If price action is a road map of supply and demand and a portrayal of whether the bulls or bears are control of a market, then it seems that the bulls are firmly back in charge. As said before, 2016 has been clearly been defined by doing the opposite of what feels right and this worked in mid-February and its working perfectly now. Weren’t equity markets supposed to be savaged on a higher probability of rate hikes in the US? Weren’t oil, credit and equity markets supposed to be smashed on USD strength? Well, the market has priced in a 28% chance of a second hike from the Fed by the December FOMC meeting and the trade-weighted USD is rallying AND the S&P 500 has broken the April downtrend and European markets are flying and are facing another solid open.
Asian markets have had limited news flow to deal with today, so the bold moves are a reflection of the belief that the global economy is actually not so shabby. All markets seem to be heavily bid, with the likes of the ASX 200 testing the top of their recent trading range of 5400. S&P futures are starting to move higher, again putting upside into our euro equity calls, while US oil (July contract) is once again honing in on the 18 May high of $49.56. All eyes on today’s DoE oil inventory report and after last nights huge drawdown in the API private inventory report of 5.1 million barrels, if we see a big drawdown in the official report then $50 oil is a reality and we are back into the breakeven levels of the US shale gas companies.
In the US retail sales, inflation, new homes sales and claims all look good and in Europe the Citigroup Economic Surprise Index (which tracks European economic data relative to expectations) has moved into positive territory for the first time since 22 January. The Fed’s message in the recent minutes was ‘the world isn’t so bad, you have to have faith’. Throw in a data that confirms Armageddon isn’t happening, Brexit is seeing diminishing support from the over 65’s and there is a turn in sentiment. Positioning is also clearly helping the bulls trading case and there has been some talk of Asset managers being heavily short of markets such as NASDAQ futures. One has to feel that part of the short-term move higher has been influenced by market positioning, but also the term ‘never short a dull market’ is just so true.
In fact, rather than panic that the USD is rallying, the opposite is true in Europe and the Stoxx 50 and other markets are rejoicing at the move lower in EUR/USD. Assess the Stoxx 50 futures (green line) relative to EUR/USD of late…tick for tick! EUR/USD has seen a touch of short covering today, but the trend is firmly lower and rallies into $1.1200 will likely be sold. This should support equity and credit markets and one questions if markets are going up after a fairly sleepy period whether the fear of being underinvested kicks in, creating a second wave of buying and this well used acronym; FOMO.
