out an opinion piece on the subject. But, for this to become a central theme in markets and attract the attention of multiple Fed speakers, not to mention capture a decent chunk of Stanley Druckenmiller’s overnight speech at the NY Economic Club, is bizarre.

At the risk of being a conspiracy theorist, it’s almost like an entity has put out a trial balloon for the market to debate and ultimately remove any taboo. Most Fed members are openly opposed to negative rates, but by openly discussing this it removes much of the shock factor well in advanced.

The fact is NIRP is a monetary policy tool they have in their arsenal. Perhaps it’s one that will be deployed behind yield curve control, increased QE, forward guidance or even equity purchases, but it is one they can use, and the market has it on their radar.

As Cleveland Fed President Loretta Mester made clear (in her speech overnight) – “we don’t view negative rates as a go-to tool for the Fed”. Fair, but its one they acknowledge and fits in well with a 2019 paper authored by Eric R.Sims and Jing Wu titled ‘Evaluating central banks’ tool kit: Past, present and future’, in which they lay out the policies available and the probable and preferred order should each be rolled out – I suspect this has been adopted through the Fed collective, and negative rates are the last one off the run sheet.

Markets pricing negative rates

The swaps and fed funds futures curve started to price in negative rates last Thursday, where we saw the June fed funds futures trade to -5bp. Options on Eurodollar futures were pricing in a 20% chance of a cut, and if we look at the swaps market now and 1Y1Y OIS, we can see this now at -3bp – while in the UK, swaps pricing (top pane – white) on 1Y1Y OIS is about to turn negative. Rates traders have been quick to point out that this element of negative pricing is more technical in nature, with funds hedging tail risk rather than it being a genuine play on a change in policy.

Source: Bloomberg

Rates pricing aside, the US 2-yr Treasury gets the close focus on the bond curve. At 16bp we are at or getting into the zero lower bounds (ZLB), but a move through 10bp would be the trigger to show the bond market is preparing for the Fed to move. That won’t come anytime soon, and is incredibly unlikely in 2020, but if equities do turn lower and vols pick up markedly then the market will go after the Fed and explore what they have in their toolbox.

Are negative rates positive or negative for risk?

At this juncture the market likes the idea of negative rates – I guess the notion that investors are pushed further out the risk curve is seen as good for risk assets. One can argue that by lowering the discount rate, the net present value (NPV) for high cash flow business increases, which is why we have seen US tech working so well. The same is not true for banks, and as we can see with JPM – one of the world’s premier financial institutions – is holding a strong relationship with the 2-yr UST.

The fact the S&P500 and NASDAQ 100 has rallied whenever there has been talk of negative rates being adopted is likely because of concentration risk, where a handful of mega-cap stocks command a sizeable weighting on both indices. If the financial sector commanded a 30% weight on the S&P500, for example, we’d likely see the index fall when talk of NIRP kicked up – so index composition is key.

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I also expect the USD to become far more sensitive to moves in US2yr, and as we can see, the 20-day rolling correlation between the DXY and UST 2s sits at 38%. Looking at the distributions over the past five years, we have typically seen this correlation closer to 55%, so I expect this relationship to grow, where higher bond yields result in USD strength and vice versa. I would expect USDJPY to be especially correlated, with the 20-day correlation moving above 80%.

Gold, Bitcoin and EM FX would also be a beneficiary of negative rates.

(20-day rolling correlation between the DXY and US2yr)

A very high barrier to entry

There is no doubt that most economists and market participants see negative rates as unlikely, but also incredibly undesirable and counterproductive. Why wouldn’t they? It has smashed banks profitability in Europe and Japan and the various case studies we have hardly make the policy seem compelling.

US banks will mount a serious PR and legal challenge here, as it would represent a tax to them. Let’s not forget they have strong ties to the Fed, who would need to alter the Fed Act to allow the fed funds effective rate to move below zero. We also need to remember the US banks have just made massive provisions against future bad loans. As we can see from the chart, bankruptcies tend to follow the unemployment rate (blue), although we’re told that many of these jobs are to return once the economies re-open.

So, penalizing the banks at this vulnerable time could see interbank lending rates (think Ted Spread) rise.

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Listen to the market

The thing is it does not really matter what economists or Twitter influencers think of negative rates. It only matters that the Fed is open to the idea of negative rates and that NIRP is in the toolbox as an option – but that is it. What matters is what the market thinks, how the collective flow of capital moves in anticipation of the negative rates, and from what we have seen of late is that negative rates are positive for risk.

Negatives aside, consider the other side of the argument:

  • The likely $4t deficit needs funding. Adopting negative rates would help keep the associated costs down. With yield curve control presumably in place, bond investors will demand greater compensation for having to fund the US Treasury, but yields would be capped, and bond investors have a pre-defined risk.
  • It will be another blow to savers, but they have had a negative real return for some time, and this could force investors into the corporate bond space, which is now backed by the Fed. There is plenty of real returns in this asset class, with the Fed having reduced the risk.
  • By adopting negative rates, the Fed could weaken the USD, which may, in turn, boosting the EM trade.
  • Negative rates would bring down lending rates. Of course, you need demand from borrowers, but if you’re in the market to buy a house then it will be cheap.

Personally, I see pro’s and many cons but when the market puts NIRP in their collective sights, it will presumably mean the world is a dark and gloomy place and of the many other policies the Fed throw at supporting the economy are failing. I think that makes the potential effectiveness of NIRP incredibly hard to model and it could be a case of being careful or what you wish for.

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Chris Weston, Head of Global Research at Pepperstone.

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Positioning the Secret Sauce for Further Gains in Risk

S&P500 and NAS futures opened a little lower, but have come roaring back with Asian equities firing up nicely, despite selling in crude futures.


Certainly, the MXN has worked well of late, and it feels like in the absence of a pullback in stocks and a further reduction in implied vol that USDMXN heads for 23. EURMXN could push through the 50-day MA (25.64) amid the favourable environment for carry positions, although, much still depends on price action in crude which, as I say is giving back some of last week’s 25.1% rally. I also went short EURAUD as a trade and feel the downside has opened up nicely here – here is my trade rationale.

