Ed Matts gave a presentation today at the London Forex Expo and promised that the Powerpoint slides would be available to download. The 17Mb file can be downloaded by clicking on the link below, and requires Microsoft Powerpoint or the free Powerpoint Viewer (Windows)to display.
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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 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.
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
The last week has confirmed that, so far, the major domestic and international weapon of the Trump administration is rhetoric. It is quite an achievement that, within 2 months of Donald Trump’s inauguration, he succeeded this weekend in removing the G20’s apparent commitment to fight protectionism.
How? Fear. Few countries wish to be excluded from favorable trade terms with the mass market that the US represents and therefore will not prejudice their position by fighting a war of words. Hence this weekend’s G20 statement could have been written by Steve Mnuchin. But like many aspects of the Trump phenomenon, it is action that creates sustained consequences not rhetoric. Although protectionism is ultimately bad for global stock markets and possibly the cause of the eventual end of the current blow out, so far the evidence for an actual curtailment of global free trade is limited. Ironically the bark of the protectionist dog may serve to exaggerate the blow out even more — until the bite (crash).
This extreme potential is reflected by the structural matches of all four major US indices to their first legs in 2009-2010.
Neither DJIA nor SPX have met their once aggressive but now conservative equality matches. But the fact that both the (arguably clearer) Russell and NASDAQ have and are set for the ambitious targets suggests this blowout has much more to run. Buying (extreme) dips remains the mantra of 2017 but when? When the market is also most afraid.
Our suspicion that the weekend play was VIX proved valid even though the substance for such a break higher is more a delayed disappointment to the Fed and indeed the post Trump event fractal we highlighted last week. This continues to flag the risk of a larger correction this week as the USD curiously continues to lead yields that are, in turn, leading SPX.
Fortunately all 3 of the above charts show clear conditions if not levels for when we can rejoin the uptrend in what have a sting in the tail. And as the market capitulates this week, NIFTY’s 10K Road Map (in today’s update) shows how an over-commitment to bearishness at this juncture is playing with fire.
Outlooks: (for analysis subscribers only)
| DAX 8H & 48H | In Muddle of DAXUSD Uptrend |
| FTSE 48H | Wedge Shrugs Off GBP Strength |
| NKY 48H | Awaiting the Final Breakdown |
| NIFTY 48H | Playing with Fire |
| SPX 8H & 48H | The Laggard |
INTRODUCTION
When George Soros said “Every bubble has two components: an underlying trend that prevails in reality and a misconception relating to that trend” he went on to add “When a positive feedback develops between (that) trend and the misconception, a boom-bust process is set in motion.” That is, sentiment takes over in the last phase of any aggressive uptrend until the bubble is burst and results in a market crash. But he, like most other bubble commentators, fail to explain how that reality plays an important part in shaping that misconception itself. The reality or fundamentals of a bull market bubble often help determine the nature of the sentiment and that, in turn, has a knock-on effect on both fundamentals and how that sentiment is traded. It may intrigue some (but probably not many) to know there can be a positive feedback loop about a positive feedback loop. But what interests us at MatrixTrade, as a research company that trades and issues trading signals, is that this interaction help creates important tradeable milestones. In other words, there are important fundamental (not just economic) markers in an aggressive bull market or bubble that help us identify where we are in the trend so we can make money on the way up and on the way down. The purpose of this article is to show some of those fundamental milestones.
The comparison between the 1920s and 1980s bull market charts and the current uptrend is striking.
We have successfully made a great play of this fractal comparison for much of the uptrend not just from a technical perspective but also from the other core elements of the Matrix FITS approach (Fundamental, Intermarket, Technical and Sentiment). Today we demonstrate how the fundamentals in each of the 1920s 1980s and the 2010s are not only similar but have and should continue to shape the current bull market until the market can no longer sustain exorbitant PE values.
By fundamentals most people think of economics. But the fundamentals of, what we believe will be, the third largest stock bubble in 100 years are so significant that the reasons for and consequences of the uptrend that started in 2009 involve many aspects of the Great American society and indeed the world. The development of the 1920s, 1980s, and 2010s global bull markets can therefore be compared from more than just an economic and financial perspective. Not least there are also strong parallels between the development of financial market technology in these decades that helped fashion these uptrends and, probably more importantly, the subsequent reversals. All these combine to provide a check list of where the market is in the countdown to a top.
These milestones come in the form of theory (economic and financial), narrative (social, political, international and market which will be available in a later article) and the all-important data (available to paid subscribers as an appendix). The aim is not really to write a history book but make money in what may be known, in later years, as the Trump Bubble. To do that we need to understand what is really going on.
THE THEORY
In the introduction to this series of seven articles on Milestones in Mania we outlined the now classic Kindleberger/Minsky model of Bubbles. They correctly identified the beginning of each bubble with a real cause. But the KM model, like most other models, then leave the fundamentals aside and focus more on the development of the bubble in terms of stock market sentiment. They therefore omitted to explain how the real cause serves to underpin and characterize the entire uptrend. The business model we have created could be thought of as a product cycle but that product or innovation has such an impact on the economy through pre-existing conditions, government policy and self-perpetuation that the product cycle becomes the bellwether for the entire economy and consequently the markets. More so than even the dot.com bubble of 2000. Rather than the Roaring Twenties, the Jazz era could be more rightfully be called the Mass Machine Age, the 1980s the Computer Age, and the 2010s? The all-pervasive Internet or Web 2.0 Age. In short, they are all technology bubbles.
