How to make 39% next quarter

How to make 39% next quarter – Apr 02

As we come to the end of the first quarter of 2017, it is worth taking stock in more ways than one. The markets remain both fascinating and exciting but still mixed. Stocks continue in their uptrends, Bonds consolidating and, partly as a consequence, currencies a combination of mature trends, ranges and emerging new trends. Opportunity abounds for the savvy trader who can identify the real themes from the noise in the last leg of major collective trends.

Besides this newsletter, we now publish at least one daily email for subscribers outlining typical reactions to key market events and identifying themes and opportunities particularly outside our usual range of markets. The Euro – Commonwealth (AUD, NZD, CAD) reversal and then fade was one such opportunity. This is consistent with our ‘stray dog’ theme where currencies inside the terminal Dollar Index uptrend are prone to wander but be brought sharply back in line. Those outside DXY have scope for greater sustainability and therefore volatility. The projected EURUSD ‘stray dog’ spike of 1.0830 and subsequent reversal exemplified this (as did USDCAD 40 days previous below 1.30) and still puts USDJPY and therefore the Nikkei on our key watch list. But, in doing so, EURUSD continues to follow a stunning collection of historical precedents. One of which amazingly predicted it would only spend 11 hours from the break to the top and only 31 hours above 1.0830.

This increases our confidence in our closely monitored Washington Euro template that promises to produce the forex reversal trade of 2017 later in the year. This erratic but accurate ‘map’ also advises a continued wariness of reacting to rather than anticipating any market moves inspired by Donald Trump.

Thursday’s comment that the Trump administration was studying ways of penalizing countries that sought competitive devaluation resurrected the USD devaluation theme for only a few minutes and 40 EURUSD pips before continuing its trend. This is a classic example of the ‘Resurrection’ Fractal that will feature in tomorrow’s daily email as we highlight some new exciting trading opportunities.

In the last legs of trends, sentiment takes over from the fundamentals but is often therefore confused by reality checks. Seeking to penalize countries that intentionally or otherwise pursue competitive devaluation is not tantamount to a general USD devaluation as that would arbitrarily penalize countries not benefiting from a weaker currency. More likely it would result in country specific tariffs and potentially fuel the Trumpflationary USD uptrend … in the short term at least.

The impact of the Trumpflationary USD on markets generally should not be understated. The difference we flagged between Euro STOXX and FEU (its USD ETF equivalent) this week not only portrays the varying impact of the USD but how much further stocks have to go in this 1929/1987 style blow out. The very well defined Morgan Stanley World Stock Index reflects this.

As our note on Friday explained: “A key characteristic of the final leg of any trend is the lack of breadth. That is, correlations break down and indices do not move in tandem; some move faster than others. Picking the right index at the right time then is key to maximizing returns out of this market. To some extent we are fortunate as this last leg is being driven by the Trumpflationary bubble. Our focus will rightly remain on US markets. However, the timing of buying other markets is to some extent determined by the USD and the local currency, itself influenced by local factors. In the last 3 weeks we have seen the USD lead (yields and then) stocks lower and now back up.”

We can never be complacent in a fragmented market. Flexibility helps exploits swings both ways as we have done in the last 2 weeks but also when to take advantage of out of sync moves.

March was an excellent month for our signals performance. We made 2198.55 points/pips (16.96%) to finish the quarter at 6158.55 points/pips (39.40%), which is over double our performance for the previous quarter. You can see our detailed performance figures here

More importantly, the outlooks that underpinned this performance are proving increasingly accurate. We are confident this run will continue.

LAST WEEK

Last week saw the end of the week, the month and a very strong quarter. Most markets reversed their pattern from last week. Equities generally rose, although NKY and FTSE peaked early, the latter hampered by GBP strength. Gold and bonds fell (yields rose), and currencies were again mixed.

Note that the clock times quoted are GMT, whereas the UK and Europe are now in DST, one hour later.

Monday got off to a good start with the German IFO Sentiment beat at 0800, and saw equities rise across the board. USD was mixed, it gained against CAD and to an extent JPY, but EUR and AUD were flat, and GBPUSD even rose slightly. Gold and oil were both flat, and 10-year yields recovered some ground from the previous week.

The equities rally continued on Tuesday, particularly after the strong US Consumer Confidence beat (125.6 vs 114) at 1400. Bond yields spiked up sharply after this, gold fell, and USD rose, especially against GBP which fell with disappointment at the content of Article 50 letter. Surprisingly AUD rallied, reversing last week’s trend. Oil continued a smooth rise which lasted all week.