AUDUSD continues to have lock-on on the S&P500 futures, with the US equity benchmark putting on 3.5% last week, dwarfed only by a 6% and 5.5% rally in the NASDAQ and Russell 2000, respectively.

AUDUSD daily – pushing the 100-day MA
AUDUSD daily – pushing the 100-day MA


On the daily, the S&P500 will be eyeing a break of the 29 April high of 2954 and from we make an assault at 3000, which is obviously the round number, but the 100- and 200-day MA also sit here too. We are also told this is the line, where the CTAs (trend-following funds) flip to increase long positions in S&P500 futures, a development that could take us materially higher.

Looking at 5-day realised volatility in the S&P500, we see it has come down to 16.4%, from a high of 176% (17 March) and we’re back to pre-crisis levels and one suspects if vol sellers push the VIX closer to 20% (currently 27.98%), vol-targeting funds then enter the fray too.

White – S&P500 5-day realised volatility/RV, orange – 30-day RV

Source: Bloomberg

This, again, would be positive for risk FX such as the NOK, AUD, NZD, MXN and ZAR.

I have been guilty of not wanting to chase this rally in equity indices, but the lack of any follow-through in the selling (pick up in vol) has certainly lowered the impulse to short risk. I do see us moving past peek stimulus inspiration, with the Fed’s balance sheet growing at an ever-slower pace, as they do for other central banks, although the commitment to do more should we see a second wave in the corona virus is key.

On the fiscal side, the US House is due to vote on a Phase 4 bill on Thursday, rumoured to be close to $750b, and it’s uncertain that will pass, with Trump making it clear he wants to tie this in with a payrolls tax cut.

It is also clear that this is not a time for thinking too intently about valuation, with the S&P500 commanding an incredible 23.06x 2020 earnings, while 2021 FY earnings sit at 18x – economics have not played into considerations either. These are markets boosted by actions from the Fed to support credit and liquidity more broadly.

Re-positioning from hedge funds, specifically the systematic and rules-based crowd has been key and will be the reason, if it happens for new highs in US equity markets.

Consider that cash in money market funds, the safest of safe, has grown 30% since March, so there is still a ton of cash on the sidelines.

We can also look at the futures position in S&P500 futures held by non-commercial players and see this held net by short 222k contracts – that’s the largest net short positions held since 2015 and over two standard deviations of the 10-year average.

Total US$ value in money market funds

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Source: Bloomberg 

The disconnect between economic reality and valuation is keeping a lot of discretionary players from entering the market here, and that is fair as it feels incredibly wrong to buy risk – I guess that is one of the many reasons why a systematic approach can work in one’s favour.

So, we watch the S&P500 and NAS futures through Asia, where both markets were down smalls early doors and are coming back to the flat line as I type. There is little to trouble on the data side, although tomorrows (22:30aest) US CPI could be interesting with headline expected to drop 0.8% MoM and core -0.2%, amid a fierce debate on whether we get inflation or deflation as a result of COVID-19.

Retail sales (Friday 22:30aest) would typically get a strong look-in, and calls for an 11.7% decline won’t go unnoticed, but just as we saw with the 20m jobs lost in Fridays NFP and the failure to move markets; economic data at the moment is largely irrelevant, at least for markets – who will be looking intently on re-openings in the US and Europe, with plans to do so in the UK, Australia and others.

What could be important is the raft of Fed speakers this week, which you can see on the calendar below. Fed chair Powell mid-week speech will be the highlight, especially, with all the talk of negative rates that were priced into the rates market most intently on Thursday. In a crisis, you leave everything on the table, and things move so fast that what the central bankers say one day may not count the next. So, while Powell sits in the camp that negative rates are not warranted – he has been consistent on this message – it makes some sense for Powell to be vague enough to keep negative rates as a future option.

He can remove pricing from the fed funds future by lifting interest earned on excess reserve (IOER) by 5bp. However, with yields on 2- and 5-year Treasuries at record lows, in turn supporting sentiment more broadly, and reducing the appeal of the USD, it has pushed traders out the risk curve. Therefore, it makes sense for Powell to be somewhat vague on the subject.

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As the week rolls on front-end yields (2 and 5-year USTs) could matter for the USD this week and presumably for gold too, which maintains the 1738 to 1675 range. USDCNH continues to be a central focal point and barometer of sentiment towards the US-China relationship, while inflation expectations and implied vol continues to be central too.

Good luck to anyone trading the Bitcoin Halving today, with price trading lower into the event. It seems we are seeing a buy the rumour, sell the fact scenario play out before the fact it seems.

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Chris Weston, Head of Global Research at Pepperstone.

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The Great Markets Debates

This is likely reflecting the fact that S&P500 and Nasdaq 100 futures are up 0.8% and 1.1% respectively. Asian markets are responding in kind.

Spot gold is down smalls, although gold futures are modestly higher, but the daily chart of spot gold looks bullish and we are watching for the upside closing break of 1738 for a future move into 1800.

Two important market debates

The two big debates that have been most prevalent through the weekend, or at least that I found most interesting, remain the disconnect between the real economy and asset values. And, where to for the USD. There has also been increased focus on the moral hazard argument, where at a simplistic level the Fed incentivised business to over-lever their balance sheet, and now the Fed is bailing them out or supporting them indirectly. We can also look at the number of countries that are opening their economies, gradually, and the market is eyeing the risk of a second wave, which is another factor that makes it hard to chase risk.

Italy has announced they will start to ease lockdown restrictions on 4 May, joining Spain who will ease movement restrictions on 2 May. France will detail a plan to the world tomorrow to end lockdown next month, while Belgium is due to open shops on 1 May. In the US, a number of states are easing restrictions, and we hope this is the start of more normal times ahead, although the post-virus world throws up many challenges and one focal-point that immediately springs to mind is the blame game and the US (and the world’s) ongoing relationship with China.