THE MATRIX FUNDAMENTAL BUBBLE
There are essentially five fundamental stages to a Bubble that help us identify markers:
Innovation, Adversity, Universalisation, Saturation and Financialization.
INNOVATION:
Many would not associate this first phase with the Bubble itself as it refers to the previous period of ground breaking invention. But it warrants inclusion as it drives the later (current) bubble. What Kindleberger and Minsky describe as the ‘displacement phase’ is often incentivised by the final stage of the preceding boom and stock market rally. But the impact of that invention on the economy and stock market does not gain traction until the conditions are ripe for its development into an affordable mass market. Indeed we may well now be seeing the invention of product(s) that will drive the next bubble in 10-20 years time but not realise it.
Previous Inventions:
1900s-1914: Affordable car (Model T 1905), fridges for home (1913) , television, and radio
1978-1981: Home computers
Mid 1990s: The Internet.
ADVERSITY: A period where real disposable incomes contract.
The time between invention and mass popularisation in the decades in question was interrupted by a period of economic adversity and stock market downturn. This adversity served to misallocate (and depress real) resources but in a way that later allows them to move far more freely into the development of the new technology as the economy improved. This period sees the stock market bottom and start a major bull market.
The First World War and aftermath both delayed but later assisted the mass production of machine technology for home use. OPEC inspired inflation and recession in the 1970s similarly slowed the development of the computer into the mass home product of the 1980s. But the death of inflation and economies of scale soon made computer prices affordable. And although the internet was well established at the of the 20th century, it is only since the sub-prime crash of 2008 that the internet has become all-pervasive through affordable hand held devices and mainly free social media.
UNIVERSALISATION
Universalisation: Mass production of a good or service to a point where most are able and do buy it.
As the US economy came out of these periods of adversity, spare capacity in the economy facilitated the relative speedy development of innovations previously available only to a few. As they become mass markets , the stock rally gains momentum and the economy starts to grow rapidly. But more than that, the actual technology has in all three cases helped spur even greater productivity gains. The universalisation period typically produces the strongest economic growth in the entire bubble.
1920s: The post WW1 economy developed quickly as new technologies became cheap when mass manufacturing methods, eg Ford’s assembly line, were perfected. The infrastructure for the masses (paved roads, household electrical and telephone wiring) was in place. Companies active in new technologies were deemed to have immense growth potential. Although motor vehicles, radio, movies, the telephone, and significantly, stock tickers remote from the exchange floor had been invented in the nineteenth century, and available to the privileged few before World War I, these technologies only came in to widespread usage by the masses in the 1920s. It was the first era of mass communications, vital to the creation of market volatility. Notably these new industries themselves were public joint stock companies offering unlimited promise. Radio in particular saw stratospheric valuations at various times in the decade.
1980s: The personal computer revolutionized the way people did business even if they only used it as a word processor. Demand was huge. Companies involved were stock market darlings and, as usually happens, spawned a whole set of new satellite industries (software, maintenance, supply chains). A similar but more limited effect applied to the other great 1980s technologies, video recorders and multi-channel (satellite) broadcasting.
2010s: The internet had already changed the world, and by the start of this decade, virtually everyone was connected. As collaborative technology and software was developed, social media exploded. The internet became indispensable in daily life, as whole categories of consumer life (music, maps, newspapers, banking) became applications on a smartphone. Winners in the space, such as AAPL, GOOG and FB, exploded in value.
The mass manufacturing boom of the 1920s, the computer boom of the 1980s or the all-pervasive internet (Web 2.0) recovery would all probably have happened without the help of business friendly and expansionist governments and arguably more flexible economies. But probably not with the same speed. In the 1920s income tax was steadily cut as GDP expanded from $73Bn in 1922 to $97Bn in 1928. Rates hovered between 3.5% and 4% during the period. In the 1980s the overriding challenge was clearly to reduce stagflation and after that interest rates, and this was largely achieved. Enterprise was stimulated by tax cuts. It is not surprising the market continued to rise on these measures. The last decade has been dominated by the need not just to recover from the 2008 crash but avoid its recurrence. In complete contrast to the 1980s, deflation was the problem. With relatively low inflation and interest rates, quantitative easing was successfully introduced as a means of supporting and reflating the economy. Fiscal policy has remained relatively neutral until the arrival of Donald Trump who promises a far more business friendly fiscal expansion.
The finance sector in each decade also enjoyed a similar experience. Markets generally (not just exchanges) benefited from the new technology making them more accessible and provided financial institutions with the means and incentive to attract more investors to the market place and drive the stock market higher. The opposite of the Perfect Storm. Not quite Serendipity more like BuytheDipity.
SATURATION
Saturation : The slowdown in growth caused by many more companies joining a new industry.
