Are You Nervous?

Are You Nervous – Apr 09

Get used to it!

View this email in your browser

Markets are nervous. We continue in an historic 1929 and 1987 style global stock uptrend where valuations are at unsustainable levels. This is likely to continue for a while yet as we wait to see the detail and effect of proposed Trumpflationary growth.

There is therefore still the plenty of time and money to be made in a bubble until it reaches the point where a price fall is more likely than earnings growth to bring PEs back in line. That will be when greed replaces anxiety as the prevalent market emotion. In the interim we can expect increasingly violent swings in both market sentiment and prices. It is important then to stay, and adjust to being permanently, nervous the higher prices go. It is also a fact of a new trading life to look forward to the next Trump event such as the unexpected Syrian air attack this week or the outcome of the scheduled meeting with Xi of China this weekend.  How one anticipates these opportunities or risks will partly determine how successful we are.

Whether you like it or not, we are likely to remain in a Trump-centric world. It is possibly what he wants on a personal level but to Make America Great Again he needs to drive the agenda. For global financial markets this translates into four key Trump factors (or Tractors) that are driving the market. :

1. The scale and duration of inflationary growth.  We have dealt with this subject at great length in our article Fundamental Milestones in Mania. It was a surprise (not yet seen) slowing of economic growth that characterised the last leg of comparable 1920s and 1980s bull markets. But it was actually a fall in inflation that triggered the reversal.

2. The extent to which the US Fed can contain inflation and therefore how long it can help sustain economic growth.

Markets fell this week in reaction to the March FOMC Minutes. Although reference to “quite high” stock prices didn’t help, the main driver was the unexpected reference to balance sheet (BS) reduction in 2017 that overshadowed more dovish reference to actual rates. BS reduction is the process where the Fed allows US bonds to mature without replacing them – essentially Quantitative Easing in reverse. It tightens by removing liquidity from the system. In a QE world, where stocks went up with greater liquidity as money sought a home with a better return, BS reduction would hurt indices. Hence Wednesday’s knee jerk reaction. But we no longer live in a QE world.  Since Donald Trump’s election in November, stocks, yields and USD have rallied in tandem on the expectation of inflationary growth. News of tightening now typically sees an initial stock sell off but then followed by an even greater rally as such news resurrects the new bullish sentiment associated with rising yields stocks and USD.

The USD continues to provide a 205 hour (counter-intuitive) lead over 10 Yields:

Monday’s email to subscribers will explain why this new Fed policy should help continuously repeat the sell off-larger rally trading pattern into the final stock blowout. It will also show an uncanny similarity between yields in 1999 and now and how both will impact currencies.

3. The knock-on effect of Trumpflation upon global stock/bond markets and consequently currencies.  Global stocks continue to lag the US markets for now. But this added (BS) Fed uncertainty may help other markets catch up once they break our key levels. Picking the right market at the right time will remain key to leveraging this market as reflected by our switching of our additional DJIA (Syrian spike) long into DAX before NFP.  Currencies should therefore continue to help time the moment. We missed the very top of GBPUSD last Friday by pulling our 1.2555 sell order into the weekend but used projected Sterling weakness to enter an even better (10:1) risk return trade on FTSE instead.

4. Anticipating Trump Events. The Trump fractal has served us well so far on either avoiding or exploiting two-way stock volatility. But market history this week also highlighted two very interesting templates in commodities. The Syrian Gold spike followed very similar price action to before Brexit last year, with a remarkable projection for the French election on April 23rd. Similarly, Oil’s violent reaction to the air strike matched a previous moment in Gold history. The fractal approach sometimes helps you expect the unexpected. Other times, disciplined risk management is the key to survival and success.

Volatility in the form of violent whipsaw and trends will remain a feature of 2017. So will renewed perma-bear sentiment at the end of market corrections. This will add to general levels of anxiety (and frequent VIX spikes). But please note: markets are not nervous at the end of an historic uptrend. They are delusional, greedy and complacent. If we can stay nervous and therefore vigilant, we will see the Tractors coming.

Ed Matts

For live daily updates on five indices (including intraday reports on DAX and SPX), seven forex pairs, gold and oil, why not subscribe to MatrixTrade analysis or MatrixTrade trading signals (with stops, targets and sizes). Packages start at $99 per month. Click here for more information.


In general USD rose slowly all week whereas 10-year US yields fell all week. The reason? Non-US bond yields fell faster as exemplified by one of our key charts.

This decline gathered pace after the NFP miss on Friday as US yields rallied 10bps. Equities were mixed, SPX and NIFTY were flat, DAX and NKY gently declined, and FTSE which had followed SPX suddenly had a sharp rally on Friday.

The new quarter opened on Monday with the news of a bombing in Russia, and in anticipation of the various risk events in the week, equities retreated all day as did bond yields and safe havens USDJPY and gold rose. Whereas German and Eurozone Manufacturing PMIs were as expected at 0800, the UK missed at 0830, and US PMIs were mixed, a miss from Market, but a beat from the more influential ISM. Not normally reported was the sharp miss in US Vehicle Sales (16.6M vs 17.5M) at 1910, considered by some to be a serious blip in the Trump recovered. In currencies (other than JPY), USD was slightly up against AUD and CAD, the latter assisted by a slight fade in oil. GBP was firmly down on the day.

