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What Can We Expect From FX And Equities Markets This Week?

Published 03/15/2016, 05:24 AM
Updated 05/19/2020, 04:45 AM

Developed market equities have a heavy, soggy feel to them, and on a number of metrics traders have been looking at overbought readings and deciding to book a little profit.

90% of S&P 500 stocks are above the 50-day moving average, which is extreme, but prices are not yet flashing a convincing sell signal, although indecision is clear on the daily chart. A close below yesterday’s cash market low of 2,012 would be a sign to reduce bullish exposure, although it’s hard to advocate aggressive short positions just yet. Our client base disagrees, with 73% of all open positions being held short on the S&P 500. There is similar positioning in the DAX and FTSE 100, and on the whole there is a view that the equity market has greater downside risks from here.

Certainly, it’s difficult to chase the market higher, despite that hollow feeling of missing out, but after a 4.5% rally in the S&P 500 so far this March (5.3% - ASX, 7.4% - Nikkei, 6.5% - CSI 300, 5.2% - DAX) most will be sitting on their hands waiting to hear what the Fed have in store this week. The USD will be key, and the Fed will have to play a balance between fairly subdued market pricing (on future rate hikes) and steadily improving data trends.

The ‘dots’ plot projection should command much greater attention from traders, as it will be used as a signalling tool of future intentions. For funds who run news-based algorithms, this will be one of the first inputs they source. It is fully expected that the four hikes in the current median Fed projections will be lowered by 25 basis points for this calendar year. There is also a strong chance that the median view for 2017 will be lowered by 25-37.5 basis points and closer to 2%. The hawkish surprise comes if they leave the projections for 2017 and 2018 unchanged, therefore sending a message of intent that would signal to markets a stronger-than-forecast tightening. That could be unsettling to markets.

With a 4% probability of a hike at this meeting currently priced into the interest rate markets, it’s interesting that four economists (of 90) feel the Fed will lift the target range this week. Expect fireworks in euro/dollar or fed funds future and the USD if that were to occur. The S&P 500 (and global equities) will fall as well.

Asia has largely been on the back foot, with the ASX 200 really underperforming in the region. A 13% rally from mid-February in the financial sector has seen traders taking profits, and banks are taking the points out of the market. Although volumes, in general, have been poor. Good selling was seen in the AUD after the RBA minutes, with AUD/USD trading down to $0.7479. But sense has prevailed as most traders see the minutes as dated, and the Statement of Monetary Policy and 4Q GDP have been released since then. GBP/AUD looks supported around A$1.9000, but good supply seems to be coming in closer to A$1.9100 and I want to buy the pair, but it’s just so difficult to be long sterling right now with Brexit concerns still so heavy in the market.

China weakened the CNY by 166 points, which has taken some of the wind out of the markets’ sails. But there is growing opinion that some sort of tacit agreement between central banks may have been reached at the recent G20 meeting. We have seen the ECB move away from targeting the EUR, to one of reflation through traditional channels (i.e. the banking system), and there is a belief that if other central banks help keep the USD from rallying then China will not have to devalue and global financial conditions can continue to improve. There is speculation that the PBoC is taking the fight to the speculative FX community and may be ready to introduce a Tobin tax on speculative CNY transactions. This will not be taken kindly by the IMF if it eventuates, and if Chinese officials broaden this to other markets, like swaps, then speculators may pile into proxy currencies like the HKD.

The focus of the session was the Bank of Japan, who ultimately delivered…. very little. It certainly seems that the BoJ have little desire to lower the deposit rate deeper into negative territory, in a similar vein as the ECB, and from that perspective one can make an argument that they are following the ECB’s guide. If you were long JPY yesterday then you probably have a little more conviction today, although those calling for more easing will increasingly look to April 28 as the potential date. Nikkei and USD/JPY traded lower in the wake of the decision.

Nikkei Chart

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