The disconnect between economics and asset values will be the focal point this week though.

The data and event risk rolls in and I know investors have written off 2020 as a shocker and are looking more intently into the landscape in 2021, but this argument will be seen case in point this week. On the micro-side of considerations, this week we get to hear from some big-name corporations – Amazon, Tesla, Microsoft, Apple, Boeing, FB, Alphabet, McDonald’s, and Exxon, to name but a few. Earnings expectations have come down and FY20 and FY21 consensus stand at $131 and $165, respectively, but it still means we are going into this week with investors paying 21.6x for 2020 earnings – the highest since December 2001. But they are also paying 17.1x 2021 which is still lofty given the challenges ahead.

At this juncture though, in the battle of liquidity vs earnings, liquidity is winning but these are some big names dropping this week, representing a catalyst for index traders. The NAS100 is the strongest market if looking for a vehicle to express a risk-on bias this week (in index land). However, I think the set-up on the US500 needs attention. On the upside we have downtrend resistance, the 6 March gap and 61.8% fibo to clear and a break here needs to be respected, especially when we’re hearing that the systematic funds will be ramping up outright longs on a break of 3007.

However, on the downside we see price has broken the wedge and the head and shoulder neckline kicks in around 2726. A break here will see buying in the USD, JPY and US Treasuries. I am watching inflation expectations (breakevens) extremely closely, as where they go will underpin where equities and gold go.

On the data docket this week we get:

BoJ meeting – we saw the BoJ meeting and as expected they removed the cap and reverted to unlimited JGB buying. There has been limited reaction in the JPY. I continue to like the JPN225 on a break of 19,886 and will wait for price to compel and the structure to suggest the index is ready to trend.

USDJPY is interesting because it is just so dull – there is literally no range and it feels like it will break hard soon. At this juncture, the market feels this is fair value, but I am watching for a change here.

US – Q1 GDP (consensus at -3.9%), jobless claims (3.5m), FOMC meeting, ISM manufacturing (36.1). I would expect no reaction to Q1 GDP, as Q1 is but a relic in time and we are looking at Q2 and beyond. The FOMC meeting is the main game in town this week and after two emergency meetings, we look at the first scheduled meeting that could move markets.

We should see the Fed tweak the interest it pays banks on excess reserves by 5bp, although, the market is going some way to discounting that and it shouldn’t cause much of a move in the USD. We should also hear more about the targeted level of US Treasury and mortgage buying, with the monthly run-rate closer to $150b, but they will retain an element of flexibility towards this.

As mentioned, the debate as to where the USD is headed is key, and I will put out a note tomorrow on this as it is important. For now, the DXY (or USDX) tracks the regression channel and is not going lower despite USD funding costs (blue – 3m FRA-OIS, yellow – EUR cross-currency basis swaps) falling heavily as a result of the Fed’s swap lines, massive balance sheet expansion and excess liquidity.

Next week we get NFPs and consensus currently sits at 20m jobs lost, with the unemployment rate at 15.1%.

Eurozone – The ECB meeting is the highlight, especially given the recent widening of interbank credit metrics, notably the Euribor-OIS spread (see below), which has pushed into 30bp. The ECB will need to do more and granted the PEPP program (Pandemic Emergency Purchase Program) has been seen as a solid step forward from the bank, this program is going to need to be increased from its current E750B size – although, whether it plays out at this meeting is unlikely. We should see some tweaks to what can be offered as collateral to access PEPP funds, and similar to the Fed the ECB may accept bonds that were downgraded to junk since the start of COVID-19 the so-called ‘fallen angels’.

Whether this Thursday’s ECB meeting (21:45aest) proves to be a vol event is yet to be seen, and we see EURUSD 1-week implied volatility at 9.17%, which implies a move (higher or lower) on the week of 116p.


I am looking at the EURAUD short idea and watching price action very closely. I do not see the ECB meeting being a huge vol event, but I am loath to hold EUR exposures over this meeting.

China – Manufacturing PMI (30 April- 11am) – consensus at 51.0 (from 52.0). I am sceptical this will be a vol event but may get some headlines.

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Chris Weston, Head of Global Research at Pepperstone.

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The EUR Looking Vulnerable to Further Downside

They did give their blessing for a short-term plan of $540b, although we have no idea how it will be funded and this is not the panacea to stop an impending 15% contraction in GDP – 15% being the number ECB president Lagarde made mention of overnight.

EURUSD has seen whippy price action, trading a range of 1.0846 to 1.0756 through European and US trade, and is currently sitting towards the low-end of the range here in Asia. The technical set-up on the daily has become just that bit more damaged and the prospects of a re-test of the 23 March low (1.0634) has increased a touch, but the bears will want to see the 6 April low give way.

I looked at EURAUD shorts in yesterdays ‘Daily Fix’ trader thoughts and I’ve added to that position through 1.7014, as its working well – as in life, if something is working you do more of it. The 100-day MA at 1.6771 beckons. EURJPY (see chart below) also gets attention as we’ve seen a break down through the September lows of 115.87 and a convincing break here opens up a test of the 115-figure, where there’s not as huge amount of support through here.

There has been no move in EUR vols, with EURUSD 1-month implied volatility holding below 8%, but one factor that some traders are talking about is the Euribor-OIS spread. We see this pushing up sharply, suggesting growing stress in the EU banking sector. Granted, we’re some way from the levels seen in the GFC or even the European debt crisis (2011), but there are a few stresses in the system that are getting attention and if they start to really move higher the EUR will find sellers easy enough.

Staying on the JPY, there has been a focus on the idea that the BoJ will announce a plan to remove its ¥80t bond-buying limit. The central bank is due to meet on Monday and we may hear plans then, but we haven’t seen much of a broad sell-off in the JPY as a result.