As profits in these key markets attract new entrants they approach saturation point in the later but not final stages of the stock market uptrend. Unless there is sufficient spare capacity in the economy or significant productivity gains through economies of scale then the growth of this dominant sector and the economy starts to slow. Some of the early entrants disappear as they fail to keep up with the pace of innovation in a highly competitive market place. This is an early warning sign that the fundamental uptrend is beginning to deteriorate and lacks the breadth to be sustained. This is reflected by a decline in the growth rate and most notably a steady decline in earnings growth in all three decades.
1920s: There were allegedly 100 automobile companies in Detroit in 1900 but by the second half of the 1920s GM, Ford and Chrysler had 70% of all. The industry had become characterized more by economies of scale than innovation.
1980s: Previously dominant mainframe computer companies like Digital Equipment Corporation and Honeywell lost out. For example, in the bubble year before the 1987 crash when Intel shares rose over 300%, Honeywell shares only managed a 10% rise.
2010s: Because of the crazy valuations of the 1998-2000 tech bubble (353% in 17 months), there was a huge saturation clear out in the previous decade leaving space for the formation of almost accidental monopolies such as FB GOOG and NFLX. Even AAPL is growing inexorably proving that smartphones are not saturated yet.
This saturation point sows the seeds of the final leg in the upcycle
FINANCIALIZATION
This last typically most aggressive phase of the bubble is driven more by greed and sentiment than fundamental reasons. And exactly where we are now. The gulf between reality and expectation in this last phase typically grows wider and wider. The gap between expectation reflected by stock market prices and what Donald Trump can deliver almost seems to get bigger each day.
Both the KM and Rodrigue models highlight how some of the smarter earlier investors and pioneers crystallize the stock market value of their companies by selling out, often either to start a new business or acquire more. Both the 1920s and 1980s witnessed a relative explosion in merger and acquisition activity.
1920s: When Walter P. Chrysler bought the famous Dodge car company in 1928, it was said “he rescued a failing business which was barely meeting its payrolls”
1980s: This was the era of (often hostile) M&A and leveraged buyouts (LBOs) without any necessary synergies to create conglomerates (common ownership of businesses in diverse sectors). However these were not generally in computer technology. For example IBM only made two acquisitions in the 1980s (compared to 70 in the 2010s and even three in the 1920s)
2010s: The main realization was FB, the largest IPO of the decade in 2012. The company was only eight years old and is now the fifth largest company in the world. The other notable financialisation was LKND, bought by MSFT in June 2016 for a 47% premium on the traded price, and most recently SNAP, which launched in 2017 at a larger market cap than American Airlines or Hilton Hotels, showing that tech enthusiasm is undiminished.
The financialization phase, by no means, entails the end of the new technology. Rather it has reached a maturity where its growth is more dependent on acquisition then further development of the technology itself. Partly as a consequence, an important tell-tale feature of the final financialization rally in stocks is resurgent inflation.
This is in stark contrast to the implosion in dividend yields in the final leg that marks the very last stage of the bull market and the widest gulf between perception and reality.
The 1920s, 1980s, and the current decade show a remarkable similarity that we have tried to evidence with this model. The reason the dot.com bubble of 2000 does not belong in this direct comparison is threefold. Firstly, the exorbitant rise in stocks and PEs was reflected mainly in the NASDAQ. The other indices did rally and reverse but not on a bubble scale (although it also finished with rising stock values, interest rates and Dollar). Secondly the dot.com bubble in NASDAQ reflected the first innovation phase that helped create the current and second much larger and more pervasive bubble. Thirdly the social, political and international narratives for 2000 are, partly as a consequence. sufficiently different to those of the 1920s, 1980s and the current decade. These will be the subject of a further article. They also contain markers by which we can judge our position within this tremendous bull market.
The more we can quantify these milestones, the easier they are to trade. This quantification is important as the nearer we get to the top the more commentators will cite a whole series of arguments to show this time is different. Super low interest rates do partly explain why our targets for PE and CAPE have always been more aggressive than many would have believed. Spare capacity is always hard to gauge and growth rates may be lower (certainly compared to 1920s) but it is the change in growth rates and the change in tell-tale signs of full capacity eg inflation, that are important even in a now de-industrialised economy with a rapidly changing labor market structure. Yes, Donald Trump could do a 1953 Eisenhower and prove us wrong by swelling capacity and productivity in a sustained rally that never returns to current levels. But it is highly unlikely. And fortunately, we can rely on an important data set to prove us right or wrong before we commit either way.
So when people tell you this time is different based on price rather than reality, ask them for their evidence. The evidence we provide in our fundamental data set for these periods (in an appendix for subscribers) hopefully demonstrates that this time is no different to the 1980s nor the 1920s.
The evidence suggests, just like before, dividend yields indicate when the last leg has started – confirmed by Productivity, corporate earnings that the top is close, that inflation is the trigger to get out of longs, GDP the sell signal and yields confirmation to sell more. And fed policy? That you have missed the trade of the decade. How one exactly interprets and converts the evidence into a generational trade will be the subject of our last article.
A longer version of this article, together with a large body of supporting fundamental data is available to paid subscribers here on our Premium Posts Channel.
