LOOKING BACK
The previous week seemed to be a mirror as we once again saw credit tighten for the week, equities continue to bleed and the US Dollar go from strength to strength – looks like our defensive feeling and thoughts played out.
Credit: While credit tightened for the week, unlike the previous week the space did not close on the lows for the week, given the disappointing ECB conference. Key closes: U.S. 10-Year tighter at 2.44% (2.53%), UK 10-Year at 2.39% (2.47%) and Bunds tighter at 0.92% (0.97%).
Equities: The equity markets continued to bleed in the US, Europe and most of Asia last week. In Europe, the main equity indexes in the UK, France and Germany are now down for the year : by 3.9%, 0.3% and 3.7% lower respectively. In the US, the S&P 500 was down 75bp at 1,968, while in Europe, Euro Stoxx was down by 2.68% at 3,133. In Asia, the divergence continued between price performance on the HSI Index and the Shanghai Composite – bearing in mind that mainland China does not come out of holidays until Thursday this week.
For the week the HSI was down 3.6% while the Shanghai index was up 2.3%. I still continue to think that CY Leung, the chief executive of Hong Kong, has mismanaged the protest situation and is out of touch with the citizens of Hong Kong. A Sunday midnight deadline has been set for the protestors to clear out and as I write this, it's very clear that there will still be plenty of protestors and blockades on the streets of the city. We’ve also now had clashes between pro-democracy and pro-CY Leung backers. What’s also worrying is there seems to be a breakdown in the groups that constitute the protest movement, including chatter about criminal elements. I continue to think we could still see increased escalation, especially if the police try to move the demonstrators and take down the blockades by force.
Please take a look at these two trading ideas we put out last week, one that focused on levels/rationale behind shorting the HSI index and the other on the different forms of exposure. See this interesting piece from CNN on the different generational perspectives on the situation in Hong Kong.HSI: More downside ahead, with 22500 and 22000 the key levels to watch
Source: Bloomberg and Saxo Capital Markets
FX: The continued strength in the US dollar has been nothing short of breathless, as we closed over the key resistance level of 85.0 on the DXY dollar basket and are now at 86.6, up 1.2% on the week. Do not get in front of a fast moving train. With the Federal Open Markets Committee meeting set for the end of the month, once again I am still unsure what it will take for the dollar to take a breather.
Geopolitical Risks and Conflicts: We already touched on Hong Kong. In the US, we may have our very first potential Ebola death as one of the first treated persons is back in hospital in a critical condition – press will have a field day if this happens and I am sure those Ebola cure speculative stocks will see some moves as well. In Thailand its worth noting that the revered King has been hospitalized with a severe fever, news that could weigh on Thai equities this week.
Meanwhile in Brazil, the incumbent government gained quite a few points leading to a more binary outcome not only on the elections but on the direction of the Brazilian real and the Bovespa, with the latter still 20% above its March lows – when the optimistic run on a potential change in government started.
LOOKING AHEAD
Still tactically bearish, call it early October blues – yet very constructive that we close higher at the end of the year on equities, a higher USDJPY, lower EURUSD, stronger cable, weaker EURGBP, tighter European credit and looser US and UK treasuries. I think tactically European equities (which were up on Friday) and credit (tighter for the week) may be getting the short-term price action wrong. I was very surprised by the lack of a number from Draghi … which does not leave me wondering on whether he will act on full QE (think that still has to come by year end, Europe is in serious dire straits – I think it's worse than in 2012), but will he wait a lot longer than the market or myself are expecting? For now I am not sure.
On the central bank side of things, this week will see the Federal Reserve minutes, as well as monetary policy decisions from the Reserve Bank of Australia, Bank of Japan, Bank Indonesia and Bank of England.