I have been continuously highlighting how stock futures trading in recent weeks have morphed into intraday momentum plays, and again this appeared to be the case on Friday. Despite heightened US-China trade tensions and an underwhelming fiscal response from the National People's Congress, global risk appetite came back as global investors start to brush off the Hong Kong law dust, and the momentum plays kicked in.
There is about $80-90 billion in global GDP expected to go up in flames (in the best-case COVID 19 scenario). So with China not setting GDP targets, it's probably not that big of a deal in the context that commodities and oil prices are coming from a shallow point anyway. Even more so as global investors are continuing to map the re-opening of global economies to the overall risk narrative, and global stock markets continue to move higher with positive changes in mobility data.
The high-frequency data inputs around increased foot traffic, traffic congestion, and public transportation use have temporarily replaced PMI's and other such forward-looking metrics in the market code, so mobility does matter.
As with most Google Analytics features, analysis can be completed in external spreadsheets and databases. The secret sauce lies in automating queries run. What was considered a tinfoil hat analysis not so long ago has now turned into a godsend for the market, which continues to trade the second derivative of this analysis by measuring how the rate of change of a Q( queries run) is itself changing.
Buy The Dip?
Check your mobility data apps first.
There have been plenty of dissenting voices regarding the level of equity markets in the last few weeks. Ahead of a long weekend, you would not expect dip buyers to emerge, but then if anything the last few weeks have taught us is not to underestimate the amount of interest in buying the dip.
Next week and provided risk continue to stabilize. There are two of the three CTA buy signals currently in the stack for Long-Term strategies that could come into play. These are believed to have the most AUM following, so expect intense buying pressure when the signal crosses. They typically happen around 200 DMA (2997), so I think it is safe to say S&P500 2995-3000 will hold a chunky buy order.
Currency Markets
On the global markets, FX volumes were down around 10% this week, partly due to the Ascension Day holiday in Europe on Thursday and partly due to the lack of apparent directional momentum in the USD and risk generally. Individual themes were very much still in play, including EUR topside since the Franco-German debt agreement, USD/CNH and USD/HKD spot and forward jitters, GBP movement around Brexit negotiations, re-engagement in selective re-opening short USD plays.
Central banks are heralding a deflationary world in the chorus. And with the heat in and around China continuing to build up, it is incredibly challenging to jump back on the reflationary trade. But the market will keep pressing that envelope.
Here is my reflationary breakout checklist
EUR/USD 200-day 1.1016 Below
AUD/USD 200-day 0.6663 Below
e-minis 200-day 2997 Below
As long as these three products are south of the 200-day, you can argue this is a bounce off oversold. Still, I think as we close in and start to peek above those 200-day moving averages, the wall of money argument wins, and there will be another massive round of bear capitulation.
The question is, how much pain do you want to endure on these trades with US-China trade tension bound to wreak havoc over the near term. Still, we know the market will soon desensitize to the trade bluster, and who knows the markets might throw HK to the wolves and move their money state sides or elsewhere in Asia, leaving China to clean up the mess they might have created. I am a bit saddened by the HK story, so I am not going to comment on it until next week until I have a better read on China's playbook. (or slay book)
Safe Havens
JPY and US bonds have been the safe havens. Gold, silver, and bitcoin are behaving like risky assets, not safe, havens. Silver and bitcoin have been particularly bad. Gold is trading like a currency, and not a haven one. If you do not think gold is going to get tested by the massive drops in job data and the deflationary implication, you could be in for a substantial unwelcome surprise.
But bonds and JPY are poor havens as they pay little to no interest. Hence, while backward-looking SPX/UST SPX/JPY correlation varies over regimes, so presumably, relationships with other "safe havens" also vary. And if you want a real haven –it is cash—liquid, cheap to hold, not volatile. In a Covid 19 environment, there always room for a considerable amount of "cash" in the portfolio mix.
I never read most gold analysts as I've been trading gold for 25+ years, although I would never miss an article by Joni Teves ( UBS) Jeff Currie ( Goldman Sachs (NYSE:GS)) or Alan Ruskin from Deutsche Bank (DE:DBKGn) when he makes a foray into the world of gold.
In contrast, most of the others I’m told are sticking to the prevailing narrative, which is the run of central bank largess and risk-off is supposedly good for gold in a Covid 19 environment but completely misses the point that the Drukenmiller's and Tudor Jones's of the world are preaching.
More stimulus and shifts into NIRP do not translate into more inflation, nor does it increase the velocity of money. Even in better times, Japan failed miserably in this experiment.
Sophisticated investors are flocking to gold believing central banks are primarily de facto government financing vehicles, and inflation targeting is just a facade; investors seek debasement/inflation hedges. Gold, Silver, and BTC are likely the answer. But these things go up when stocks go up, generally, so they do not offer safe harbor from risky asset weakness. In that regard, improving risk sentiment around tertiary commodities and higher oil prices could be suitable for gold prices.
Gold occasionally works as a safe haven; silver and BTC do not work reliably at all. This does not make them bad investments; it just means they are not “safe havens.”
So, keep an eye on the reflationary break out checklist above as if those levels get breached, gold will fly.
Forex Week Ahead
The Yuan
There are mounting tensions on multiple fronts, trade tensions notwithstanding. In mainland China, news from the first day of the NPC suggested regulators were far lest dovish than market positioning mostly because the group decided not to set a GDP growth target for this year, and other goals for government support was more foggy than usual. All of which suggests there will be a lingering bid in USD/CNH likely for weeks to come. But if China and even HK stocks turn a darker shade of red and with USDCNH breaking through my short-term trading target of 7.15 and although I still think currency stability is in the PBoC best interest. Risks remain skewed to the topside as markets price a higher risk premium on trade war risk, potentially leading to further portfolio outflows.
Euro, Canadian Dollar: Truth-Bearers For U.S. Dollar
The market is still looking to sell dollar selectively, believing the US economy will take longer to normalize relative to others given the US labor market will likely remain under pressure well into 2021. Even the higher frequency data still showing claims leveling off rather than trending down as parts of the economy re-opened
Before " Freaky Friday," the two most unambiguous signals EURUSD higher, USDCAD lower needs to be confirmed by the market downplaying of risk aversion as US-China tension simmer. While the less obvious but soaking under the surface narrative is the broad USD weaker story via the performance of carry trades, rising EM FX reserve balances, and USD selling in the North American time zone. History reminds me when US time zone G -10 traders start to sell the buck on the back of real money flows, its time to take notice.
On Tuesday, when traders return from the long weekend, and if risk continues to normalize after the market has a good soak in the NPC's outpour, the EURUSD and USDCAD ( the CAD as it so often does) could be the truth-bearers for the US dollar direction into the summer.