Less Bearish With USD Pullback To Continue

I'm finally on the way back from a long yet excellent business trip in Australia. This week’s piece will be slightly briefer than the norm as I have a flight to catch shortly – however expect the full kryptonite package for next week, as I am bubbling with ideas.
Looking back
Feels like déjà vu for the third week running, and the tactical bearish call from last week was excellently timed with blood on the streets being seen in equities, gains in bonds and finally an entire week where the dollar actually gave ground – I had to do a double take on the latter.Looks like our volatility-is-back call from September was spot on.
Credit: Not only did we see credit outperform last week as yields tightened, but we are at one-year lows in the US, Europe and most of Asia. Key closes: US 10yr tighter at 2.28% (2.44%); UK 10yr at 2.22% (2.39%) and Bunds tighter at 0.89% (0.92%) – for those that forgot, this is all new record territory on the German 10-years.
An epic deal is in the making in Asia, which is set to announce to the world that the Asian credit market has arrived. Let's set the stage in terms of context. We have a $6.5 billion CoCo bond deal from the Bank of China that is set to price on October 15. This is c. 3x the average size in Europe and represents c. 10% of all year-to-date issuances in China (which is year-on-year up 60% from a record 2013).
Of the $6.5 billion, 65% of the offering was covered by anchor investors, with the remaining free-float of $2.3 billion being covered by c. 5.5x. I’ve never been in the China hard-landing camp and the fact that a deal of this magnitude is being done in China, given the shift to quality growth and with a probably pricing yield of 7%, I think it sends a hard message to those perpetual China bears out there – “I’ll lift you right out of your shorts.”
A $6.5 billion Coco bond deal from the Bank of China is set to announce to the world that the Asian credit market has arrived. Photo: Thinkstock
One can also flip it around and say, it's another blatant example of too much cash chasing too little yield. My take? This is big and the significance is not being fully digested yet – also bear in mind we are already moving into a tighter global monetary policy with the UK and US getting out of the printing press.
Equities: A very well-known ex-CEO for a major investment bank would wait for big pullbacks in the market to go screaming on the trading floor, “There’s blood in the water. Let’s go kill!" Well, Mack the knife would have been screaming his lungs out last week. Big pullbacks in the US with the S&P and technology-laden Nasdaq pulling back -3.1% (-75 basis points) and -4.6% (-81bp) respectively.
European equity swings were of similar magnitude with the Euro Stoxx, the DAX and CAC clocking -4.5% (-2.7), -4.4% (-3.1) and -4.9% (-2.6%) respectively. The DAX chart looks terrible. Momentum: yes we are oversold, but support wise, we crushed right through the key 9000 level and closed at 8789 on Friday – for those short, 8500 is the next target.
The DAX rips down through 9000 on very strong volume

Those who follow me on Twitter (@KVP_Macro) would have received my call to start picking up some S&Ps a little before Friday's US close – as I think the level we closed at is important on four points:
1. It’s around the same level we pulled back to in the July/August correction – that saw a low of 1904.78 to be exact, we closed on the lows of the week on Friday at 1906.
2. It's pretty much right above the 200 DMA of 1905.
3. We are now starting to get into oversold territory
4. These new market jitters on European growth and Ebola fears are nothing new, in fact we’ve been covering them for months now here. When markets sell-off, any news flow will do.
With all that said, on the S&P, technically while 1905 and 1900 are key levels, from a momentum perspective we are not yet oversold. Hence I suggested picking up c. 25% of one’s position on Friday and seeing how the price action is this week. My target for the year end is unchanged at 2050/2100.
In regards to the Hang Seng, I believe we’ve probably seen the worst from the protestors or at the very least we are past what would have been the highest potential for an explosion in the confrontation. The price action on Friday was like the rest of Asia – all off of the US. I’d look to close the short idea on today on volume average weighted price – while we broke the 33,000 level we only managed to close below that level once.
The protesting seems set to continue, but I believe the juice is out and there is a decent probability that Hong Kong Chief Executive CY Leung is also out if he’s found guilty in an anti-graft case. If I was Beijing, this would be an easy way to throw him under the bus, give the protestors "something" and put a chief executive in his place who is much more in tune with his citizens – just one who agrees to meet students would already make further grounds than the current one (i.e. there's only upside here and there would be a healthy pop in HK equities if this were to happen).
FX: So a double take was needed to note, we had our first week in maybe four to five, whereby the USD actually weakened against all the majors. We’d made a tactical short USD call on Wednesday in our regional morning calls. While this was halted by the risk-off we saw on Thursday and Friday, I still think it holds going into the new week.
I am feeling a bit oversold on the equity side and everyone and their grandmother has been waiting for a pullback – so another -% may not happen … especially with the November-December potential Christmas rally just a few weeks away.
The crosses with the most potential to bounce back are AUD 00.8686, NZD 0.7815 – note this is a very near-term call – but bear in mind that the next key anchor point for the U & USD is the Federal Open Market Committee meeting on October 30 – so 18 days to go till then. I would expect the market to regain its focus on that meeting from next Monday.
The key level that we need to break is 85.0 to the downside on the USD basket to really see a stronger and more sustained technical correction on the surge of USD strength that we’ve had since early July.
Tactical USD correction held back by Thursday and Friday risk-off in the market

Geopolitical risks and conflicts: Perhaps the weekly has just been lucky or perhaps the world just keeps catching up to what we’ve been talking about – but finally we are seeing Ebola out of Africa with the first death in the US (yes, the media is having a field day) and in Spain.
I’d expect things to get worse before they get better; the extra screening steps that are being initiated are excellent. This is not something that will be taken care of by the end of the year, but could last until the end of 2015 – again dependent on how much help and resources are given to root out the problem in West Africa.
Meanwhile in the Middle East, Kurds are getting slaughtered by the Terror State close to the Turkish border, whilst the Turkish government stands on the side doing F-all. I believe sooner or later they will have to do something. And yes, I agree with Dennis and Warren Buffett: the Clintons will be back in the White House in 2016.
LOOKING AHEAD
I am less bearish than I’ve been over the past two weeks, where I just felt that we needed a bit of a tactical pullback – and we are getting that. I’d expect equities to have a bounce for the week and the USD to continue to ease back a bit. One area of concern is again as we touched on last week, the news flow coming out of monetary policy in Europe. That is, markets can continue to tank, unless we see a lot more than just European Central Bank President Mario Draghi crying out loud again.
Long Allianz / Short Axa trade: This rubber band trade call on Allianz is working very well, as we just hit the first 50% profit target on Friday at 6.80 (+3.0%) and are targeting the balance at c. 6.90/7.00.
Macro data highlights for coming week:
Asia: China loan, money supply as well as trade data for September will be out this week. Bank of Korea rate decision.
EU: August IP and probably the most anticipated data for the week, final September CPI figures on Thursday.
US: Empire manufacturing, retail sales, beige book and industrial production data.