Risk Upbeat as We Head to the Marquee Event of the Week

Trader thoughts

We look to the main event of the week, with a plethora of top dog central bankers speaking in a fairly tight window at the Jackson Hole Symposium – the title of the conference is “Navigating the Decade Ahead: Implication for Monetary Policy” and at the risk of being dramatic, it promises to be a defining moment in monetary policy setting.

Fed chair Jay Powell takes centre stage when he speaks at 23:10 aest, but while we also hear from BoE Gov Bailey at 23:05aest, and BoC Gov Macklem just after Powell. ECB chief economist Philip Lane rounds out proceedings with his talk at 01:50aest.

One may have felt that risk may have been shunned into Jackson Hole, but quite the opposite can be seen. European equities closed up modestly higher with the DAX leading the charge with a 1% gain. In US trade, tech has smashed it once again and from 22:30aest the buyers stepped in and pushed the index towards 12k. I was looking at reversing the long call, but the selling just never came in and I continue to hold and will do until price can close below the 5-day EMA. The US500 hones in one 3500 and has closed up 1%, yet we’ve seen the VIX gain 1.2 vols to 23.27%, while the NASDAQ VIX (VXN) has pushed 3 vols higher- an equity rally married with higher implied volatility is odd – traders are betting on movement.

Digging into S&P500 sector moves, we see comm services on fire, with tech just behind, notably buoyed by Salesforce and Adobe which have exploded 26% and 9% respectively. Microsoft has worked too, but in the universe of US stocks Pepperstone offer if I scan for names that are above the 10-day MA, 10% above its 50-day MA, and that reside at or near the 50day high – i.e. momentum/strong stocks – I see these names and they are flying. Buy strong, sell weak, as they say.

20200827 Earnings Bloomberg

On the data side, we’ve seen a monster 11.2% increase in durable goods orders in July, smashing expectations and continuing the theme of better data, which I think is just so key to the risk story. Take out transportation and we saw a 2.4% increase, which still beat consensus by 40bp. French consumer confidence was also pretty good, and that added to news that the German govt is extending measures to help business from insolvency, in turn, supporting the German labour market. We’ve also seen the news that Moderna will be presenting its new interim clinical data later today (12:30aest), and again this is helping sentiment.

The USD is down smalls vs the EUR, with EURUSD tracking a 1.1772 to 1.1839 range on the day, yet when EURUSD found a bid from the lows, so too did we see Nasdaq futures rally. This is my tongue in cheek mock-up of the perpetual motion in markets. It all rotates into one circular trade, but does it start with USD weakness?

20200827 Cycle

We’ve seen solid moves in the NZD, with NZDUSD up 1.2% and into the top of the recent channel and through R3, so it tells you it was a punchy move. Can it break out?

20200827 Chart

There are other pairs which get the attention for breakout traders, with USDCAD, GBPUSD, AUDUSD, and AUDJPY also in the mix, with price moving into the top of their respective ranges.

Any worry that Jay Powell will disappoint has not been in the precious metals space and whereas yesterday I asked if there was to be a catalyst it seems the market has found one.

Silver has gained a lazy 3.2% and gold 2% and helped seemingly by a 5bp decline in real yields on the day, where real yield remains the focus as we head to Jackson Hole. We know Powell will be dovish, we expect that he will reveal some of the findings of the long-running policy review and we have a belief that he will detail a tolerance of some sort of inflation overshoot. But how explicit will he be and how much has now been discounted and will we get the full clarity and urgency to meet the market? Given the moves, it feels like the market is confident he will be.

I will update the Telegram channel on FX/gold overnight implied volatility and implied moves as the day rolls on, so keep an eye out there if it helps.

Where Is the Catalyst for Gold?

Trader Thoughts

Looking around the traps today, sentiment continues to be upbeat, although the session has lacked the urgency and FOMO, if you will, that we saw in Monday’s trade.

I guess the news flow has been there, with the market hanging on the tailwinds of vaccine and US-China trade deal headlines. On the data side, the German IFO was marginally better, although the expectations sub-survey was a touch light.

US consumer confidence was well below expectations at 84.8 and printed a new six-year low and even pulled below the levels seen in April – the stock market didn’t react like perhaps it once would have, and if we look at the correlation between CB consumer confidence (white), the Uni of Michigan consumer confidence survey (blue) and the S&P500, this is just another chart you can add to the divergence pile.
2020/08/26 S&P500
(Source: Bloomberg)

Also, on the data docket, we saw US new home sales smash expectations with a 13.9% increase in July, while the Richmond Fed manufacturing easily beat at 18 vs 10 eyed.

In equity land, the S&P500 pushed up another 36bp, closing on the highs of the day, with healthcare and comm services leading the way, with tech not far behind. Energy was the laggard, with a 1.42% loss and that despite crude 1.8% higher for both WTI and Brent.

Where we see XTIUSD finally through the 200-day MA with Hurricane Laura tearing through the Gulf Coast, with more than 84% of output in the Gulf of Mexico temporally shutdown

The NAS100 has led again with a 0.82% gain and I hold longs for now looking to exit on a daily close through the 5-day EMA – a level which has defined the recent trend since the 12 August. That may change, where I may square and reverse, with the timeframe taken into 30 minutes chart, as I think there are risks that suggest a short opportunity in the coming session – it could be good for 150-200 points – one to watch, and react to should price react.