We can focus on the JPN225 (Nikkei 225) as this could be a beneficiary if the BoJ do step up its liquidity drive. On the daily, which is good for oversight here, I see both the 5-day EMA and 20-day MA headed sideways, with the RSI mid-range – it’s a range traders paradise right now, but my view is to let the market come to me. For that, I would buy a closing breakthrough 19,886. That would give me some belief the market is benefiting from changes to BoJ asset purchases and ready to trend.

USDBRL has seen some flow too, with the pair hitting a new record high of 5.5554, largely thanks to Justice Minister Moro resigning. NZDUSD has printed an outside day (on the daily) and could make a tilt at the 50-day MA at 0.6095 – watch for follow on here, and if this prints a higher high today it could take us to the average and 14 April high.

More positive times have been seen in the NOK, with better flows seen in crude. As I type front-month Brent sits up 7.2% and WTI 23%. I am not sure much has fundamentally changed, but price has shifted. Interestingly we haven’t seen any real relief in inflation expectations, with 5-year breakevens unchanged, with the HYG ETF closing -0.05%.

The S&P500 also closed -0.05%, again on light volumes, with futures finding sellers after the close. One to keep an eye on as there was no interest in participants supporting the index above 2800. Asia has seen broadly mixed trade, with the ASX200 higher but sellers are seen in China and Japan. S&P500 and DAX futures are lower and indicating a weaker open for European trade. Although, as said, it’s the EUR that is more heavily on the radar.

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Chris Weston, Head of Global Research at Pepperstone.

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Oil Volatility is a Sight to Behold

While we’ve seen the USD outperform, I can’t go past moves in the options markets, with oil volatility (vol) moving like a freight train, and there are a few charts that suggest trading in a more defensive tone for now.

I won’t go through all the news flow, as price tells the clearest story here and maybe I’ll cover off on most the news and views in tonight’s webinar, which if you haven’t sign up for and are keen click here.

Once again, when it comes to focal points, the session belonged to crude, and while we saw June crude trade into $6.50 (our ‘spot’ crude price traded to $3.39), and we’ve seen June Brent crude into $17.51, the move in implied vols that have materialised have been incredible.

The CBoE oil volatility index, for example, traded in a monster range of 517 to 213 today, although it ultimately closed up an impressive 99-vols on the day at 325.

This implies that crude will move (higher or lower) by 20% a day. So, consider since the futures re-set June crude is +21% and July 13% and despite this being an incredible percentage change, it feels effortless.

Source: Bloomberg

The ICE exchange has announced they are preparing the Brent futures to accept negative prices, so that is one to watch as we head towards expiry on 30 April – although the June WTI expiry on 19 May will be the main event.

If we look at the crude 1-month risk reversals – that being the difference between 1-month crude 25-delta call volatility minus put volatility, we’ve seen it blow out to -78 vols. That is an insane move. Options traders are saying if there is a move the downside move is going to be far greater than any upside move.

Let’s take the near-term storage issues out of the equation and look further out the crude curve, at say the 5th-month futures (October contract). I like this part of the curve as it removes a lot of the near-term storage issues that are playing into the front-month futures.

As we can see, price never really took off from the March lows, or should I say it did but now it has rolled over hard. Clearly, the lack of follow-through highlights that crude wasn’t affected by the Fed’s buy everything program, in the same way, equities and credit have.

That said, when crude collapsed in January, the S&P500 followed. When 5th-month crude rallied in March, the S&P500 followed. Could this be a sign the S&P500 is to follow? Maybe this tells a far clearer story of future demand and economics.

Inflation expectation rolling over

This chart also throws weight to the notion that volatility is going to stay high and that I should be trading on the defensive side of the ledger. For perspective, from the March lows US 5-year inflation expectations/’breakevens’ (blue) moved sharply higher and this put a backbone, not just into the S&P500 (orange), but gold too – which I have left off.

US 5yr Treasury yields (white) remained anchored through the move, with the Fed ramping up its QE program and no one is going to fight the Fed here – as inflation expectations moved up faster than bond yields we saw ‘real’ yields falling and this not only boosted the equity market but weakened the USD.

Maybe it’s been driven by crude, but inflation expectations are now rolling over hard and this is boosting real yield. This could be very influential to the risk trade, as well as where to for the USD.

Blue – USDX, white – US real yields


In terms of FX vols, we’ve seen a slight move in petro-currency volatility, but they haven’t been as punchy as I would expect. This is also quite interesting, as I would certainly have expected vols to ramp up and FX traders are taking a calm approach to the madness seen in crude markets.

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The Day the Crude Price Went Negative

Inflation expectations falling hard, higher implied volatility (the VIX closed at 43.8%), with selling seen in the CAD and the NOK. We’ve seen traders net sellers of risk though Asia, although the crude price has lifted somewhat through the day.

Despite the various news flow though Asia, the discussion with clients remains on the moves in crude price. Here’s a few views on what went down:

Hello negative crude futures prices

Many have been introduced to the concept of negative commodity prices for the first time, something that is not unheard of in physical commodity markets, although, it’s rare for crude to go negative and has never happened before in crude futures markets.

That said, in recent times, we’ve seen negative prices in (physical) Western Canadian Select and Wyoming Asphalt Sour blends, and as we can see in this bulletin from Plains Marketing, their advertised purchasing (pricing) rates of various grades of physical crude from producers sit at very low levels.

The moves in the May futures contract have been the talk though, with prices trading to -$40.32 at its worst, before settling at -$32.75. The May contract expires today and rolls into the June contract tonight, for those who don’t roll or close can take delivery of the physical on 1 May.

The contango (i.e. the steepness) seen between the May and June futures contracts ballooned out to a record level $58.06 at one stage (see Bloomberg chart below), although has come back into $19. In a normal contango markets, traders expect to pay up for the next-month futures contracts (as full interest is encapsulated in the price), but if for some strange reason you’ve left it until now to roll it would have really hurt. This is certainly the case many who recently bought into the USO ETF who have felt the roll down in its full force.