The last three months have been dominated by the Trump Effect: the expectation of inflationary growth based on election promises and subsequent policy hints. The consequent effect was dramatic: rising US yields, US Dollar and US stocks. We have highlighted this as typical of the last leg of a stock and USD trend (viz 1929 and 1987). It is the perception and therefore sentiment that drives this seemingly unusual triangle and last leg not necessarily the fact. It is partly this difference that leads to an also typical break down in correlations. This observation has been supported so far by a lack of substance from the Trump administration: the difference between rhetoric and action. It has also been supported this week by a striking disintegration of the triangle. US stocks have continued to rally, the USD has remained fragmented but flat and US yields have broken down.
In isolation, one could be forgiven for seeking a continuation of each of these three different trends. Together they suggest a very interesting week not least because one forex pair is clearly leading the Dollar Index and therefore flagging risk aversion. They also highlight a change in trading strategy for both Indices and Forex.
This is a note we will be sending out to our trade signal subscribers:
The US stock market has emphatically confirmed our long held view of a 1929 style blowout – a market few of us have ever traded before. Even though some may remember trading its copy in 1987, the market and instruments to trade such a market is quite different now. Although there were options back then, there was no VIX.
At Matrix, we make a great thing about evidenced based analysis and talk less (but think more) about evidence based trading. It is arguably even more important in what is potentially the best trading market of at least a decade.
Our tactic of suspending the take profit limits on our DAX 11156 SPX 2244 and DJIA 19776 longs has clearly been justified by the level of subsequent volatility beyond the SPX 2300/2351 DJIA 20,700 DAX 11430 technical targets. We were and still are convinced the Trump rally would accelerate beyond most people’s expectations. But by how much has been and will be difficult to measure and only becomes clearer (with time) in the latter (but not very final) stages. This is not a technical market but certainly a sentiment driven possibly not a fundamental driven market (as the move has been predicated on perception of Trumpflation rather than inflationary growth itself). Where sentiment takes over volatility is even harder to gauge. USDCAD’s blowout last year is the best recent example of ‘silliness’.
For the US Stock market this requires a careful and continuous assessment of how high before how low before it goes up again eventually to the ultimate 2515 SPX objective . In other words how silly it will get. As soon as SPX hit the 2330 region we believed and still believe any further strength will not be sustainable without an eventual major (possibly straight line) retracement back at least to those levels if not a shock correction back through 2300 to our entry points. Hence why we hedged SPX and now DJIA at 20820. The Matrix (risk/return x probability) metric shifted significantly against holding longs without protection. But as we cannot be sure of how high it goes first we hedged rather than closed our longs. After all we could possibly have ended up taking off the hedges at break even for the next 100 point SPX rally. However, now we have had more definition with time we can be more confident of a major retracement. Since VIX remains at historically low levels it presents a massive divergence between implied and actual volatility.
Since picking an interim top remains both difficult and dangerous this suggests a change in strategy. We will no longer rely on cash trades and hedges. As the week starts possibly with another new high, we will exit our arguably more over-extended DJIA long and hedge and start taking advantage of a low VIX by buying relatively cheap puts. As SPX could try to catch up on this possible blowout we will delay the cash and hedge exit by as much as 48 hours or so but still buy puts. We will leave fine tuning cash shorts until we can identify a clear Matrix (risk/return x probability) set up that works.
In short we will exit longs and sell early week strength looking for a return to 2330 possibly even lower. Given a likely hike in VIX on any such drop we may end up using the low VIX entries to buy cash against.
A careful continuous assessment requires flexibility that both hedges and vix-driven options can provide. We are lucky. Traders in 1987 and 1929 did not have that flexibility.
We will also introduce a similar change in Trading Strategy for Forex. We continue to identify 100-200 pip moves as part of a potential larger trend. But these larger trends are not materialising as yet. Rather than continue to hedge the trades, it may be better in some cases to ‘hit and run’. This will allow greater flexibility that the break down in the Trump Effect demands.
For a more detailed explanation of our hedging strategy please see http://www.matrixtrade.com/hedging/
Thank you to all those who attended the London Forex Show on Friday. I was flattered and worn out to have been asked to address the three main audiences of the show. Its not ever day that an ex-politician gets to address hundreds of people on his favorite subject.
Next week we will publish the second article in the Milestones in Mania series focussing on the fundamental drivers of the 1929 and 1987 style blowout in US stocks.
Mon 20
0700 EUR German PPI Beat
What we said at the time (for the week)
Indices
This weekend we have highlighted how and why such bubbles can challenge people’s expectations of normal volatility. Milestones in Market Mania is the first of 7 articles aimed to help us trade the third largest US stock bubble in history.
We have and will continue to make a big thing of the break down in correlations in this phase. The US should generally outstrip most other markets,. However, there will be times when other markets catch up either due to local factors or a dampening of US Trumpflationary expectations. This week provides one such opportunity.
DAX has continued to follow the ‘Trump Correction’ now suggesting a textbook retracement is unlikely before an aggressive break higher
Forex
The Forex market should remain somewhat erratic this week within consolidation ranges, mirroring the consolidation in the US yields. Although Trumpflation remains the main driver of most markets, where US yields aren’t volatile, currencies are likely to be buffeted by local factors.
Today sees the start of the House of Lords debate on Any diversion from the Government line is likely to see GBP strengthen but for how long is open to debate as well. Similarly today also sees the start of Greek debt negotiations with pressure on Greek bonds but the scope for a livelier EURUSD towards the end of this week into next is probably more likely to come from developments in the French or German elections. The JPY continues as a somewhat subdued risk animal.