We’ve seen selling in US Treasuries, with yields at the longer end moving higher on a relative basis, causing a steepening of the curve. As mentioned, data was mixed, but the Treasury department got a massive $50b 2yr Treasury auction away without any issues at all and demand was good.

Inflation expectations have kept pace with Treasuries, and therefore real yields have not really moved and this is possibly a reason why gold and silver remain lost and continue to consolidate after the monster run from 1670 in June to the recent high of 2076. As we see on the daily and weekly timeframe, there is solid support into 1910/00, with buyers happy to support for now.

If 1900 goes then we may see a decent flush out of longs, which should offer a buying opportunity for a new run-up past September. If I look at the options market, the skew (‘risk reversals’) between call and put implied volatility is finely balanced and traders see risks to price moves as incredibly symmetrical – gold is in need of a new catalyst and as the headline writers say “Gold’s time to shine” is not now. Again, a good flush out would perhaps be that catalyst for a longer-term bull run.
2020/08/26 Bloomberg
Top pane – Gold 1-week – 1-year implied volatility
Middle – 1-week risk reversals (call minus put volatility)
Lower – 1-month risks reversal

On the FX side, gold didn’t really follow the USD through Asia, then suddenly caught on through US trade and as the USD moved lower, then gold caught a bid from 1914.
FX Percentage change 2020/08/26
We’re left with the USD down 32bp on the day but scanning across the respective pairs and the USD was lower vs all major currencies except USDJPY, which is 37bp higher but finding sellers into 106.58. After two bullish outside days of late, there is clear support for the pair, but the key resistance sits into 107.00, so that is one for the radar, and levels to take the timeframe right in and react accordingly as and when we get there. Cable has been a mover too, despite the recent headlines about poor EUR-UK trade talks…again, a pair consolidating and one the bulls will jump on if this break higher.
USD/JPY 2020/08/26

Staying Long NAS100, but Will Review Shortly

Trader Thoughts

There’s a bit of life in equity indices, notably in EU markets and the US30, with the latter being buoyed specifically by Boeing who have contributed 73 points to the Dow’s 378p rally.

The GER30 being the best EU market with a 2.4% rally in cash trade, with the price here now pushing into the 12 August swing high in our out-of-hours pricing. In US equities, the S&P500 closed up 1%, to new highs, where we’ve seen turnover above the 30-day average for the first time in a while in cash trade, although 1.2m S&P500 futures traded is light.

Breadth was far better today as well, which is something I touched on yesterday, with 82% of stocks higher on the day, led by energy (2.8%), financials (+2.3%) and industrials (1.8%). Healthcare (-0.5%) was the only sector to close lower. My NAS100 (0.6%) long is still working, but I will be strongly considering closing this into the Jackson Hole Symposium.

Its still no surprise that my momentum dashboard is showing some solid trends in equities, yet a messy picture elsewhere. The dashboard has conditional formatting set to detail “bearish” if price is below both the 5-day EMA and 20SMA, “bullish” if above both, and “neutral” if neither is true (i.e. its above one, but below the other).

I also want to see if price is above/below the pivot point. I have used the Excel RTD Smart Trader Tool to pull prices out of MT4 (*might be a good webinar one day), and set up, so why not check it out.

Momentum and Trend

Asia should open with a mixed picture despite these leads, and our calls for the ASX 200 and NKY225 look strong enough, while weakness is likely in HK and China mainland markets. Apologies, I have used bright colours.

Equity Index Opening Calls

The fixed income world is gearing up for a chunky $148b in US Treasury auctions to play out over the next few days, which could impact yields, and subsequently influence yield sensitive parts of the market, like the USD, gold and NAS100. A risk to consider, but at this stage we’re seeing US Treasury yields rising into this supply, with 10s +3bp to 65bp, yet inflation expectations are rising faster (10yr Breakevens are +5bp) and thus real yields have fallen.

It’s surprising then that gold is not having any of it, with price down 0.6%, with the USD up smalls against the basket (USDX). Copper has rallied 0.3%, yet lumber is -2.9% (after rallying for 16 straight days, however), while WTI and Brent crude are up 0.1% and 1.6% respectively. It’s all a tad messy.

Major Currencies Bloomberg Terminal

Moves in FX markets have been quite sanguine, with the ZAR having a solid move, yet that was really the only mover vs the USD. The CAD is the weakest link on the day, and we see USDCAD moving into the middle esculents of the bear channel it has held since late June. GBPUSD has also been offered, with GBPUSD finding sellers into the 5-day EMA and forming a hammer candle – if this kicks lower the 1.3000/1.2980 area looks like key support, where a break sees the pair into 1.2850, although given the volatility, one would assume that won’t happen overnight. AUDUSD has traded a 0.7204 to 0.7153 range, and a look at the daily show the consolidation playing out after the run from March – one for the range traders for now.

20200825 AUD/USD Chart

By way of event risks, as detailed in yesterdays week ahead, we get the German IFO survey at 18:00aest, which is out just after German Q2 GDP and could be worth focusing on for those with GER30 and EUR exposures.

The GDP numbers won’t move the dial as its Q2 data and it’s a revision of data that that has already been announced. There is little to trouble in Asia, but I would be looking at US consumer confidence (due 00:00aest), as this poses small risk to exposures, with the market expecting a small improvement to 93.0 (from 92.6).