Generally I am one to follow the money flow and ride the trend, but the market internals in the S&P 500 and other developed markets had become so oversold that the risk to reward trade off had become quite compelling.
This view seems to be playing out and one questions whether the ‘sell everything’ call marks the low point in risks assets. Note to the bears, your time will come again.
On a positive note we’ve seen the S&P 500 futures print the first higher high this year, so this has thrown some backing to my short-term bullish call. It’s hard to be bullish with any real conviction though in this market, as that really requires commodities to rally. Until this ferocious speculative attack abates and the leveraged funds start covering short positions, then one of the key pieces of the bullish puzzle is missing.
This speculative attack is unlikely to unwind (specifically in the oil market) until these funds get a sniff that supply will be reduced and that doesn’t look likely even at current levels. WTI and Brent futures are being sold on any rally and the broader Bloomberg Commodity Index (a basket of 26 actively-traded commodity futures) is being guided lower by the five-day average.
In a strong downtrend you will see markets respect this average and, until oil can break above the five-day average (the blue line on the chart below), those calling for $20 oil should still be optimistic. Personally, I want to put my contrarian hat on in suggesting we could see a move into $32.50 to $33 a barrel, which seems to be more aligned with IG’s client base (79% of our client base are long oil). Obviously, if we see a lower low today and a break into the 20s I would be wrong.
Keep in mind WTI has been below the 200-day moving average for 366 sessions – 31% above the next-longest run below this longer-term average, which started in August 1993.
The stress in the materials space has also been savage and much focus has been placed on the rampant moves higher in Credit-Default Swaps (CDS) in a number of key corporates. Yes, remember them? They are back in vogue and showing an elevated default risk in the credit space. Take Freeport-McMoran Copper & Gold Inc (N:FCX), for example, the equity has fallen 71% since October. However, some of their outstanding debt is trading at distressed levels and not investment grade.
Asia markets are starting to sense that a short-term upside move could be on the cards and the S&P/ASX 200 has certainly seen better buyers. Even the energy sector has found buyers and the daily chart of the sector looks to be trying to put in some sort of bottom. The daily CNY ‘fix’ provided some inspiration to traders today as well. The ‘fixing’ rate has effectively been set in a 20-point range for the last five days and was effectively unchanged for a fourth day, so stability is the name of the game and that’s good enough for traders. Good trade data from China has also caused a second wave of buying, so watch copper prices through European trade to give some real backbone to the equity rally.
(Strong volume increase in iron ore imports – AUD supportive)
The Chinese authorities have gone to great lengths to reduce CNH (offshore yuan) liquidity, in turn driving up funding costs to unbelievable levels and making speculation (at least shorting) on the yuan neigh on impossible. What counts is the fact Chinese authorities have achieved their goal of converging the onshore and offshore yuan, with stability in the ‘fix’ and they have even seen a positive session in the equity markets. It’s just a shame they had to go to such lengths to achieve this. The question is what asset class will be the next target for the speculators?
With US futures starting to find buyers given the positive flows in Japan, Australia, Hong Kong and Korea, the open of the European market looks quite upbeat. We’ve even seen buying in sterling, although AUD/JPY has been the star of the show today in the FX market. The CAC 40 looks set to reclaim the 4400 level, with the FTSE 100 eyeing a retest of yesterday’s cash market high of 5985, and once again we’ve seen the market defending the 5870 area, in a similar manner as September and December. A close above 5985 should bring out further buying activity from the technically-minded traders.
EUR/CNY is 0.4% lower so my preference remains for longs in the DAX. I would be holding for a move into the 10,250 to 10,300 in the short term, trimming back on a move back through 10,000.