Intraday Market Thoughts Archives
Displaying results for week of Jun 25, 2017Volatility Whip
A round of risk aversion gave the yen a reprieve in New York trading on Thursday but how it unfolded speaks to changes in the market in a low-volatility environment. The pound was the top performer on the day while the kiwi lagged. There are 8 Premium trades in progress, including 2 equity indices.
A whip laying on the ground is a good metaphor to understand how markets are behaving this year. Most of the time, it's limp. Different part might be nudged in different directions while the rest remains stationary. Periodically, however, something in the global economy shakes it more aggressively. When that happens, the handle is jarred and a wave of energy moves through the entire whip.
That wave is like how energy is moving through cross-assets in 2017. Sometimes what happens in a faraway place isn't enough to create a jolt but when it does – like with comment from Draghi that set off a round of European bond selling – the wave quickly moves from one asset to the next as it circles the globe and the crack of the whip awakens sleepy investors to the risks.
Mechanically, this is taking place because there are so many bets on low volatility. As volatility creeps up, it raises alarms in funds or algos that are monitoring cross assets, so they pare back risk and it sets off the chain reaction.
Going forward, the takeaway is that intermarket analysis is more important than ever. Tremors anywhere are capable of rattling the whip and when any market makes a big move – like Eurozone bonds – it's only a matter of time until the wave of volatility hits something distantly related like tech stocks. Afterwards, the energy is released, the whip goes limp again and risk assets slowly recover.
Crowded in the Hawk’s Nest
Carney and Poloz dropped fresh hawkish hints to spark big moves on Wednesday while the ECB failed to damped expectations. The Canadian dollar was the top performer while the US dollar lagged. US jobless claims are next and their latest 4-week moving average is at 245K, the highest since April. The Premium GBPUSD long was closed for 205 pips, more importantly what's next? 2 Charts were added.
الدولارواقتراب السياسات النقدية (للمشتركين فقط)
Central banks are on the march. On Tuesday Draghi sent the euro soaring more than 150 pips, then it was Carney and Poloz with the follow-up on Wednesday.
In a presentation, Carney said continue to send confusing signals. In last week's Mansion House speech he dampened hike talk but he rekindled it today by saying some removal of stimulus is likely to become necessary in the coming months. A bunch of conditions and qualifiers were attached but the market only focused on the headlines and cable jumped more than 100 pips to as high as 1.2972 before it got jittery ahead of the big figure and peeled back to 1.2925.
At the same time, the ECB was trying unwind euro gains after yesterday's comments from Draghi. He said some factors restraining inflation were likely temporary and that was all it took to send the euro higher. Those gains were continuing Wednesday until two separate reports citing ECB sources said the market had misinterpreted his meaning. That sent the euro 75 pips lower in a flash but in a clear sign that sentient has shifted, the dip was completely erased inside two hours as the 1.1190 support held comfortably.
On net, the ECB and BOE signals were subtle and may speak more to the market's bias towards buying EUR and GBP (and selling USD and JPY) than to a genuine change.
That's not the case with CAD. The market was dead wrong on the Canadian dollar and Poloz. A more than 60% chance of a July hike is now priced in and the BOC isn't trying to dissuade the market. Poloz spoke to CNBC Europe and said lower interest rates “have done their job”. That was in the context of the market already pricing in a high chance of a cut.
You have to assume that Poloz knew the odds going in and would have dialed back the rhetoric if he wasn't seriously thinking about a hike. USD/CAD certainly noticed and tumbled to the lowest since February. It was helped along by another 1.5% gain in oil.
In total, central banks are certainly feeling better about growth despite soggy inflation numbers.
Sometimes It only Takes a Nudge
When markets are on the razor's edge it only takes a nudge to send them tumbling; that's what came on Tuesday. The euro was the top performer while the yen lagged. The Asia-Pacific calendar is light but a major central banking event takes place later on Wednesday. The EURUSD premium long was closed at 1.1348 for 168-pip gain, while cable remains open. Below is the Premium video posted right after Draghi's inflation remarks.
In central banking, it's not always the words, it's who says them. Yellen has been saying for months that the slowdown in US inflation is only temporary but when Draghi said mainly temporary factors were weighing on inflation it immediately sent the euro higher. By the end of the day, 50 pips had turned into 160 as technical levels gave way and the bears gave up.
At the same time, the IMF cut its US growth estimate for this year to 2.1% from 2.3% and for 2018 to 2.1% from 2.5%. They blamed, in part, the inability of Congress to deliver on promises. That point was underscored late in the day as Republican leaders said no vote on healthcare reform would take place until at least after next week's break.
Stocks didn't like that headline and the S&P 500 fell 0.8% and the Nasdaq 1.6%.
The bigger story was in the bond market as European 10-year yields surged 12-16 bps and 10-year Treasuries rose 6.6 bps. That helped to sink the yen across the board including a 230 pip rise in EUR/JPY.
The Canadian dollar got a helping hand from a 2% rise oil and that led to breakouts in USD/CAD and CAD/JPY. However late in the day, private inventory data from API showed yet-another surprise inventory build and oil slipped back.