(Difference between May and June crude)

Source: Bloomberg

The fact that May futures were so weak and so deeply negative going into today’s futures rollover has caught everyone a bit by surprise. Granted, oil traders have not been trading the May contract for days, moving into June futures well before, but the fundamentals were clear and the potential for weak prices elevated.

The oil dynamics in play

We know demand has dropped off a cliff given the sheer downturn in global economics that is likely going to result in a sizeable global oversupply of crude, which many believe will be close to 9m b/d through Q2 – importantly, the OPEC++ agreement to cut back on supply doesn’t kick in until 1 May.

And in the US, specifically, which of course is the backdrop to which WTI crude reflects, there are fewer places to store oil. For example, crude stocks at Cushing (Oklahoma) sit at 55mm barrels and around 25% away from hitting capacity although other facilities are even more constrained.

Testing the capacity limit seems likely given the trajectory in the massive inventory build (in the US) over the past four weeks, which has promoted the storage issue to the forefront of trader’s considerations. It can be expensive to shut down wells, although, we have seen the US oil rig count falling 35% since mid-March.

But it isn’t enough to change the supply/demand imbalance. Logistics also make a huge impact, because we know WTI production is landlocked and transferred via pipelines, so this dynamic offers less flexibility when it comes to storage – if you’re an oil producer and have excess capacity and the refineries (you’re selling too) have no immediate need for the product you may pay them to take the crude off your hands – hence we get negative oil prices.

Logistical difference between WTI vs Brent crude

These logistical dynamics are different in the physical Brent complex which is waterborne and can be readily transported out of the US and into China, Asia (more broadly) and into Europe.

The fact that this shipping process can take a greater length of time is also quite appealing for refiners and a further reason why Brent crude trade as a premium to WTI crude. Consider a Chinese refiner can buy Brent crude and know that by the time they receive the delivery in several weeks, global supply cuts may have kicked in, and even signs of demand may emerge. WTI delivery occurs is a matter of days, so once you have bought the crude, it’s with you before market dynamics can change.

Can we see support for June crude?

So, while the media focus has been on the May futures move, the reality from oil traders is that June is where we should be looking, as the open interest has been five times this of May and volumes in the June contract have been staggering, even for the rollover period. The question then evolves to what keeps the June price from cratering in the near-term?

Well firstly, the OPEC++ cuts will likely be pushed forward from 1 May. Donald Trump has said the US is looking to add as many as 75 million barrels to the US’s Strategic Petroleum Reserves (SPR), which would take some of the excess capacity from the market.

Trump is also talking about stopping shipments of crude from Saudi Arabia, which will support near-term. Price will tell, but demand is unlikely to come back anytime soon, and we are about to see the real economic weakness in the April and May economic data flow.

So, the move in May futures is unprecedented but the supply/demand dynamics, married with storage issues and the futures expiry created a perfect storm. The big issue for the market is what measures will be put in place now to counter a similar move to June and July futures as its clear falling oil prices are not going to sit well with risk assets. The forward curve tells us that better times are ahead, but it doesn’t mean we’re not in for another volatile period for the near-term contracts.

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Trading the EUR as Markets Re-Focus on Economics

S&P500 futures now reside 0.8% lower, with June WTI -1.5% and this should weigh on broader Asian equity indices, even if the moves should be less dramatic than opens gone by.

Keep an eye on the ASX 200 as price action is certainly looking less favorable for bullish upside and after a solid run, we’re seeing the daily ranges contract and indecision to push price higher. A rising wedge in the mix for the pattern traders out there, married with a stochastic shift in momentum.

Can the Aussie market lead a potential reversal?

So, one to put on the radar, even if the lead from Wall Street continues to be positive, with the S&P500 closing +2.7% and the Russell 2000 +4.3%. despite a 2% closing decline in June crude.  US equity indices aside, we saw a largely unchanged move across the US Treasury curve, while breakevens (inflation expectations) fell 4bp, resulting in 5- and 10-year ‘real’ yields gaining 4 and 5bp respectively.

Gold was hit hard, with a downside move of 2% and the weekly chart closed with a rather ominous looking candle, with spot -0.3% on open today. One to watch for a kick lower that may resonate with price action traders, even if the fundamentals for gold are solid, and perhaps the Fed announcing it was halving the daily pace of bond-buying to $15b is playing into the move – recall, this is one-fifth of the initial size of Fed asset purchases.

Gold bulls will say $15b is still a huge number and ultimately the Fed’s balance sheet has moved to $6.36t, taking excess reserves to $2.64t and these actions should support gold.

Copper is 0.2% lower on open, after gaining 2.2% on Friday and is another that hasn’t gone unnoticed and the daily shows how ‘The Doc’ is at a very delicate stage in the run. I am compelled to sell this move, especially when you look at the 20-year chart and how price is pushing on the former trend.

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Is copper just following the S&P500 or did the market price in too much bad news for 2020/21?

Personally, I fail to see economics lifting the fortunes of the metal and I know many are looking at 2021 and suggesting better times are ahead. However, we are coming into the eye of the storm and as the market starts to focus less on virus headlines, or at least will be less sensitive to better news, we will focus more on the lasting effects on the economy and solvency. US earnings season should go some way to highlighting this as well.

There is little doubt that last week saw an accelerant in the debate around the disconnect between the financial markets and the real economy. Awful Chinese Q1 GDP, US retail sales, NY manufacturing, and Aussie business and consumer confidence – to name a few – and this week that view will be pushed further with traders eyeing German ZEW, EU consumer confidence, EU PMI’s, weekly US jobless claims and German ifo.

That’s ahead of US ISM and NFP’s on 2 and 8 May respectively, where I am already seeing calls for as many as 28 million job losses in April.

It’s hard not to think this week’s data will be ugly though, and with so much data out of Europe this week, it’s fitting that we also get a Eurozone Head of State meeting (23 April). Expectations for this meeting to be a volatility event are low, with a focus on near-term clues around debt mutualisation. There is also speculation (source: FT) that the ECB is pushing for a so-called bad bank, which would ring-fence the bad loans on the balance sheets of EU banks. Whether this gets much airplay at this meeting is yet to be seen, but with the EU Stoxx bank index at such precarious levels, it is something EUR traders will be keen to watch.