What happened
Monday was President’s Day and US Markets were closed. Unsurprisingly, markets were flat, except the NKY which rose in the Asian session, and FTSE which faded slightly in response to an equally slight rise in GBP. Even the German PPI beat at 0700 only spiked DAX 40 points which it immediately gave up to settle into a 30 point range all day. Other than GBP, currencies were mostly flat.
Tue 21
0030 AUD RBA Minutes
0830 EUR German PMI Beat
1000 GBP BoE Governor Carney spoke
1445 USD PMIs Miss
2130 AUD RBA Governor Lowe spoke
What we said at the time
Indices
The critical variable for stock indices today is volatility. Although markets still appear relatively subdued after the US holiday and the US uptrend in particular need of consolidation, there is a window for something more dramatic. Much will depend on the US later today then as to whether they will post a sharp extension to 2368 and help trigger catch up in European stocks. DAX continues to follow similar Trump SPX price action before breaking aggressively to new highs.
Forex
The Forex market continues to dance to the tune of Trumpflation with a few local variations. Despite the keenness of some to force it and seek trend, they will mainly be disappointed for 2 clear reasons and charts.
USD strength is unlikely to be sustained with one or two exceptions. USDCAD has broken wedge resistance and just needs to clear out 1.3210 to see a deceptively overlong CAD market bail out.
The second reason is political and debt (Greece) uncertainty in Europe ironically serves to trap currencies in the range until resolution. Uncertainty and Greece also invokes the uncertainty fractal that EURUSD followed before the Greek referendum, GBP before Brexit and to some extent EURUSD before the Italian referendum. The likeness is striking and exactly in line with our ‘ Washington’ EURUSD scenario of a whipsaw declining wedge (See EURUSD evidence charts).
The third reason is the break down in correlation still highlights scope for better levels to sell both AUDUSD and NZDUSD and flagging what currently seems an unlikely Euro-Commonwealth major reversal.
Just as the stock market continues with the ‘Buy, Buy, Buy’ theme so currencies are singing ‘Fade, fade. fade’
What happened
The Trump rally resumed on Tuesday, DAX was straight up after the German PMI beat at 0830, then SPX and DJIA followed (ignoring the US PMI miss at 1445), the latter making another record high. FTSE and NKY didn’t join in.
Currencies were mixed, AUD, GBP (after a dip through BoE Governor Carney’s speech before the US opened) and gold were flat, but USD was very slightly up against JPY and CAD (the latter despite oil’s rise), and more so against EUR. 10-year yields were also flat
Wed 22
0900 EUR Germany IFO Sentiment Beat
0930 GBP UK GDP mixed
1330 CAD Retail Sales Miss
1900 FOMC Minutes
What we said at the time
Indices
Global stocks have confirmed suspicions of an aggressive blowout to the most aggressive phase of the uptrend.
SPX remains the bellwether index with potential to extend and DJIA the potentially the beneficiary with a 20901 target. However, despite the volatility of this move some indices are lagging due to local factors
Forex
What a mixed bag Forex is at the moment. We are so conditioned now to explain things away in terms of Trumpflation, days like today seem perplexing. And yet it is very clear what is going on today. Concerns over France are overshadowing a US dominated market waiting for FOMC minutes.
German-French Bond spreads are therefore under pressure as investors shy away from anything French and rush to safe haven German Bunds. Reference to the 10 year differential chart shows how this is probably overdone today above -80 but probably not the end of what appears to be a corrective decline. Presumably this implies Le Pen doesn’t win.
This helps maintains our view that EURUSD weakness is not sustainable.. yet and also helps explain a completely fragmented Forex market.
SPX Update
As SPX goes into a probably fait accompli FOMC Minutes today it is creating the ideal bull trap. Confirmation that the Fed may well raise rates in March in the first of three hikes in 2017 should pass uneventfully and allow the market to buy SPX to new highs for the final time probably for a week or so. From there it will be at risk of the first major correction since the break of 2300.
What happened
After Tuesday’s rally, equities took a breather on Wednesday, and were all flat, (except DJIA which again added 50 points made a new high). This is very unusual on the monthly FOMC Minutes day, reflecting the fact that very little was said by the Fed that was not already known. Only FTSE rose slightly but this was probably because of the GBP fade, assisted by the mixed GDP figures are 0930. CAD faded on the retail sales miss at 1330, and oil giving up Tuesday’s gains, but otherwise the other currencies (EUR AUD JPY) were flat against USD.
Thu 23
0700 EUR German GDP a/e
1330 USD Initial Jobless Claims Miss
1600 WTI EIA beat
What we said at the time
Indices
Global Indices continue in a near term climax to the most aggressive stage of this historic 1929/1987 style blow out.
This phase is characterized by
1. Divergence between actual and perceived fundamentals (ie sentiment)
2. Typical break down in correlations.
If this is a short term blowout these characteristics are likely to be accentuated.
