View: Sit with trends buying stocks into weakness, bearish UST’s and short EUR/USD
Election-day and markets are typically sedate, more out of habit than anything else. We find it difficult to become overly excited at the outcome whoever wins seeing rather limited room for policy manoeuvre going forward. While much has been written about the positive prospects for the US economy should Romney receive a mandate we’re not convinced it would herald any marked shift in trajectory, certainly a sustainable one. We have no concerns Romney would be a Tea Party-ite, more the moderate he has spent most of his career and the more radical campaign promises should be whittled back accordingly, including many of his tax reform ideas which look incomplete to put it modestly. But he would face similar obstacles to Obama in dealing with the fiscal cliff, particularly if the Democrats remain in control of the Senate and the debt ceiling might even be more of a contentious issue with a Republican at the helm as expectations shift accordingly. There has been much chatter about the impact Romney would have on the dollar, which seems to centre on the hostility towards Bernanke and his QE programmes. While this might mean Bernanke takes the easy way out by standing down when his term expires in January 2014 we doubt it will have any immediate impact on easing with any President likely to be seduced by the prospect of the easy stimulus/scapegoat package.
Full report below…
View: Fed expectations buoy stocks, better risk reward looks to be Gold
Reading through the Fed minutes is the boring part of those Wednesday evenings, far more entertaining is just how the market interprets what is often just subtle tweaks in the committee’s rhetoric, the August minutes being an excellent example of this. Headlines would lead us to believe that there has been a substantial shift in tone, inferring that the Fed has now primed the market for QE3 in September, snatching the comment that the Fed “will provide additional accommodation”. However, this overlooks the balance of the sentence which read “as needed to promote a stronger economic recovery and sustained improvement in labour market conditions in a context of price stability.” Together this is far from a definitive statement even if it sounds a little more accommodating than the minutes from the June meeting which itself is unsurprising given the data flow which completed the picture for (the softer) Q2.
Full report below…
View: Payrolls print is not an inflection point, open short 10-yr UST @ 2.05%
While most were absent Friday enjoying the Easter break those less fortunate were subject to a rather disappointing payrolls print with the headline missing the 200k consensus forecast by some 80k jobs and revisions were broadly flat (January -9k, February +15k). Hours worked also dropped back to 41.7 from 41.9 and earnings flat-lined, a further drag. The unemployment rate did drop to 8.2% from 8.3% but the participation rate was also a little weaker and therefore this improvement was not enough to offset the negative reaction the headline release brought.
Full report attached…
- ANALYSIS:US Mar Payrolls +120k, 8.2% Unemplymt-Only Fair News (forexlive.com)
View: Fed’s stance a short-term headache for USD, impact on risk assets more prolonged
I started to write this note on Sunday which is a lesson as to why one should finish things at the time and not let them slide down the pile. At least with the FOMC now out of the way we can add some additional colour on how the DXY is trading and the implications this should have for markets overall both in the near-term and in the coming months. We identified the technical reversal signal seen in the dollar index in our weekly strategy, last weeks close leaving a nice bearish engulfing pattern on the chart which not only spanned the previous week’s trading but the one prior to that, adding some more force to this set up. Following the Fed last night we can add some further insight to this view and frame it more effectively in a macro context.
Full report attached below…..
- Weak $, many say risk on, I say self defense (ritholtz.com)
- Previewing Today’s Economic Events And FOMC Announcement (zerohedge.com)
View: EUR problems to linger, volatility good for RV bond plays, US to outperform
It is interesting how people still feel the need to believe that the start of each year is a clean sheet, particularly markets. More relevant should perhaps be the level of the New Year’s Day hangover – now compounding those lingering from the past few years’ excesses – in trying to assess how this year will play out. It is rather unfortunate that the main story is still the most obvious by a country mile, Europe. It is far more fun to drum up a list of potential surprises, or in the post Taleb world ‘Black Swans’, which will catch markets by surprise. It still may be true with an increasingly stressed Iran (fate of regional ally Syria being a key factor here), a possible soft patch or not in China and the more important year-end risk emanating from the end of the trusty Mayan Calendar which any stockpile of guns and tinned tuna can’t save one from. But the real stresses will emanate from the Eurozone which despite all of those repeated breakthroughs remains in turmoil.