The RBA rate hold at 0430 Tuesday was expected, and AUD continued its slide as the market maintained its stubbornly bullish view. Indices and bond yields recovered slightly, the US 10-year bouncing off a five-week low, helped by the US trade balance beat at 1230. The FTSE recovery was stronger, erasing all Monday’s losses, helped by a 0.3% fade in GBP. USD gained also slightly against all currencies except EUR which rose slightly. NZD spiked down over 0.5% on the slight GDT milk miss (1.6% vs 1.7%) but recovered to end the day flat.

Wednesday was a day of great contrast. After a quiet Asian and European session, the third ADP blowout beat in succession at 1215 gave SPX a big lift, rising nearly 1%, shrugging off the Services PMI misses at 1345 and 1400 although the effect was less marked in other markets. However, the FOMC minutes at 1800 changed all that with Fed indication that they wish to reduce their balance sheet, i.e. tighten money supply, and even a very rarely seen comment on equities that they are “quite high relative to standard valuation measures,”. SPX immediately gave up 1.42%, and made a new low for the month, and this time the other indices followed suit.

USD and bond yield reaction to the two factors was in the same direction (up for ADP, down for FOMC), but overall the dollar was flat on the day against gold and currencies except CAD which fell slightly as with. Oil fell when stocks rose on ADP, and on the EIA miss at 1530, but didn’t react further to FOMC until the following day, probably due to oil pit hours.

Thursday was, like Tuesday, a recovery day. SPX and NKY recovered 50% of the previous day’s drop (and gold gave half back), helped by the US Jobless Claims beat at 1230. DAX and USDJPY recovered 61.8%. FTSE recovered 50% with brief 61.8% spike. Satisfying technical points. Oil recovered 100% of it’s Wednesday loss and then flattened, taking CAD with it, otherwise USD made modest gains against other currencies. Bond yields were flat on the day.

At 0040GMT on Friday, the US launched a major missile attack on Syria in a surprise change of policy. Asian market reaction was immediate. Gold (safe haven) and oil (Middle East) spiked up. SPX (through Globex) and NKY were trading, and returned to Wednesday’s lows of the week, and bond yields fell even further. FTSE and DAX did not open until 0600, gapped down of course, but their reaction was more muted, and as the day progressed, and it was clear that Syria was not going to escalate, markets recovered.

The European morning data was mixed, German Trade figures beat at 0600, UK Manufacturing miss at 0830, and UK NIESR GDP estimate as expected (0.5%) at 1200. Then came another surprise. In February and March the ADP huge beat had presaged a similar blowout on NFP. This month, we saw, for the first time in a very long time, a substantial miss (98k vs 108k) after the ADP beat. Coupled with the strong beat on unemployment (4.5% vs 4.7%) and the fact the markets were already depressed after FOMC and Syria, equities shrugged this off and rose, albeit modestly. SPX DAX and NKY rose slightly above Thursday’s high, although they still finished down on the week. FTSE on the other hand rallied sharply, the only index to end the week up, although this can be attributed to GBP performance on the day.

The poor UK Manufacturing figure helped to push GBP into a tailspin, it lost 1% on the day  and EUR was nearly as bad, losing 0.9%. CAD had an interesting day, spiking down 0.57% instantly as the Canadian payrolls figure, in contrast to the US was a massive beat (19.4k vs 5.0k). However all these gains evaporated to end the day flat. Otherwise USD had a good day against AUD, the latter falling to almost touch the 75c psychological level, down 150 pips (1.94%) on the week. JPY gave up the Syria spike, and then some, almost hitting its pre-FOMC low. Oil and gold similarly fell to Thursday levels, with the former advancing slightly towards the close.


Remember all times are GMT, one hour behind the UK, and two hours behind Western Europe.

Next week is a lot quieter than last, but the focus is on inflation figures.

Monday should see the results of the Trump-Xi meeting, on Friday night Trump was candid, and said he had got “absolutely nothing”. Fed member Bullard speaks at 0305 (in Australia), and Janet Yellen speaks at 2000 at the University of Michigan but there are no expectations. The day is quiet on the data front, with only NZ Card Retail Sales at 2045

On Tuesday, We get UK inflation (CPI) and also PPI at 0830, followed half an hour later by German ZEW Sentiment. UK inflation (CPI) is expected at 2.2% vs 2.3% last month. Note however that despite the figure being above the BoE ‘target’, there is no BoE rate meeting this month, the next being May 11.

Wednesday is a bigger day, with Chinese CPI at 0030, then Indian CPI. In Europe, the important UK Claimant change is at 0830. BoE Governor Carney speaks at the same time, where he may refer to the previous day’s CPI figures. The only central bank report this week is the Canadian rate decision at 1400, expected to remain unchanged at 0.5%, despite recent upbeat data including payrolls blowouts.

Thursday’s Asian session has Australian employment and unemployment figures at 0130. However the AUD rate hold was last week, so the numbers would have to be very strong to help raise AUD. Chinese imports/exports are at 0200. After German inflation at 0600 there is no news for the rest of the day.

Good Friday is a public holiday and European, US and Australasian markets are closed. The US Retail Sales at 1230 should therefore have little effect, as the Chinese and Japanese markets are closed by then. (Note European and Australasian markets are also closed on Easter Monday, whereas other Asian and US markets are not).

CALENDAR (High volatility items in bold)

Mon 10
2045 NZD (Card) Retail Sales

Tue 11
0900 EUR German ZEW Sentiment

Wed 12
0030 CNY China CPI
0830 GBP UK Claimant Change
1400 CAD rate decision

Thu 13
0130 AUD Employment/Unemployment
0200 CNY Imports/Exports
0600 EUR German CPI

Fri 14
1230 USD Retail Sales/CPI