After offering a dour view of the world yesterday we’ve seen markets do the complete opposite, with the risk bulls dominating – the news flow certainly doesn’t justify this positivity, especially in light of JPM’s CEO Jamie Dimon’s comments that we could be facing a hurricane, “down the road, coming our way." We also a 5% bullish reversal in Microsoft after trading down to $261.60 at the open, before the buyers stepped in all through US trade – the market reacting to revised earnings guidance, the tech giant saying that the strong USD would become more of a headwind – if ever you needed proof that the USD is central to the equity story, this is it. In fact, any basic regression would show Asian equity markets are even more negatively affected by a strong USD.
We also heard from Fed vice-chair Lael Brainard who detailed “If we don’t see the kind of deceleration in monthly inflation prints, if we don’t see some of that really hot demand starting to cool a little bit, then it might well be appropriate to have another meeting where we proceed at the same pace (I.e 50bps)”…I’m not sure this is a huge shock to the markets, who had already priced this into rates markets anyhow, so maybe the rally in risk (equity and credit) is part down to the fact interest rate markets are already pricing in aggressive hikes.
I also think we must come back to our friend flow – when something can't easily be explained – such as today’s rally in risk - then sometimes we just have to consider there are bigger forces out there…such as positioning, hedging flows and volatility targeting fund flows. It feels to me that a decent part of the leveraged institutional world is caught offside on their equity position and managing it accordingly – volumes through the S&P500 cash market were poor though - some 22% below the 30-day average - and we saw 1.47m S&P500 futures traded, 20% below the 20-day average. Obviously, you still make or lose money in low volume markets.
A break of 4200 in US500 would be the pain trade and likely see further short covering, but the talk on the street is we need to push above 4270 to see the systematic trend-following funds really cover shorts more aggressively. The NAS100 is looking even more bullish, with price printing a bullish outside day reversal and now sits above its 30 May swing and the short-term trend indicators favouring longs here. We’re pushing a congestion area in the NAS100, so a breakoff of 13k would be very constructive indeed.
We can see in FX markets that the USD has been shunned, largely because of the equity move. All of Wednesday’s gains have been erased in the USDX and we see high beta FX working nicely, notably vs the JPY. We’ll have to see if today's US payrolls change things, and I would be looking squarely at the unemployment rate (consensus 3.5%) and average hourly earnings component – this is the inflationary aspect, and the market expects wage growth of 5.2%.
CADJPY has been a pillar of strength but it’s the AUD that is now firmly on the radar - I like it higher vs the EUR and GBP here, with EURAUD and GBPAUD breaking down – it feels like we could get a bit more upside in EURAUD but rallies look like they will be sold and if the equity flow can continue - a big if – but in this vein, EURAUD should be headed for 1.4600. AUDUSD gets the lion's share of attention from clients (and the broader market) and we currently eye a bullish daily reversal and a test of the May swing of 0.7266 – one for the breakout players.