While to us it seems clear what the problem is – insolvency – governments and the EU itself still seem to believe that it is more a matter of rebuilding confidence, particularly that of fiscal sustainability. Unfortunately the debate on how to manage this has been one dimensional and Germanic in nature thus far forcing futile austerity packages upon everyone from Greece right up the ratings scale to France. This medicine might be fine for the usual business cycle recession. But this is not one. Scant attention has been paid to growth measures, key to stabilising debt ratios, with the structural reforms that might help raise productivity often being the first steps jettisoned by governments. Instead so called temporary tax hikes and quickly formulated spending cuts underpin fiscal consolidation, dampening demand and auguring in recession or maybe depression.
One only has to look towards debt trap Greece to see how such policy initiatives exacerbate the initial problems. Of course it’s fairly easy to criticise this example given that tax evasion seems to be more firmly embedded in Greek hearts than the Olympics (the fact that hosting an Olympiad often leaves one impoverished can’t be coincidence!) but the prescribed mix of aggressive fiscal measures and (in)voluntary debt restructuring which will still leave Greece with debt levels of 120% of GDP if (unachievable) targets are met is laughable. As one Greek government spokesman noted this morning, if the current bailout fails they will have to leave the euro. Greek depositors are clear on the risks having been voting with their feet to months in what is a slow motion bank run – and one that could quicken at any moment. We’d bet Merkozy et al. will view this latest comment as another negotiating tactic. Their own stance will of course be that leaving will condemn any country to a future back in the stone-age. We’ll come back to this specific subject in another note.
A bust Greece is the most immediate problem although that is by far the sole concern. Portugal looks to be following closely in Athenain steps while recent austerity measures in Spain and Italy will inevitably draw those economies into recession with France and its AAA rating not far behind. One additional risk we think is worth flagging is Hungary. In fact it could be the pick of EU members to be the first forced into something disorderly. The government in Budapest is developing an authoritarian tinge having already nationalised private pensions and is currently staging a soft coup to disgorge the NBH of its independence. The US has been vocal in its criticism, a band of journalists have been on hunger strike since early December complaining of censorship and Ministers appear hostile to IMF/EU conditions. The old problem of FX debt may yet turn toxic too with the forint nudging record lows vs. the EUR. Given that liabilities are largely held by foreign banks this creates room for a nasty surprise, a risk for Austrian institutions in particular. PLN/HUF longs could be a way to play this; Poland has its problems but, as round one of the financial crisis proved, is more resilient than most with a nice mix of competitiveness and domestic demand. We’d also be more optimistic on the zloty should risk appetite improve whereas Hungary’s problems should prove more lasting.
We’d bet Germany turns out to be more resilient than some expect; thanks in part to our view of a weaker Euro allowing the country’s export machine to grab further market share from its uncompetitive peers even if global growth as a whole slows. This trend should be helped along by both a more accommodative ECB, which is likely to continue to deny money printing while continuing to do so and cutting rates further. We also remain optimistic on the dollar, rate differentials helping what should be relative outperformance in economic terms too – a view the December ISM figures support, not to mention the Chicago and Milwaukee PMI figures already released – and of course its status as the world’s reserve currency looks a little safer.
Looking at the euro chart we’ve seen not an unsubstantial decline since those October highs perhaps but looking at the blocks fundamentals a much larger adjustment is still needed to help temper the recession/depression risks stalking club-Med. Selling rallies should remain the play based around a core short using swings in positioning to take the most out of declines. For now this pair has held the Jan 2011 lows (1.2870ish) and looks to have some room to test back towards and possibly through 1.3200 in the short-term as shorts are squeezed on New Year enthusiasm and technical break of the downtrend form those October peaks. But medium-term accounts should hold on through this and look to add if the opportunity to sell in the mid 1.30’s comes up. Resistance remains the 200-DMA. We’d expect to see EUR/USD sub 1.1500 at some point this year and a move towards parity is by no means an unreasonable target if you also buy into a cyclical dollar upswing.
