Intraday Market Thoughts Archives

Year-end is near and that means flows dominate rather than fundamentals. The S&P 500 roared higher while GBP led and CHF lagged. The Bank of Japan decision is up next. 5 trades from the Premium Insights are currently in  progress, 4 of which are in progress. USDJPY and AUDCAD are the trades with the most in the money with more than 200 pips each.  1of the EURNZD longs hit all targets, with the other in progress in the red. 

There is no coherent way to explain all the market reactions before and after the FOMC decision. If Yellen was dovish, the stock market rally makes sense but the rising dollar and yields don't make sense. If she was hawkish, why did the S&P 500 complete the best two-day rally since 2011? The nature of markets is in flux and not every market moves can be tied to the latest news.

Eventually, however, fundamentals matter. What might have been most-surprising about Yellen's press conference and the FOMC statement was the confidence in the outlook for 2015. Storms are brewing in Europe, Japan and the BRIC countries. It's was possible for the US to remain an island of strong growth in the 20^th century but it's not likely today.

The dollar was generally higher on Thursday but economic data painted a softer picture. The Philly Fed was at 24.5 compared to 26.0 expected and 40.8 last month. The Markit services PMI was more concerning at 53.6 compared to 56.3 expected. It was the lowest since June and the comments in the report were concerning.

“The extent of the slowdown suggests that economic growth in the fourth quarter could come in below 2% which, with the exception of the downturn caused by adverse weather in the first quarter, would be the worst performance for two years,” the report said.

At the moment, the market is unappeasably excited about US growth now and in 2015 but much of the growth in Q2 and Q3 was simply a rebound from a terrible first quarter. Go with the momentum now but tread carefully in January.

Looking ahead, the BOJ decision is the immediate risk event and it's usually delivered from 0230-0330 GMT. More easing is highly unlikely after it squeaked by in a 5-4 vote on October 31.

Today's SNB entry into negative rates will not be enough. Just as the SNB was forced into a series of interventions in summer 2011 before eventually formalizing the 1.20 peg, more will be needed to maintain the peg and combat a fresh onslaught of risks such as deflation-inducing oil collapse, event risk in Russia, uncertainty in Greece and exported deflation from China. Full chart & analysis.

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The FOMC statement essentially retained the bias to keep rates low for a 'considerable time' but Yellen added some hawkish hints in her press conference. The US dollar surged after the announcement while JPY lagged on risk appetite but the Fed wasn't the only reason why. In early Asia-Pacific trading, New Zealand GDP beat expectations. Our AUSUSD Premium trades issued prior to the Fed statement are in the money as are USDJPY, USDCAD, UDCHF and EURNZD.

The market whipsawed on the FOMC statement. In one sense, the Fed's guidance no longer commits to a considerable time of low rates and instead replaces it with 'patience'. But in the very next breath, the Fed spelled out that its intentions on rates are unchanged.

Yellen opened her press conference by reiterating the same point but later made a few hawkish hints. She said all Fed members see liftoff in 2015 and also emphasized that low inflation because of commodities will be transitory; she also brushed off low market-based measures of inflation.

The US dollar surged with USD/JPY gaining more than 200 pips to 118.75 in a broad dollar rally. The move may have been exaggerated by US dollar bulls returning to the fray. The euro also fell after the ECB's Coeure said there is a broad consensus to do more and that sovereign bonds are a 'baseline option.'

Mixed in was a sharp rebound in emerging markets. The ruble jumped nearly 10% and oil was slightly higher after an earlier surge.

The FOMC was the final major risk event of 2014 and that means position squaring and flows are likely to dominate the remainder of the year. Regardless of the near-term outlook from the Fed, the market still views the US and USD dollar as the best place to invest in 2015 so the dollar may continue to benefit.

The Fed's confidence in the economy is also good news for commodity currencies if it proves to be founded. The New Zealand dollar briefly rallied after Q3 GDP rose 1.0% q/q compared to 0.7% expected.

The FOMC began its two-day meeting on Tuesday and the market sent a powerful message as the Russia ruble continued to collapse. USD/RUB rose more than 23% at the highs before paring losses; amongst the majors sterling led and the Aussie lagged. Japanese trade date is next. Subscribers to our Premium Insights find a special edition on global equity idices, dissecting the 8 striking similarities the S&P500 has charted in the 2 months leading to the December high with the 2 months leading to the October 2007 high, including this week's confluence, indicated in the RED DIAMOND on the daily SPX charts. The Premium piece also gives insights on the Dow-30, FTSE-100, KOSPI 200, ASX 200 and OBX 30. All these are in the Special Indices Premium Insights.

Volatility remained at extreme levels as the market grapples with the infinite possibilities in Russia. USD/RUB rose as high as 79.38 then skidded back to 66 followed by another bounce to 71.

