Stock Market Cycle Top And Fearless Vix Signal Turning Point

A Day of Event Risk For Traders

I touched on the Jerome Powell’s testimony to the House Services Panel (tonight at midnight) in yesterday’s daily, and that continues to be the dominant event risk.

I will add that Powell speaks on behalf of the Fed and a collective view, rather than his personal thoughts. This is important as there are eight voters, who are yet to be convinced a cut is needed in the near-term, and one could argue that the recent ISM manufacturing and services, and payrolls are no smoking gun.

It’s probably why we continue to see selling in the August fed funds futures contract (the red line), where traders use this tradeable instrument to bet on the probability, and the extent, of a July cut from the Fed. Go back to the 24 June, and the yield here was 2.02%, which given the fed fund effective rate ( sits at 2.38% (green line), it shows we were pricing in 36bp of cuts (if we look at the difference between the two variables). The yield on the August contract has since risen to 2.14%, and we see 24bp of cuts currently priced. So, I would expect this to get some focus over the next 24 hours or so, and importantly we should see the USD, gold and equities keying off this instrument.

On a side note, Pepperstone is planning to roll out interest rates and bonds to clients in the next few months, so I will keep you appraised here. As even if you solely trade equities, FX or gold, they can be useful in understanding what’s priced in, and this can really help with our risk-to-reward assessment. Especially when holding positions over events.

Source: Bloomberg

Fed member Harker offers his thoughts

Philadelphia Fed President Harker was interviewed in the Wall Street Journal, causing a bit of a stir, easing USDJPY above 108.80, a level I mentioned yesterday, and for those who like to trade inverse head and shoulders patterns, then consider the technical target here. Harker’s view that “there’s no immediate need to move rates in either direction at this point in my view though slowing global growth and uncertainty over trade policy have created clear risks to that outlook”, has genuinely resonated here.

It’s also been a key reasoning why AUDUSD has traded through the 20-day MA and looks heavy. A 4.1% decline in the July Westpac consumer confidence (out today at 10:30AEST) has hardly inspired AUD bulls either. 50bp off the cash rate may have helped stabilise sentiment towards the housing market, but consumers seemingly need a bit more encouragement. That said, the probability of a November cut has actually fallen a tad to 52%.

AUDCAD a key play

As I wrote in today’s ‘chart of the day’ (, AUDCAD is interesting given the cross sits at the lowest levels since 2010 and is one to watch ahead of tonight BoC meeting, which also comes out at 00:00aest. Consider there are actually a few things going right for the Canadian economy, and this could come across in a more balanced statement. With 11bp of cuts priced into Canadian swaps over the coming 12 months, we should consider if the statement goes anyway to justifying this.

For me, diverging paths at a central bank level are the perfect breeding ground for trend traders. Its where we see a blow out in bond yield differentials, with FX coming along for the ride. That’s exactly what we see now, where we see the yield differential between Aussie 2-year and Canadian 2-year bond yields, as highlighted by the red line, getting ever wider. I have overlapped AUDCAD here, to show the influence.

As the event risk rolls on, we also get the FOMC minutes for June at 04:00aest, and it feels like the market is going to focus on the eight members who called for rates to be kept on hold in 2019. We also know that these members were open to a cut, they just wanted more information to compel them to call for a cut – the question is, what exact information would they like to see? Perhaps that comes tomorrow when we get the June CPI print.

Elsewhere in G10 FX, volumes in GBP have ramped up, notably in GBPUSD, which got a lot of attention on the break of 1.2506. Rallies remain an opportunity to sell, although I will say that despite all we hear in the Tory party leadership battle, and measures to make no-deal Brexit a higher hurdle, that traders are still very sanguine on Brexit. If I look at GBPUSD 1-month implied volatility, there are just no concerns here at all that price is going to have a sizeable move. To put into context, the market feels (with a confidence level of 68.2%) that GBPUSD will trade 120-pips either side of the current spot price (1.2452), putting a 240-pip range in play. Still incredibly hard to buy GBP on a timeframe over 4-hours.

DAX and FTSE at a make or break

Aside, from the pre-positioning in FX I’ve mentioned above, we see a better feel to equities again through Asia. The German DAX (GER30) and FTSE 100 (UK100) are two markets on my radar, as the price has come back to test their respective break-out points, and the buyers have supported. A rally tonight off this level is what technical traders would guide as support and could be a clear bullish signal.

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Chris Weston, Head of Research at Pepperstone.

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