Eurozone trials and tribulations should also keep volatility elevated in the bond markets creating more opportunities for the relative value accounts, although given how liquidity can evaporate as stresses pile up one might need to be rather nimble. Bunds will remain the region’s ultimate safe haven even if we see setbacks form time to time as the failed auction on November 23rd proved. But the real risk looks set to remain in France and Spain (which could flare up again) with Belgium, Austria close behind. We’d look to use any narrowing of spreads between these credits and bunds to look at wideners, depending of course on the immediate news flow. From past experience these markets are still slow to grasp both political and macro developments. The ECB may provide another source of movement. Italy is likely to see similar swings although given where yields are currently trading perhaps have less attractive credentials from a trading perspective. Greece of course is history although might end the year as a distressed debt play.
Good luck for 2012.
- Five reasons the world won’t end in 2012 (csmonitor.com)
View: Break of DXY support significant, EM crosses look the most constructive option now
The break up in the dollar we saw during September looked a positive development for the greenback, but the pronounced failure of the key support area at 75.75/76.00 on Thursday was significant from a technical perspective and rules out any test higher in the immediate future. Indeed, the natural instinct of the market now should be to take the index to test down towards the 73.50 area which proved such solid support throughout June, July and August.
With bulls gaining confidence more widely, lured by hopes of a Santa rally, the obvious whipping boy is the USD. The Fed as ever remains firmly attached to dovish rhetoric, even if the widely anticipated ‘twist’ has only limited real impact, which will keep interest rate differentials blowing in a hostile direction – at least until the ECB cuts rates. It is also probably too early to become attached to the cyclical story with the downside risks to US growth substantial enough to offset what remains a dire picture for Europe (we’d stress the recent breakthrough on the debt crisis had nothing at all to do with fostering growth, if anything austerity focused policies in club Med and elsewhere have become even more closely linked to the support mechanism of the EFSF). This backdrop will probably be viewed as a success by the Fed, a weak dollar perceived to be one of the indicators that are supportive of recovery, alongside higher equity valuations. Bernanke has said as much.
In a world of ‘the least bad currency is king’ we’re left looking for more viable substitutes to be long. Despite the debt crisis solution in Europe we still find it difficult to come up with a constructive reason to buy the EUR and our gut still tells us to use rallies as an opportunity to sell, although we’d prefer to wait for a confirming technical sell from our indicators. GBP is being dragged along on the euro’s coat tails for the time being but we think this rally is poised to turn and would look to the first instalment of Q3 GDP due on November 1st as a potential trigger. There were plenty of disruptions in Q2 but any rebound is likely to be tepid. Median estimates see q/q growth at 0.3% and only one respondent in the Bloomberg survey is calling for a negative print. On a y/y basis the trend will slow further. Consumer confidence remains depressed thanks to a weak labour market and rising inflation, fiscal policy is also biting so the outlook for the fourth quarter is hardly inspiring too.
As we noted in our report yesterday though (http://wp.me/p1G1Fr-hk) the best opportunities in the FX arena appear to lie elsewhere, we like short USD/MXN for the time being while EUR/PLN and USD/ZAR also offer opportunities to bet on improved risk appetite lasting. The big macro bet of Asia currency appreciation took a big knock during the recent panic phase but the fundamental arguments for this remain solid too and the regional JPY crosses might also be a nice way of positioning for any BoJ intervention for an added kicker.
View: Market downplaying risks of a weak final quarter, Oct rally mature
Over the past few weeks US economic news flow has improved in tone, highlighted by the bounce in the October Philly Fed index (+8.7 compared with –9.4 median) and jobs data amongst others, which has helped steady equity markets after the rout of the summer. But it’s questionable whether this modest improvement the start of a sustained recovery or is simply noise in what remains a hostile economic environment. We’d be tempted to ascribe a large chunk of the perceived improvement to economists catching up with reality, adding a pessimistic bias to their models having failed to pick up on the slowdown in growth mid-year, in turn increasing the prospect for less bad outcomes now. There has also been a significant positive contribution from expectations that politicians in Europe have now grasped what needs to be done to ring fence Greece and recapitalise the banks, even if technicalities mean final negotiations are as protracted as ever.