Cable was also a winner as it rose above 1.28 and then busted through stops in an instantaneous move to 1.2862 as the mid-June highs broke. Part of the equation of Sturgeon announcing a halt on plans to host a Scottish independence referendum in two years.
Buried under it all was an upbeat US consumer confidence number and hawkish (but consistent) comments from Harker and Williams. It's clear that soft data and hints at continuing to raise rates aren't good enough for the dollar any longer.
The breakout in the euro is real but it's not going to be a non-stop climb as the August and June 2016 highs are less than 100 pips away.
Looking ahead, the calendar is quiet for a few hours ahead but we're looking forward to a panel in Portugal later today. Draghi, Carney, Kuroda and Poloz will all appear together at 1330 GMT to talk policy.
Act | Exp | Prev | GMT |
---|---|---|---|
CB Consumer Confidence | |||
118.9 | 116.1 | 117.6 | Jun 27 14:00 |
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What Would it Take?
What's the breaking point for the Fed? We're clearly not yet at the point where the Fed signals a pause but another weak data point makes it a question worth considering. The Australian dollar was the top performer while the yen lagged. The Asia-Pacific calendar is quiet.
The US dollar slid Monday after May durable goods orders fell 1.1% compared to -0.6% expected. Core orders, which exclude defense and aircraft, fell 0.2% compared to +0.3% forecast.The miss is part of a series of poor data points that stretch back months. The Citi US economic surprise index, which measures if numbers are beating or missing the consensus, is at rock-bottom levels.
At the start of the year almost everyone at the Fed and on Wall St was on board with a strong year but this week marks mid-year and it's looking like 2% growth may be a struggle. The Fed has been quick to brush aside soft growth and inflation. For months they pointed to upbeat soft data but there are no signs it's filtering into the hard numbers.
Some signals are even deteriorating. J.D. Power was out with a forecast Monday saying the June autosales pace is going to be the slowest in five years.
The market is stuck in a position where it can't ignore the hawkish signals from the Fed but can't buy the dollar against a headwind of bad data. The pendulum is swinging against the Fed at the moment and cracks are appearing. The FOMC is grasping for answers as patience wanes.
The week is light on US economic data but on Friday the PCE report is due and that could prove to be a turning point. The Fed is stubborn but not deaf. Weak inflation and personal spending could be the beginning of the end of the strong hawkish stance. The ISM and non-farm reports the following week could be the end of the end.
Act | Exp | Prev | GMT |
---|---|---|---|
Core Durable Goods Orders (m/m) | |||
0.1% | 0.4% | -0.5% | Jun 26 12:30 |
DUP in, Italy bailout, Qatar squeezed out
The UK Conservative Party has reached an agreement with the Democratic Unionists, helping it win support for Theresa May's minority government as the DUP gets an additional £1bn for Northern Ireland over the next two years.The geopolitical thermometer is quickly rising in the Middle East as Saudi Arabia squeezes Qatar with toughened demands in a development the oil market can't ignore forever. European bourses rally across the board after Italy led a 17 billion euro bailout to clean up two failed banks. US durables data is next. There are 8 Premium trades in progress; 4 in FX, 2 in indices & 2 in commodities.
On Friday, Saudi negotiators presented a list of 13 demands to Qatar including cutting relations with Iran, shuttering all media, reparations and closing a Turkish military base under construction. The demands came with a 10-day deadline to comply without mentioning the consequences of defiance. They strike us impossible to fulfill. Qatar has already responded that they are unjustified and Turkey said they're illegal.
Whether Saudi Arabia is more eager to test Qatar's resolve rather than easing the situation in the Gulf remains to be seen as new Crown Price Bin-Salman manoeuvers to further bolster his position in and out of the region. Others see more-dangerous motives.
There are no answers yet but the lack of a response in oil can't last. Crude has fallen nearly 20% in the past month and declined for five straight weeks. Qatar isn't a significant oil producer but a more assertive Saudi Arabia is a step towards direct or indirect confrontation with Iran and that's the ultimate possible buy-signal for oil.
In addition, WTI and Brent are both near support at the November lows so shorts could be looking to cover anyway. If crude can get some momentum to the upside, the Canadian dollar is especially well positioned as it threatens to break out against USD and JPY.
CFTC Commitments of Traders
Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.EUR +45K vs +79K prior GBP -38K vs -39K prior JPY -50K vs -51K prior CHF -3K vs -14K prior CAD -82K vs -88K prior AUD +15K vs -1K prior NZD +21K vs +1K prior
A portion of the euro bull gave up quickly after soft inflation data. There were hopes for a V-shaped reversal in ECB policy in the year ahead but there is increasing talk about a U-shaped shift if not a L-shaped one where rates stay at zero for years.
What also stands out is the rush into antipodean currencies, especially the kiwi. It had held a strong bid recently and the flood of specs helps to explain why.
Act | Exp | Prev | GMT |
---|---|---|---|
Core Durable Goods Orders (m/m) | |||
0.4% | -0.5% | Jun 26 12:30 |
Ashraf on BNN 1 yr into Brexit
Ashraf's take on the UK economic and political evolution since the Brexit referendum. Full interview.