1. Superficially yesterday’s FOMC minutes appeared relatively dull. They reiterated the growing consensus that March will probably produce the first of three rate hikes in 2017. However, they were possibly the most revealing in a long time (not least the repeated reference to the USD). One of the reasons why the text appeared less hawkish than some expected was the implied difference between actual fiscal policy and effects AND perception – the hallmark of a blowout. The minutes therefore emphasized the need to follow the data and didn’t exclude downside risks with the curious exception of downplaying geopolitical risks into a dangerous French election. The impact of the minutes was, as expected, the typical resumption of blowout potentially into a late Friday-Monday top.
2. The scale of breakdown in correlation (divergence) is key to the extent of this short term blowout. DJIA is leading a lagging SPX. Nifty is creating a possible bull trap between the 2 historic highs. French CAC may also still be in consolidation but continues to threaten the 4920-4930 highs. Either of these breaking without their currency taking the slack will likely fuel the global blowout.
Forex
The Forex market is currently dominated by two overriding themes: The ‘Frexit’ risk posed by Marine Le Pen to European stability in the forthcoming French elections. And Trumpflation: the extent to which Donald Trump’s mooted fiscal expansion will drive inflationary growth and interest rates. Neither are clear and therefore serve to continue erratic Forex trading within the range.
Two similar themes at very different stages in their cycle. The Frexit risk, highlighted by the Le Pen’s first round lead but most likely diffused in the final round, serves to depress safe haven Bund yields and consequently the Euro and ‘risk’ pairs most notably EURJPY. By and large it is USD neutral as evidenced by the fragmentation of USD pairs when France is to the fore such as the last 72 hours. Trumpflation on the other hand serves to drive higher the USD higher (EURUSD lower) and risk pairs higher via rising yields and stocks. Since the market appears currently to swing from one to the other on news events, most Forex markets should be, and are, erratic but range bound. The theoretical exception is the EURUSD which should, by rights, be much lower. So why isn’t it? Uncertainty. It is a textbook cliche that uncertainty depresses currencies but the reality is different. Ironically uncertainty also serves to limit the extent of the currency weakness until a resolution as reflected by the EURUSD uncertainty fractal.
(See EURUSD uncertaintly fractal above)
The outcome of the French election is still fairly unclear as also reflected by the German-French spread chart that presumably projects the more obvious Le Pen defeat.
Uncertainty is also a recurrent theme in Trumpflation. Donald Trump has mooted fiscal expansion but we are yet to see the ‘phenomenal’ tax cuts and their subsequent effect. A point that was made clear in FOMC minutes with their dependence on data as opposed to political rhetoric.
“Participants cautioned against adjusting monetary policy in anticipation of policy proposals that might not be enacted or that, if enacted, might turn out to have different consequences for economic activity and inflation than currently anticipated.” FOMC. What was interesting was the repeated reference to the stronger USD that serves as a counter inflationary alternative to interest rates. “The downside risks from the possibility that longer-term inflation expectations may have edged down or that the dollar could appreciate substantially further were seen as roughly counterbalanced by the upside risk that inflation could increase more than expected in an economy that was projected to continue operating above its longer-run potential.” Not the clearest or shortest of sentences but counterbalance has the effect of keeping yields and USD range bound at the very least or limiting the scale of any rise. A stronger USD will reduce the inflation and yields and therefore limit USD strength.
If we could have picked a scenario that would suggest a slow erratic USD turn (Washington Euro), it would have been an uncertain Trumpflation and an uncertain Europe. We can thank Donald Trump and Marine Le Pen for that.
Effectively no change in our Forex outlooks.
What happened
After German GDP came in at 0700 Thursday as expected (1.2% YoY), DAX gently faded, while other indices (SPX NKY FTSE) stayed flat for the day, although SPX made a new intraday high, as did the rarely monitored FTSE All-World Share Index. However, ignoring the US jobless claims miss at 1330, DJIA again made another 50 point new closing high. USD definitely faded on Thursday against all currencies and particularly GBP which rose 133 pips (1.07%) although it gave up all this on Friday. Gold also rose sharply putting on 1.25% at one point to reach a three-month high. 10 year yields started a fade to 2.38% (1.4% rise in bond prices), CAD was up, as the EIA beat at 1600 pushed up oil.
Fri 24
1330 CAD CPI Beat
What we said at the time
Indices
Global stocks remain buoyed by the cheering prospect of Trumpflation and buffeted by the worrisome French elections. The most vulnerable to developments in either remains the Bund-driven DAX as it comes to the end of its catch up week. Although it still has potential to extend the uptrend, a warning shot has been fired by US stock divergence (between DJIA and SPX) and an inability to maintain new highs despite more Trumpflationary comments from Steve Mnuchin, the US Treasury Secretary. Not phenomenal but “very significant” tax reforms within the next six months and a curb on regulations could boost US gross domestic product growth to at least 3 per cent by the end of the year. This momentum loss from US will place greater emphasis on Bunds staying high (2 year German yields made new lows yesterday) and EURUSD below 1.0600 if DAX is to maintain its catch up week. The fact NIFTY is also struggling at two year new highs suggests the global uptrend may pause and keep both Nikkei and FTSE within their ranges – for now.
We did not issue our afternoon Forex bulletin on Friday as we were at the London Forex Show.