But looking directly at the macro risks in isolation there is still plenty to concern, underlined by this morning’s October consumer confidence print which slumped to 39.8 vs. market estimates of 46.0, a level that fits well within the bounds of a recession. The principle headwinds of weak housing, high unemployment and creeping inflation further eating into incomes are unlikely to disappear anytime soon and additional steps by the Fed to inject some pace into the economy, via the ‘twist’ don’t really look to have got off the ground, underlined by chattering from several members – Fed Vice Chairman Janet Yellen and NY Fed President William Dudley included – that as more aggressive QE3 type programme could yet be implemented.
Thursday’s advance Q3 GDP print is expected to provide a supportive balance to Tuesday’s confidence number – trader talk focusing on an upside surprise – but as we move into November it’s doubtful the rebound from the particularly weak August/September outcomes can really be sustained. There are a number of confidence indices due (including NAPM and Chicago PMI) which should evidence this, the most useful being the October ISM figures due ahead of the next Fed meeting on Nov 2nd. This measure has been the more stable survey over the past few months so weakness would be a worrying development for those expecting the year to end on a firmer note. The early expectations are for a modest gain in both the manufacturing and non-manufacturing components but after the run up in markets this month there is little upside to trading positions from such a result. Indeed, markets should become more sensitive to negative surprises now recession concerns have been pushed back to the fringes of debate.
While it doesn’t appear we’re quite yet on the edge of another sharp fall in stocks (10%+), the October rally is well advanced and is now reaching levels we consider offer more formidable resistance too, namely the 61.8% Fib, 200-DMA and late June base around the 1,255 area. There is room for a swing back into the September ranges, 1,175 being a reasonable objective, on any broader reassessment of the macro picture. Another way to play this scenario is via USD which has given back the bulk of its gains in recent weeks. Looking at the DXY chart one could be forgiven for not wanting to pick the low but the 75.80/76.30 area is nonetheless strong support and consolidation here should begin to tempt buyers again. We think recent EUR strength is overdone given the underlying problems facing the Eurozone, deal or no deal, and while the economic story in the US is weak it is still far better than the euro block which should feed into dollar performance, albeit on a longer-term basis. We’d also pick up on renewed mutterings from Japan on the yen which has continued to firm despite improved risk appetite.
- WSJ Economists On Recessions And GDP: The Great Disconnect (businessinsider.com)
View: Brent resistance solid at $115, near-term strength should be sold
Following our last update on Brent in early September (http://wp.me/p1G1Fr-cr) we got the immediate move to the downside we were looking for (10% or so), but the selloff never quite ran to the extent we’d hoped, instead bouncing aggressively from the October 4th low at $99.11 (based on the CO1 chart from Bloomberg) right back to the top end of September’s trading range. In fact, the market was just 10 cents shy of the top of channel resistance before the rally faltered last week.
We’re sceptical this recovery marks the start of a push back to the highs of the early summer though. There remain plenty of headwinds for crude to face. Slower global growth the principle factor although there are new dynamics at work in the US too, specifically the impact of shale gas (and perhaps soon shale oil). Those fretting over Middle East risks – which have stoked prices since the spring – might also be sleeping a little easier following Israel’s prisoner swap for captured soldier Gilad Shalit which hints at some thawing of tensions there, while in Libya the capture/demise of Gaddafi should be a watershed for the country, oil production had already resumed (albeit short of earlier capacity) helping rebuild some spare capacity. We imagine that recent US accusations that Iran plotted with a Mexican drug gang to assassinate the Saudi ambassador at his favourite restaurant – which was partly a catalyst to the move up to the October 14th high @ $114.80 – will fade back towards fiction too.
Short Brent also offers exposure to the dollar’s broader performance. Although a recovery in risk appetite and corresponding dip in the DXY has left the bears bloodied this month, cyclical positives should be coming into play for the dollar and in turn take some more of the froth out of commodity markets. Specifically we look to the diverging prospects for growth between the US and Europe and narrowing interest rate spreads.
