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"Technical Outlook"
View: Buy S&P 500 dips with new highs in mind, leaning on 1,361 support
There is something of a mismatch between our short-term bullish expectations and more cautious mid-term equity views, built around how the longer-term charts have been developing, which makes the current corrective price action rather tricky to interpret. This degree of ambiguity is also reflected in the more immediate fundamental drivers, specifically what has so far been a disappointing earnings season not to mention the closely fought US election contest which has added to concerns surrounding the fiscal cliff. One could perhaps tack on the immediate failure of the market to rally on all that liquidity goodness delivered by Bernanke, QEinfinity as some have dubbed the open ended programme, as a further sign that the rally has exhausted.
Full report below…
View: Periphery debt tempting, short Bunds great risk reward at current levels
Gloom continues to dominate Eurozone investor’s thinking with the market reluctant to buy into the idea that there are now adequate backstops (ESM, OMT) available to finally stabilise the debt crisis, continuing to focus on the always distracting political noise. This seemingly forgets as to just how the Eurozone crisis has developed over the past three years or so, specifically just how long it takes for the numerous political factions forging those numerous ‘breakthrough’ agreements to find a consensus on the critical final details. Furthermore one can see from previous bailouts that the longer one generally stalls the easier conditions imposed eventually are, making foot dragging an essential component. Of course the Greek problem remains but even there there seems to be a realisation among the core that it is better to keep the patient’s heart beating than force the country out; at least immediately – which means this side of next year’s German federal elections. In fact senior politicians from both sides have been clear about this over the past couple of weeks.
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View: Brent remains a m/t bear play despite the seemingly hot geopolitical backdrop
It has been difficult to flick through any weekend media without stumbling across detailed editorials on the prospects for a pre-emptive Israeli strike against Iran’s nuclear programme in October, ahead of the US Presidential election. The logic of this timeframe centres on what PM Netanyahu’s camp allegedly feel is the final opportunity to mount a unilateral strike against increasingly hardened Iranian targets, feeling that a second term Obama would be far more likely to resist military intervention that by then only the US would have the firepower to execute. This tension has of course been on the markets mind for many months, even years, with a decent proportion of the rise in oil prices post Arab-spring linked to geopolitical risks in the region which Iran is the very centre of.
Full report below….
Our weekly publication insight into which data and events has the potential to move markets in the week ahead, an update on the more interesting chart developments and concludes with a summary of our core strategy views.
- ECB’s OMT ‘plan’ could remain just that while periphery yields look tolerable
- EZ equity run ought to extend but EUR’s corrective bounce is reaching its limit
- UK data remains constructive for now, market buying into improvement
- Pound vulnerable political risk, prefer dollar, still waiting for signal to short Cable
- Slim signs of hope in US data, could Q4 be a repeat of 2011?
- S&P500 continues to look bullish, pre-crisis highs at 1,576 in play
This note covers US, UK and European markets for the week commencing September 24th.
Full report below…
View: Persist with selling EUR/USD rallies, current move looks stretched, timing the risk
We’ve seen a solid bounce in EUR/USD after a brief penetration of the 1.3000 level this morning, maintaining immediate bullish momentum. While there are doubts surrounding the execution of the ECB’s OMT plan as Spain looks to avoid a formal bailout and the oversight that would accompany this, which is a prerequisite for any central bank support, the onset of QE3 followed by BoJ easing has refocused attention on the influence of central banks on currencies. This is naturally bad for the dollar with the Fed clearly having the most robust/effective track record for keeping the Greenback weak in contrast to Europe where a strong currency is still seen as a sign of confidence in the project rather than a helpful adjustment mechanism. The less said about the Bank of Japan’s ability to guide the JPY weaker the better.
Full report below…
View: Near-term equity upside doesn’t change longer-term bear picture
The returns from the summer’s front running exercise have been very healthy across many equity markets but now central banks have actually delivered, directly in the case of the BoE, the Fed and as of this morning the BoJ and via promised intervention by the rather more standoffish ECB, the question comes back to whether this move is actually sustainable. As ever there is the sales pitch that valuations are compelling which appears particularly relevant for the beleaguered Eurozone periphery and the more dubious view that higher equity markets themselves are a precursor to better economic times. Of course the central bull driver really is positive expectations as to how this further quantitative easing will impact asset prices, reflecting on the lift risk assets saw following QE1 and more relevantly QE2.
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View: View any further UST curve steepening opportunistically, like flatteners vs. 5yr
Resurgent equity markets continue to take centre stage with a raft of analysts’ papers regurgitating the likely benefits of more quantitative easing, cobbling this move together with evidence of economic green shoots (which higher equity markets supposedly tell us are there). That other favourite topic, what all this means for bond yields, is also back in the spotlight, centring on the fact that this uptrend in stocks will invariably trigger rotation out of safe haven bond markets into riskier assets, as evident during both previous instances of QE. But with the Fed committed to holding rates low until mid-2015 at the earliest now, with an additional bias for directing policy to flatten the curve via the twist, it’s difficult to see this juncture as a significant inflection point for core yields. Indeed, higher yields are one thing that would kill a recovery in a still debt heavy economy where dynamics are still ultimately deflationary. Rather it should exert shorter-term corrective pressures within the broader trading range, particularly at the longer-end of the curve, before yields edge lower once again.
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View: Bears should have much better levels to play from, 1.63% the key level for Bunds
Quite how far this risk on move can go is hard to say, much of the detail of the Draghi plan was leaked ahead of time but still there was a rush of new money into risk assets once the OMT was formally unveiled and this morning’s German constitutional court decision was equally unsurprising in its outcome, even the oversight the Court requested with regard to the level of German contributions to the ESM.
Full report below…
View: Still prefer Gold over balance of commodity complex, specifically Oil
Markets have been gearing up all summer for another dose of stimulus from the Federal Reserve and increasingly, the prospect of hard action from the ECB to prop up peripheral debtors, which although sterilised would still fit under the umbrella of looser monetary policy. Equities went early and have been range trading near the highs for the year as they await these decisions but other doors have opened with Gold breaking out of its long held trading range on August 21st to take run back towards the $1,700 level and commodities more generally have continued to edge higher, evident in the rise in the CRB and GSCI indices. Of course not all of this appreciation has been driven by expectations of more central bank printing; soft commodities have pushed up on US drought conditions specifically and oil prices continue to draw a bid from fears over Israel’s willingness to strike Iran’s nuclear programme not to mention the Syria situation which by itself is irrelevant for oil but nonetheless reminds on how divided the Middle East is (Syria in many ways now looks like a Saudi/Iran proxy war).
Full report below…