As will be the case for Italian debt, with a new fiscal stimulus expected from the Italian govt, and narrative from the credit rating agencies, with S&P and Moody’s due to review on Friday and 8 May respectively. Few expect a sovereign ratings downgrade at this juncture, but any widening of the BTP-German bund yield spread could weigh on the EUR.

Trading the EUR this week

Trading the EUR will be interesting this week then, especially when taken into context of the debate being had as to where to for the USD. Funding markets aside, you still pay carry to be short the USD and that often gets overlooked.

Options markets often give good insight, and I see EURUSD 1-week risk reversals (1-week call volatility minus 1 week put vol) headed into -0.84. This shows a slight increase in put vol buying, which offers sentiment that traders are seeing modest downside risks. 1-month RR sit at -0.94 and shows a rising belief in downside potential. Spot EURUSD has found sellers into the 20-day MA and the bears need EURUSD to clear 1.0816 for a test of the 1.0766 swing. It’s a tough pair to trade now, and EURCHF is perhaps the cleaner trade – that is, if bearish EU assets.

Certainly, we’re seeing that in risk reversals (white line), where options traders are big relative buyers of EURCHF downside volatility. The moves in spot into the low 1.05 shows the momentum here and options traders are betting on greater downside…the question is whether this is too much of a consensus trade. Price will tell, of course, although I have no position at this stage, but a number of savvy traders have told me they are expecting a bullish reversal this week.

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Chris Weston, Head of Global Research at Pepperstone.

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Solvency Fears Rise, as Risk Aversion Takes Over from Reflation

The bulls will point to the bid off the lows in risk and the further confirmation of a central bank inspired buy the dip mentality. The fact the S&P500 is just holding above the 5-day EMA (2767) is also positive, and until price can close the session below here, it’s hard to put on bearish trades with any conviction.

The bears, who haven’t had much going their way of late, will see that despite the rally off the lows in risk, the markets had a broad risk aversion vibe. We ultimately saw strong selling in EU equities, with the MIB given a good working over – see the EU bank index for reference, it looks quite concerning here, especially on rising volume. One to watch, especially with DAX and FTSE futures lower on the day and our spread betting client flow largely positioned on the short side through Asia today.

EU Stoxx bank index

Source: Bloomberg

The S&P500 closed -2.2%, with energy, materials and financials finding sellers easy to come by. Small caps were savaged (the Russell closed -4.3%) and we’ve seen solid buying across the US Treasury curve (10s are -12bp), with a strong flattening of the Treasury curve. Inflation expectations have been hit hard with 5-yr breakevens -10bp and undoing a decent chunk of the recent reflation move.

HY (high yield) credit spreads have widened, with the HYG ETF -0.9%, while we’ve seen vols pick up with the VIX index moving +3 vols to reside above 40%. In FX markets the USD has found its mojo and been the place to be in ‘major currencies’, maintaining its status as the anti-S&P500. We saw high beta FX under pressure through EU/US trade, and Asia has kept the momentum going

Don’t discount the influence a stronger USDCNH has had too. Moves from the PBoC yesterday to cut the rate on the MLF (Medium-Lending facility) to 2.95% have hit the CNH/CNY (yuan) at a time when safe-haven USD demand has resurfaced. A higher USDCNH could weigh on the AUDUSD and alike, so USDCNH should be on the radar.

US data was awful

The bears have focused on the US data, where we saw a US retail sales -8.7%, or -4.5% if we exclude auto sales. While (April) NY manufacturing index fell by a record 56 points to -78.2 and more than double the consensus of -35. March industrial production fell 5.4%, while the NAHB housing market index also had its largest-ever drop on record.

One way to visualise the data series is through the Citi US economic surprise index – if this is falling it shows the data missing not just deteriorating but missing the consensus estimates. Clearly not a good look.

Source: Bloomberg

Looking ahead – We focus on US weekly jobless claims (tonight 22:30aest), where the market is expecting a further 5.5m new claimants – sobering numbers indeed. Timely then that the NY Fed has announced they are launching a weekly economic tracker – this will include same-store sales, consumer sentiment, fuel sales and others. I expect this to get a good run by data watchers and there is a growing possibility the market will become more sensitive to it. Loan loss provisions telling a story of future solvency concerns.

Loan loss provisions a focal point

The focus this US reporting season so far hasn’t been on earnings per ce – but rather on loan loss reserves. BAC adding to the announced provisions seen from JPM and WFC reporting a $4.8b provision for the quarter, which to put into context represents around 0.5% of its loan book – either way, the provisions put forward from US banks (JPM, BAC, GS etc) have enforced the view that the next leg to the shutdown crisis is one of solvency.

It’s not just the US, but in Australia, we’ve seen a horrible NAB business confidence and Westpac consumer confidence report in the past two days, and this has just enforced a belief that the economic recovery is not going to V-shaped and it’s going to be a long and painful slog ahead. Today’s Aussie (March) employment figures were solid with 5900 net jobs created, but the survey was conducted in the first two weeks of March, so hardly reflective of the scene now and was given a wide birth from traders. I am out of AUDJPY exposures (see yesterday’s note), although I am sceptical today’s Aussie jobs report will cause too much volatility, as the AUD is focused intently on S&P500 futures.

Moves in crude

Of course, oil has been a big theme, with WTI May futures hitting a low of $19.20 before rebounding 4.8% to close +0.2% on the day. There has been a focus on the spread between the WTI May and June futures contracts which blew out to a massive $7.29, showing the fears on the near-term inventory build – this was seen case in point in the DoE inventory report which showed some 19.2 million build for the week. Comments from the EIA also very much in play. There has also been interest in trading the WTI/Brent crude spread, with a classic long/short trading approach in play – that is, being long WTI (June) /short Brent (June).