As the panic in Russia crested (for the day) there was a broader flight to the yen that knocked USD/JPY down to 115.58, which is close to the 38.2% retracement of the rally since mid-October. It bounced to 117.78 from there but then fell back to 116.34 as stocks plunged late in the day. The S&P 500 closed at the lows, down 17 points to 1972.

The twists and turns in the market were too frequent to detail in what is increasingly a sentiment-driven market. The fundamental headlines were a disappointing US Markit PMI at 53.7 vs 55.2 exp and a slightly soft housing starts report at 1.028m vs the 1.040m consensus.

Oil prices showed some life after Brent fell below $60. John Kerry had some softer words about Russia and that helped to turn around sentiment but later Kuwait's oil minister said OPEC leaders are in agreement not to meet before June.

With sentiment so delicate, the market is looking for a lifeline from the Fed but it's a tough decision on removing 'considerable time'. Throughout the Bernanke and Yellen Fed's, the best trade (but not the perfect trade) has been to bet the on the doves. One final data slice with CPI due tomorrow could tilt the balance.

But first, Japan is out with trade data for November at 2350 GMT. A key metric to watch is exports, which are expected up 7.0% but could be swayed by the weak yen.

Charting USDJPY and the 1998 crisis. Full charts & analysis.

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Russia's central bank hiked interest rates to 17% from 10.5% in a desperate attempt to stop the slide in the ruble. In G10 FX, the yen was the top performer while the loonie lagged. The RBA minutes and preliminary China December HSBC PMI are due up later. A special edition of the Premium Insights will be sent to subscribers shortly this evening.

The ruble dropped 13% on Monday and is down 50% this year as WTI crude oil plummeted another 4% on Monday. Officials attempted to intervene after a break of 61 but the effort was sooner overwhelmed as USD/JPY surged to 65.89.

The move to intervene came at 1 am local time in an episode reminiscent of Soros breaking the pound. indications show USD/RUB falling back to around 62 but the market is extremely thin.

The rout on a nuclear superpower has escalated to the point where it could cause risk aversion elsewhere and destabilize global markets. Other emerging market currencies also suffered to a lesser extent with the Turkish lira down 3.25%, the Indonesian rupiah down 1.9% and Brazil's real down 1.6%.

In major FX trading, the US dollar was caught in a nasty chop once again. It's the kind of volatility that breeds contempt.

Two conflicting forces are weighing on the dollar. Solid economic data, including an upbeat industrial production reading, points to Fed rate hikes and USD/JPY hit a session high just below 119 after the data. But the stock market is petrified of rate hikes and that caused another deep slide in the S&P 500 that pulled USD/JPY all the way to 117.85.

Elsewhere, however, the dollar was flat or higher. The big losers were the commodity currencies as AUD and CAD fell to fresh multi-year lows.

Looking ahead, with the fear in Russia and elsewhere, the last thing the world economy needs is bad news from China but that might be what it gets with the HSBC manufacturing PMI for Dec due at 0145 GMT. The consensus is a slide to 49.8 from 50.0. The break of that psychological 50 barrier could hurt sentiment.

The other main headlines to watch are from the RBA minutes at 0030 GMT. The market is struggling to price the likelihood of a Feb rate cut and will be looking for clues.

The US dollar is broadly, albeit mildly lower in early-week trading. There was no significant market reaction to Abe's resounding win in Sunday's election but the focus will remain on Japan with Q4 Tankan data due at 23:50 GMT/London time. A full analysis on the S&P500 other indices from Ashraf will be released on Monday to Premium Insights subscribers.

The US dollar is down 15-20 pips across the board as the market struggles to understand the flight to quality on Friday. The S&P 500 finished down 33 points to 2002 to cap the largest one-week loss since May 2012.

A clue was in the bond market where 5-year breakevens fell nearly 10 basis points and imply average inflation of 1.14% over that period. That will weigh heavily on Fed officials who meet on Tues/Wed for the final time this year.

As crude continues to crater, it gives officials plenty of breathing room if they don't want to hike rates. A debate rages in the bond market about whether lower yields signify that the Fed won't hike rates, won't hikes rates as high or will hike rates but it will be a mistake that will cause the US economy to stumble.

In Wednesday's statement, if the Fed removes 'significant time', even if Yellen replaces it with 'patience', it will cause markets to price in a mid-year hike.

In Japan, Abe proved to be politically savvy in calling an election even as GDP data fell to shocking levels. His coalition retained a two-thirds majority, and that gives him a fresh mandate for reform but so far he has placed most of his faith in currency weakness.

Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +. EUR -136K vs -159K prior JPY -104K vs -111K prior GBP -24K vs -31K prior AUD -45K vs -41K prior CAD -14K vs -18K prior CHF -22K vs -22K prior NZD -2K vs -2K prior

Euro and yen longs were trimmed as the US dollar gave back some of its gains. Some might point to year-end position squaring but these numbers tend to hold through the holidays. We're a bit puzzled at the lack of anti-CAD sentiment given the fall in oil.