What happened
On Friday initially equities fade quite sharply in the Asian and European sessions, but rise again in the US session. This was not enough for NKY, DAX and FTSE, but SPX finished the week on an all-time high, and DJIA did its 11th straight all time high close, finishing 185 points (0.90%) up at just over 20800. The index has put on 2950 points since the day before the Trump election. To put this in perspective, it took the three and half years up to Nov 8th, virtually all of Obama’s second term rise a similar number of points.
The currency and commodity picture was again mixed. USD was down against CAD and a material 94 pips against JPY, yet up against GBP and EUR and an equally notable 52 pips (0.67%) against AUD, the latter being remarkable as gold (for which AUD is a proxy) put on another nine dollars (0.72%) for another 2017 record as oil faded some of the previous day’s gain. What was not ambiguous was the 10-year yield, which fell 77 basis points to 2.304% (a 3.22% rise in bond prices) to new 2017 low.
NEXT WEEK
President Trump addresses Congress on Tuesday, and all eyes will be on his tax reform proposals. We will be watching this, along with Fed speakers to get hints about rate rises, as TreasSec Mnuchin was not forthcoming about detail last week. If we don’t get anything substantial, the markets may drift. A raft of US consumer data is also out, along with GDP on Tuesday. Canada’s rate decision this week is on Wednesday (no change expected), along with a raft of German data. Also the important US Manufacturing PMI is at 1500. Focus on Canada continues on Thursday with GDP at 1330.
There are four FOMC member speeches this week, Kaplan and Brainard speak on Thursday and Fischer, and Chair Yellen speak on Friday.
CALENDAR (high volatility items are in bold)
Mon 27 Feb
1330 USD Durable Goods
2145 NZD Trade Balance
2350 JPY Retail Sales
Tue 28 Feb
0000 GBP UK Consumer Confidence
0200 Trump speaks to Congress
1330 USD GDP
1330 USD Consumption
1500 USD Consumer Confidence
Wed 01 Mar
0030 AUD GDP
0100 CNY Manufacturing PMI
0855 EUR German PMI
0900 EUR German Unemployment
1300 EUR German CPI
1330 USD Consumption
1500 CAD Rate Decision
1500 USD Manufacturing PMI
1700 Fed Kaplan speaks
2000 Fed Brainard speaks
Thu 02 Mar
0030 AUD Trade Balance
0930 GBP UK Construction PMI
1330 CAD GDP
2330 JPY CPI
Fri 03 Mar
0145 CNY Services PMI
1445 USD PMI
1700 Fed Fischer speaks
1800 Fed Yellen speaks
“Watching neighbors get rich at the end of a bubble while you sit it out is pure torture” Jeremy Grantham
Why be masochistic and sit out one of the greatest bull markets in history if you have clear guidelines: milestones based on very similar trends back in the 1920s and 1980s. Like then, current stock market valuations are not sustainable but, even with the anticipated Trump inspired increase in inflation, that doesn’t stop even valuations going much higher before much lower. That is the nature of a bubble.
George Soros: “When Alan Greenspan spoke about irrational exuberance in the 1996, he misrepresented bubbles. When I see a bubble forming I rush into buy, adding fuel to the fire. That is not irrational”
In the week the DJIA uptrend matched the 2002 day equally irrational uptrend of 1929, we outline what we believe are the key milestones to this blowout before a crash. We had originally planned just one article highlighting these milestones based on our core FITS approach to any market: Fundamentals, Intermarket relationships, Technical and Sentiment. However, the more we investigated these milestones the more we found a wealth of further evidence and invaluable information that should stand us in good stead in the latter stages of this 7 year bull market. This should provide us with a much clearer idea of how to exploit the remaining stock rally and ensuing crash. After all, Paul Tudor Jones made his fortune and name on this very play in 1987 based on the very same approach. But Trumpflation is also dominating other global markets to a varying extent. This not only provides further clues on how to trade this last phase of the US stock market rally. But a similar effect on other markets back in the 1920s and 1980s should help us trade those other markets more effectively as well.
Today we outline the parameters of the research that will guide a further 6 articles on a comparison with 1929 and 1987: An article on each of the FITS that drives our analysis and an article on VC – Volatility and Clarity (probability) that frames our trading strategy.
This article continues on our free members web page
LAST WEEK
In this week’s report, we are doing something different. Rather than merely report the week’s price movies, we are reproducing our daily summaries which we email to subscribers.
Mon 13
All four US indices hit record highs buoyed by the prospect of Trump’s tax reforms flagged last week and not damaged by the relatively dull Abe-Trump meeting into the weekend. DAX and FTSE followed suit. Although this maintained our bullish outlook, the lack of the volatility we are seeking for a sharp ramp then fade is not yet apparent (subscribers can see our premium post comparison to 1987). This may be due to the exact timing of the 1987 comparison that saw NY spike (supported by the likely non-participation of NIFTY out of hours). Or it could be that front running Janet Yellen’s Tuesday/Wednesday’s speeches prevented or delayed such volatility.