This all adds to support for the technical picture which now looks more bearish again. The recent push higher failed to surpass those September peaks keeping that pattern of lower lows in place from late April. Furthermore the recent low, at least on a closing basis – which is more important – was also below the May/Jun and August bottoms. Currently the drop back has stalled at the $108.70 support line but this isn’t that substantial a level. It might be strong enough to provide room for a short-term bounce back into the $111’s but we’d expect to see sellers step back here.
The ultimate objective should be a renewed decline that would take the market down through the $99.11 marker. Note the base of the channel is well below $95.00 now, a level we think Brent should trade through before year-end. Our earlier target of $80.00 still looks viable longer-term, but first things first. There is key dependent to this scenario though, that the DXY holds above support which currently spans 75.85/76.30 which we’ve identified a number of times. If this falters a move back above $115.00 is likely, although we wouldn’t be tempted to chase that given trends elsewhere in the commodity complex (copper on the first chart specifically).
- Oil seen over US$100 in 2012 despite weak economy (business.financialpost.com)
- Guest Post: Who’s Right About Commodities: Bears Or Bulls? (zerohedge.com)
View: Sell the EUR/USD rally, but be ready to fold if 1.3834/37 weekly line falls
Improvement in risk appetite over the past seven days is notable. Stocks have bounced aggressively; battered commodities have managed to put in a decent bounce as have the higher yielding currencies such as AUD and BRL. And that other proxy measure of risk has also mirrored this, the DXY pulling back sharply from 38 week highs touched on October 4th at 79.83, helped along by a strong bounce in EUR/USD which has taken this pair back from the 1.3146 low to the 1.3800 area or up around 5% – rather painful for EUR bears like ourselves but not quite yet a game changing move.
There have been a number of forces at work, firstly expectations for a US recession have been pared back thanks to a string of better numbers (we’d note the market was already adjusting to this prior to last Friday’s payrolls report which if you look at closely is not as encouraging as the headline rate implied) and there has been a growing expectation that European politicians have woken up to what needs to be done to stem contagion risk from Greece, promises of bank recapitalisation are critical in our mind although an emerging consensus for leveraging the EFSF is equally key. On top of these we also had dovish FOMC minutes which showed there was still some support for QE3 type steps if measures taken proved insufficient to bolster growth, never nice to hear if you are a dollar bull.
Looking at the FX crosses, EUR/USD’s reversal has been aggressive, helped along by bearish positioning and the move to pick up risk again as the market adjusted to better news flow. Whether such gains are warranted on a fundamental basis is highly questionable. Although the Eurozone debt crisis may be nearing its end game the saga has inflicted substantial damage on confidence across the region, austerity policies will continue to sap growth in club Med and in core Europea growth has also stalled – before the debt crisis really took grip too. So recession is still the most probable outcome for the block and the case for the ECB to unwind earlier tightening remains compelling.
Technically the picture remains medium-term bearish too, a close above EUR/USD1.3834/37 on the weekly chart – which incidentally is also the 50% Fib line of the August/October sell off – is needed to shut off lower targets and from a daily perspective the 1.3950/1.4060 (200-DMA) area above here should prove tough to crack too. Indeed, our view remains bearish for the EUR on a multi-week timeframe (sub 1.30) and we’d only abandon this view if we can hold back above that weekly pivot or if the Dollar index (DXY) fails to hold support at 76.45/50 which would suggest the recent break here was a false dawn. Shorter-term break traders might prefer to look for a fresh swing lower rather than attempting to pick the top of this move given momentum and the broader improvement in risk appetite to which EUR/USD is well correlated too. In this regard support at 1.3680/90 is the first area to watch; a swing through here would have room to run to the lower 1.35’s in the first instance.
- EUR Shorts Flee The Overcrowded Burning Theater In Disorderly, Multiple-File Exodus (zerohedge.com)
- ForexLive US wrap: EUR stalls at key retracement (forexlive.com)
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