Wednesday was the formal Brexit day, but the damage was done to GBP the day before (although FTSE briefly spiked down only to be be bought again when NY opened). However the rest of the world was uninterested, and other indices were largely flat, as was USD. Only EUR continued its slide, driven partly by EU President Tusk and others remarks about how much Brexit was bad for Europe. Bond and gold had slight recovery, although their downtrend (yields up) remained intact.

Thursday was largely a continuation of the previous day. SPX and DAX were flat, despite the US GDP, GDPPI and Consumption beats at 1230, and FTSE’s slight dip could be attributable to a slight gain in GBP. USD staged a mixed recovery, gaining against other currencies, significantly JPY and gold. After fading against USD, CAD staged a recovery, no doubt helped by the continuing and steady rise in oil. Bond yields resumed their uptrend.

EUR briefly spiked 40 pips (0.29%) when Trump said that he was looking at ways to counter currency manipulation. His main target was of course CNY, although that only spike 0.16%, but perhaps traders were remembering his trade advisor Peter Navarro’s comments on Jan 31, about the euro being “grossly undervalued”. That remark caused a 1.13% spike at the time.

On Friday NKY dropped sharply at the end of the Asian session, on no particular news, and so may be attributed to end-of-year rebalancing. The Japanese fiscal year (2016-nendo) finished on Friday, and it was of course also the end of the week, month and quarter.

In Europe, we saw a German Unemployment beat at 0800, and UK GDP miss at 0830. Indices followed suit overall, DAX rose and FTSE fell, although these were both continuation of the previous day’s trends. SPX followed DAX during the European session, but similarly the USD Consumption miss is probably incidental to SPX giving up those gains in the US session to finish the day flat. DAX however, held on to its gains, adding to them as EUR fell. In currencies, there was a clear result, the Canadian GDP beat produced an instant ramp in CAD which ended up for the day. The general trend otherwise for USD was down against bellwether JPY, gold, and GBP. Bond yields finished their see-saw uptrend by giving up most of Thursday’s gains.

NEXT WEEK

The first week of Q2 is packed with events, not only is it a week with both FOMC monthly minutes and Non-Farm Payrolls, but also Trump’s most difficult summit with President Xi Jinping of China on starting on Thursday. IF that was not enough, we also have two ECB meetings, and 10 PMI figures.

Monday opens with Chinese Manufacturing PMIs. The same statistic from Markit is released for Germany, Eurozone and UK in the European session, and the more important US ISM figure is released at 1400. All are well above 50 (the expansion/contraction point), so only a substantial miss or beat is likely to move markets.

Asia is in focus on Tuesday. The RBA are expected to hold AUD rates at 1.5%. Less certain is the NZ GDT milk auction whose results come in during the early US session.

Despite four Services PMIs on Wednesday, and even the ADP sneak preview of NFP at 1215, the main event will be the FOMC Meeting at 1800, in particular the dot-plot for future rate hikes.

Thursday’s European session sees the ECB MPC accounts at 1130. Anything unexpected would affect EUR. However the main event is the meeting between Trump and his Chinese opposite number President Xi, which Trump says will be ‘very difficult’. Any retreat from Trump’s stated antagonistic position may, like the Healthcare Act fiasco, cause the market to lose faith in his ability to carry out his plans.

Friday of course is NFP day, and we will be following our standard fractals. GBP and FTSE may also be influenced by the UK Manufacturing Production figures at 0830, which commentators have unusually marked as high volatility. Previous experience has also shown that if Canada beats, CAD will rise against USD.

CALENDAR (high volatility items in bold)

Mon 3
0145 CNY Caixin Manuf PMI
0755 EUR German Manuf PMI
0800 EUR EZ Manuf PMI
0830 GBP UK Manuf PMI
1345 USD Markit Manuf PMI
1400 USD ISM Manuf PMI

Tue 4
0430 RBA Rate Decision
1230 USD Trade Balance
1400 NZD GDT Milk auction

Wed 5
0700 EUR non-MPC ECB Meeting
0715 JPY BoJ Kuroda speaks
0755 EUR German Services PMI
0800 EUR EZ Services PMI
1215 USD ADP Employment est 298K
1345 USD Markit Services PMI
1400 USD ISM Non-Manuf PMI
1800 USD FOMC Minutes

Thu 6
0000 USD Trump-Xi Meeting
0145 CNY Caixin Services PMI
1130 EUR ECB MPC Accounts
1230 USD Initial Jobless Claims

Fri 7
0600 EUR German Trade/Current Acc.
0830 GBP UK Manuf Production
1200 GBP NIESR GDP Est
1330 USD NFP/Unemployment
1330 USD Average Earnings
1330 CAD NFP/Unemployment