This trade enforced by the headlines that the “US weighs oil output cut by paying drillers not to produce”. In fact the headlines have lifted the oil price through Asia and it sits up 2% as we head into the European open.

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Chris Weston, Head of Global Research at Pepperstone.

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Liquidity vs Earnings and the Investment Case for Gold

One dynamic I am watching intently this week is that of liquidity vs earnings. Liquidity is often the dominant force when viewing markets short-term, but earnings do eventually matterWhat the Fed brought out on Thursday, with its $2.3t stimulus, announcing new measures and increasing exciting ones, was massive; moral hazard aside.

The Fed is now working with the US Treasury department, not just to buy investment-grade credit, but now recently downgraded corporate debt (that fell to junk status) and high yield ETFs. We all know the backdrop out there is an economic and health problem, and OK the Fed created the backdrop that resulted in the 35% sell-off in the S&P500 (in 23 days). But they also know that they can’t let the financial markets now become THE problem.

The Fed is suppressing volatility (again) and is trying to do their ‘whatever it takes’ moment. Of course, it doesn’t solve economics and it doesn’t solve for the health crisis – but it does buy time and it allows a more efficient functioning marketplace.

This takes me to my offset – Earnings are too high; the question is, whether they will actually matter in this environment of incredible central bank action. Surely, Q1 will be poor and overlooked. Q2 will be awful, and likely some -20% YoY, but with FY20 EPS now at $142, if the likes of Goldman’s and BoA are indeed correct with their call and EPS is downgraded to $110, on today’s price, it puts the S&P500 on 25x forward earnings and in this economic climate that is era multiples.

Some say 2020 is a write-off and to look at 2021 earnings, but consensus numbers here seem too high as well and also due to be downgraded – we shall see, but it feels like investors are looking as far ahead as possible to price-earnings.

We ask how far liquidity can go…? Well, with economics about to start really starting to deteriorate from here (watch China’s Q1 GDP on Friday with consensus at -6% in Q1). It still feels like there is modest further upside to the US and global equities, but if the S&P500 is my guide then I’d expect price to be capped into 2934/2909, where we have the 50- and 20-day MA and 61.8% fibo of the 35% sell-off. That said, we’re seeing S&P500 futures now -1.7% and maybe that’s is indeed telling us a message.

It’s certainly hard to be short risk here, but equally hard to chase it.

Is the price war really over?

Oil is a must-watch today, where we finally saw the agreement to cut 9.7mbd of output from OPEC and more from Russia, US and others. We’ve seen crude open strongly out of the gates this morning, but it doesn’t feel like anyone is buying this as a lasting solution though, and the initial spike was savaged – I guess this is Easter Monday liquidity at play here. But given demand is going to get slammed into Q2 and this output cut is needed, and anyhow, inventories will build in the coming months and enforcement of output levels takes hold. Markets will feed off the unity though and the idea that the price war has abated…for now.

Gold looking attractive

Gold and precious metals have come firmly back on the radar as the yellow metal gained 2.2% last week, although this was partly a USD move, as gold priced in AUD and some of the higher beta currencies had a poor showing. We’ve seen gold find small sellers on open today, but I feel pullbacks are buying opportunity.

Gold is a hedge against the madness and the experimental actions from the central bank world. It is a hedge against falling real yields, which have partly been driven by rising inflation expectations. It is a hedge against the debasing of fiat currency.

The technical set-up is most compelling, where we can choose any time frame and it suggests the balance of probability is for higher prices. I know, we in spread betting and CFD land don’t look at monthly charts but have a look at the gold monthly chart and you’ll see the rejection of $1670 area (in the prior two months) has given way.

I look at excess reserves, in the US, Europe, Australia and Japan (I can go on), and immediately think of positioning and sentiment reading. On the key metrics I look, they are not stretched. Managed money in the weekly commitment of trader’s report is high, but I am not too concerned here.

If I look at 1-month 25-delta risk reversals, they sit a 2.66 vols (that being call volatility trades at a 2.66 vol premium to puts) and that is not stretched by any means. I look at gold futures and they have broken out and held the BO highs. A higher oil price helps, not only with higher inflation expectations but gold is a capital-intensive commodity to mine and you often see gold reflecting the cost to produce.


The other consideration is whether equity traders are now buying equity index futures, or stocks and buying gold as a hedge – a barbell strategy. Makes sense if its liquidity that is driving the capital markets.

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Chris Weston, Head of Global Research at Pepperstone.

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Playing the S&P500 Through FX – the AUD has Found its Mojo

We can also consider the notion that the RBA has been active in cutting its daily bond purchases from $5b p/d to $1.5b p/d and that may also be another factor boosting the AUD of late.

Source: Bloomberg

If I look at the technical set-up of the S&P500 it looks like the benchmark heads towards the 50-day MA (2919) in the near-term, and the pain trade in the market is clearly higher. Liquidity is at the heart of the move

  • Top pane – white – Feb excess reserves, blue -RBA excess cash, orange – ECB excess liquidity
  • Lower pane – blue – global money supply, yellow – S&P500
Source: Bloomberg

I like the outperformance from small over large caps, cyclical over defensive sectors, and even companies with levered buybacks are outperforming the S&P500 – until we start to see earnings roll in, I would not want to be short the S&P500 here. Although, we have event risk in spades today, with weekly jobless claims (consensus 5.5m claims) and Fed chair Powell speaking on the economy.

Traders are also getting excited about today’s OPEC meeting (commences at 3pm London time), with Kuwait suggesting we could see up to 15m barrels of crude output being cut. Russia has committed to a cut of 1.6m barrels. The sticking point being how the cuts will be distributed through OPEC nations, and how involved the US will be, or whether they even go down the tariffs route. Oil could easily be 10% higher or lower by the end of the day, but one suspects it will influence the S&P500 and the AUD by proxy.

