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Saturday 17

November, 2018 1:04 AM



The Daily Fix - Inter-Market Analysis and Macro Insights

The Daily Fix - Inter-Market Analysis and Macro Insights

The positive flow has been centred on China at the start of the week...

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22.10.2018 03:50 PM

The positive flow has been centred on China at the start of the week, with Chinese mainland equity indices flying, with gains of over 4%, and following on from Friday’s bullish reversal. Financials have flown today on some massive volumes, notably in the brokerage space as they will likely be the net beneficiaries of any liquidity measures.

Clearly, the circuit breaker had to be triggered and that the concerns that the falls in both the property and equity markets had become too great, and would result in a strong feedback loop in economics and that the time to act was now. The barrage of headlines from key Chinese officials on Friday was deafening and extremely coordinated, which has been to great effect. The cynic in me questions just how long this can last, especially in light of the US administration fighting back and reinforcing their agenda. Specifically, Economic Advisor, Larry Kudlow, has accused Beijing of doing ‘nothing’ to settle the tensions, while Axios has reported that ‘Trump has no intention of easing tariffs on China’.

It certainly feels as though this lowers the probability of the market getting excited about any breakthrough at the upcoming G20 meeting in November. That said, that is politics 101 and the art of the deal.

The PBoC lowered the USDCNY mid-point (through its daily ‘fix’) by 151 pips to 6.9236, which was in-line with expectations and hasn’t resonated too greatly in USDCNH, which is unchanged on the day and still eyeing a move into 6.9400. Momentum is waning though, but this remains a must-watch FX pair this week, as a breakthrough the August highs of 6.9586 would be very telling indeed. 

Interestingly, S&P 500 futures have opened the new week and after initial weakness is 0.8% off the session low. The buyers clearly eyeing Chinese equities over the 0.3% decline in the Nikkei 225. USDJPY is unchanged on the day, and perhaps reflecting the flat open seen in US Treasury futures (the US 10-year Treasury sits a 3.19%), and again, this is not promoting any move in Japanese equities. Taking a look at the weekly chart of USDJPY gives us a solid perspective here, with the pair having broken the 2015 downtrend in September and holding above the 20-week SMA. ¥114.50 is a huge barrier though and has been acting as a ceiling really since March 2017. A break here would be significant and take us into ¥118.50 to ¥120 range. Although, as I write the market is respecting the March uptrend and should this give way, and price can close through trend support at ¥111.62 swing then we could get a re-test of ¥110.


One point of note that we saw in the weekly CFTC report, that monitors futures positioning week-to-week from various market participants, was a 26% decline seen in the net long position held by asset managers – this was the largest decline ever. As we can see from the chart the absolute level of longs is hardly an issue, but this is worth watching given these players tend to ion the camp that sees a high chance of a recession in the next two years.

(Source: Bloomberg) 

The ASX 200 has found sellers into 5900 and is the weakest link around the Asian region and perhaps this won’t surprise given we have seen another poor weekend auction clearance rate, with the national average sitting at 49.8% and threatening the September lows of 49.1% - which, in itself is the lowest levels since 2012. The political situation grows worse for the Liberals, with Kerryn Phelps taking the Wentworth by-election and this can’t be an equity positive. It’s a defensive day, with outperformance on the day in REITs, utilities and staples, which is interesting as we see selling in Aussie bonds, with Aussie 3-year Treasuries up two basis points.


AUDUSD has conflicting forces, as the Chinese equity sentiment is supporting, while the auction clearance rates and political situation is an AUD negative. The intra-day low has been $0.7088 but buyers have pushed the pair above the 71-handle and price action is too messy here to call any clear trade. The weekly chart shows indecision of late, and that will happen when the pair has fallen 13.5% from January, and the downtrend is so mature. The preference has been short AUDNZD, with the NZD the strongest currency in G10 of late and a look at the set-up shows price breaking out of the multi-month consolidation. We’ve seen price trade into 1.0748, and conditions are a touch oversold, so I wouldn’t be adding at these levels but will see how price reacts around Fridays low of 1.0797.

GBPUSD has seen limited moves to headlines that 95% of the Brexit withdrawal is ‘now settled’, which is a small net positive.  That said, the bulk of the weekend news flow has centred on in-fighting in the Tory party and the prospect of Theresa May surviving the next few days, so, there is still much for traders to contend with and moves in cable are still finely balanced. It’s worth highlighting that we did see non-commercial FX players reduce their GBPUSD net short futures position by 16% last week (to -50,353 contracts). While GBPUSD one-month risk reversals (these measure the skew of out-of-the-money ‘put’ options vs out-of-the-money ‘call’ options) sit at -1.3950, showing a strong skew towards puts and showing options traders still have a bearish stance for the month ahead.

EURUSD hasn’t seen any real movement on the news of Moody’s cut Italy’s sovereign credit rating, and if anything, we can say this outcome was discounted. The move to a ‘stable’ outlook suggests Italy are in the clear to avoid being cut to non-investment grade and we look forward to Fridays review from S&P, who will likely keep their rating unchanged but put them on negative outlook. We saw some positive flow on Friday with the yield premium demanded to hold Italian 10-year BTP over German bunds coming in 24bp to 302bp. The market would be expecting this spread to come in a further 20-30bp on the open of the European fixed income markets, and how these trades in the session ahead should impact both Italian equities but also EURUSD.

Again, if we look at the weekly chart for perspective, EURUSD is tracking sideways really since May, although the range sits between 1.1800 to 1.1400. This week’s ECB meeting shouldn’t be a huge volatility event, and the market is pricing a 96-pip move on the week. I use this ‘straddle’ as a guide for expected moves within a set time period, as the implied volatility used to calculate this move considers all the event risk through the week and makes a judgment call on whether this event risk, be it in Italy, the ECB or the US data releases moves the dial. We can use this to assess stop distance and how much risk we are prepared to take on.

Published by Chris Weston, Head of Research, Pepperstone
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