Here, we see S&P500 10-day realised volatility (white) has collapsed, but at 59% details the S&P500 is moving 3.71% a day (over the past 10 days). Implied volatility has dropped hard from 77% to 37% (although the VIX index sits higher at 43%), which suggests the market still sees daily moves of some 2.3%. Either way, vols are painting a picture of calmer conditions, although, they’re not at levels which tell us we are firmly out of the woods by any means.

Source: Bloomberg

AUD the strong

The reason I have singled out the AUD, is that it is strong – simple as that. If you believe you can obtain an edge by keeping things simple in FX trading by buying strong and selling weak, albeit assessing how mature that move is, then the AUD has found its mojo. That said, if you look at the weekly commitment of traders (CoT) report as a loose guide on positioning, with non-commercial accounts holding a short position of 31,664 contracts, so, clearly the recent rally has been part driven by a position readjustment.

The technical set-ups

All of these positions are a play on the US500 moving higher, as the correlation suggests, and while I feel there could be downside risk next week when earnings start rolling in, the pain trade in the short-term, as I say, is higher.

AUDJPY – marries the weakest and the strongest and the look on the daily is certainly compelling. Price is just breaking horizontal resistance, with the 5-day EMA portraying the move, and that may define a more aggressive move higher. If price is to trend, traders will lean into this average especially when the impulsive move is in its infancy, but if this kicks higher I’d follow.

AUDUSD – finding sellers into the 61.8% retracement of the March sell-off, after a break of 0.6212 high. Watch price action around the fibo, but a break here and I’d be holding for 0.6350.

EURAUD – Price has broken below the 61.8% retracement of Feb-March rally at 1.7510 and maybe headed into trend support. Conditions are oversold, and we watch for a turn in stochastic momentum, but unless we see a sharp turnaround in market dynamics, rallies are to be sold

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Chris Weston, Head of Global Research at Pepperstone.

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A Candle that Defines the Markets

The question of whether you chase or is this just a massive bull trap is the question everyone is asking.

We can look at money supply (M2), holdings of assets on a central banks balance sheet or even excess cash/liquidity and see this ramping up as a result of the recent central bank measures. Much attention often falls on the level of excess reserves created in the US or Europe but look at excess cash here in Oz – it has gone wild and at a$84b, will only go one-way in the next few weeks; higher.

It’s no disguise that the RBA is content, we heard this in the tone in yesterday’s monthly meeting statement, especially with the interbank cash rate (the rate at which banks source overnight secured funds) trading below the cash rate and into 18bp and likely gravitating towards 10bp – the rate the central bank pay certain financial institutions to hold excess capital on the banks’ balance sheet.

Liquidity has dominated

So, liquidity has dominated. It has certainly caused a rampant wave of short-covering, but we’re also hearing a number of major financial institutions saying that now is the time to look at risk (equities and credit) selectively. Perhaps, but many remain unconvinced – that said, I guess we’ve had an unconvinced market since 2009, and it’s never really felt right buying risk, which is why we always ‘climb the wall of worry’.

What’s interesting is there has been a solid lift in inflation expectations, and that has largely outpaced any upside (through selling) in nominal bond yields. If I look at US 5-year breakevens (a bond instrument for expressing inflation expectations over a five-year timeframe) we can see they have lifted from 11bp to now sit at 87bp.

That said, they have come off their highs today of 95bp today and if they roll over, I am guessing it would be a headwind for risk assets (such as equities and high beta FX – AUD, MXN, ZAR)

Are following stocks or vice versa – chicken and egg…?

S&P500 vs 5yr inflation expectations – red

Source: Bloomberg

The same can be said for the AUDUSD, which has been the star performer on the session pushing into 0.6208 and threatening to print a higher high, with a break of the 31 March high of 0.6214. For this to happen it seems we need stocks and inflation expectations to keep heading higher. If stocks roll over, so will the Aussie it seems.

Part of the rally in the AUD into 62c can be explained by the RBA statement, although, it is somewhat puzzling. The line that should conditions improve, “smaller and less frequent purchases” will be seen clearly resonated. This, of course, is in relation to their asset purchase program, which has been the reason for the massive increase in excess cash in the system.

However, the fact they formally detailed they would look to taper the QE program caused a reasonable reaction, not just in the AUD, but we saw a strong underperformance from Aussie 10-yr bonds, with the 2s v 10s curve closing +14bp at 66bp. The ASX 200 fell 1% but recovered into the close.

AUDUSD – white v US 5yr inflation expectations

So, not a great reaction from a market that has already seen the pace of bond purchases in decline and where the pace of purchases easily covers any additional bond issuance needed from the government (or the AOFM – Australian Office of Financial Management). Either way, it shows how sensitive we are to liquidity, again.

A gravestone doji getting all the attention

It leads me today’s set-up and specifically that of the US500. This chart is so defining for other markets, and sentiment more broadly. Throw in oil, which I also consider to be a huge driver of sentiment, and we have an interesting session ahead of us. A gravestone doji like this will always trigger alarm bells, but it’s what happens after that is so important. If this kicks lower it could trigger a wave of selling through Asia, as those participants that haven’t bought for a 12-18-month view take some off the table. A re-test of the range low at 2467 would be interesting. A renewed bid would obviously negate the candle and it would encourage a chase of the market.

Daily chart of US 500

What trumps liquidity? Obviously, stats that show perhaps the plateau happens later and the shutdown will play out through August. A big drop in crude would see the bears take notice and certainly you’d see that resonate in petro-FX with NOK giving back some of its recent gains. The CAD would be the better short though.

I am not a bottom-up equity guy, but I do think next week’s US corporate reporting season will be must-watch viewing even for macro heads like myself. The market is pricing FY EPS at $151.59 (Bloomberg consensus), which represents a 12% decline in the last few weeks. There are calls from some houses though that estimates should be closer to $110, which would mark a 36% fall in earnings. The question then becomes what multiple the market wants to pay for those earnings and in weak growth, high volatility it may be lower than 17.5x seen at present even if real yields are increasable low.

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Chris Weston, Head of Global Research at Pepperstone.

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