After the Euro-inspired political instability dent at the start of last week and Donald Trump’s promises of big tax reforms, we saw DXY trend higher, edging back to the 14-year high in January. But the reality is range and very reminiscent of the EURUSD’s previous mangled consolidation. Currencies were mixed. JPY hardly moved (as did 10-year bond yields), CAD was up following the equally dull Trump-Trudeau meeting, as was GBP, slightly. AUD, gold and EUR were down, and oil dropped sharply by 1c to $52.80, a level it touched several times in the week.
Tue 14
0130 China PPI/CPI beat
0700 Germany CPI/GDP CPI a/e, GDP miss
0930 UK CPI/PPI CPI miss, PPI beat
1000 €Z GDP miss
1000 Germany ZEW Sentiment miss
1500 Yellen speaks
‘Trumpflation’ continued to drive our bullish outlook for indices into and out of Janet Yellen’s Humphrey Hawkins testimony on Tuesday and Wednesday. The prospect of ‘phenomenal’ tax cuts in the US is underpinning global markets for now, and SPX moved up along with FTSE, NKY and DAX.
The extent to which this ‘Trump On’ filters through to other markets remains determined by local factors such as the recent benign Abe-Trump meeting that allowed the Nikkei to rally, political uncertainty for DAX that kept it in a range, reaching a weekly top at the end of the US session, and a firm pound that is still holding FTSE back. All markets were on hold into and beyond Janet Yellen’s testimony, reflected by the Humphrey-Hawkins SPX fractal that suggests stability while she speaks, followed by an interim sell tomorrow then uptrend resumption. Given our historical DJIA comparison to 1987 the issue is volatility, or, rather, lack of it.
Forex was a mixed bag on Tuesday where certain currencies moved more due to local reasons eg EU political instability, today’s CPI miss in the UK, which saw GBP fall. This process associated with the last leg of a USD trend should continue. It therefore allows correlations to remain weak and highlights certain FX crosses. This fragmentation exists partly because of the continued USD conflict between the still lingering belief that Donald Trump will weaken the Dollar AND the more recently reasserted fears of ‘Trumpflation’ and therefore interest rates. Although we are yet to see real signs whether the new administration’s policies will prove inflationary – reflected by the now 2 month old bullish 2.32-2.62 ten year yield consolidation range – we said the market will look closely at her reception in Congress to see whether she is to last the distance under Trump but also how the Fed will react to the clearly inflationary threat of ‘phenomenal’ tax reforms and greater government expenditure.
It is curious how sentiment and expectations combine. The prevailing view is that not much will come out of the testimonies and therefore trends can continue. Although economic data has been slightly more dovish in the last month, the recent trend has been higher yields (10-year rose today), USD (EUR and JPY fell) and stocks. There is therefore a misplaced growing consensus she may be hawkish more due to those trends. There is not much evidence for that. We do not expect any real revelations and therefore the market to react based on positions rather than any clear indication from Janet Yellen. This allows scope for spikes in both directions to end recent trends eg EURUSD weakness but also AUD strength. The key is yields and they have completed the first leg of a larger recovery to challenge the highs. In short, we expected initial USD strength to fade and for the USD to weaken primarily against the Euro. This should flag possible upside reversals for EURGBP EURAUD and EURJPY. Indeed AUD did move sharply up today, probably based on the China PPI/CPI beat at 0130. Oil was flat (and so was CAD) and ranged inside 50c for the rest of the week.
Wed 15
1330 US CPI/Retail Sales beat
1500 Yellen speaks
Now we know what a 1929 style blowout is like – in US stocks at least. And that remained the story of global indices. A US bull market where local factors and particularly the USD is holding other indices back. Our Outlooks addressed the issue of when the others will catch up. DAX was flat (see Tuesday reasons) but SPX and FTSE were up. Only NKY faded, despite JPY holding steady.
Following Janet Yellen’s seemingly hawkish Humphrey Hawkins testimony yesterday, SPX has maintained what we confidently believe is a blowout in the short term, ie we will see a correction back below 2330 but from where? SPX did indeed make another new high, and FTSE was up. DAX was flat (see Tuesday reasons). Only NKY faded, despite JPY holding steady.
Yellen was more hawkish because she wasn’t dovish as she highlighted the possibility of raising rates again next month (and by implication possibly three hikes this year). This allowed rates to ramp (but note then fade) and USD to strengthen and stocks to rally. The classic resumption of the prior trend as there was essentially nothing new.
Whether this will continue today and more particularly allow sustained new highs in other indices is doubtful. Nifty has already started to break back down on the back of disappointing earnings. Both FTSE and DAX remain almost exclusively a function of the USD. A rally back above 1.0600 EURUSD will be a big clue for more DAX consolidation given the already well developed break back down in DAXUSD, And FTSE we still believe is more driven by EURGBP than GBPUSD and we bought the dip on Tuesday.
The levels are clear even if the timing isn’t.
Suspicions of initial USD strength following yesterday’s Humphrey Hawkins testimony proved valid. Although this has persisted into Wednesday with testimony at 1500GMT fuelled by a CPI beat out of the US, we are not convinced it can be sustained. There is therefore a window now at least to arrest, if not reverse the decline. One possible exception oddly is USDCAD again highlighting certain cross plays as correlations continue to break down.
Yesterday’s perceived hawkishness from Janet Yellen stemmed partly from benign expectations but also reference to a previously unmentioned balance sheet reduction. The resulting ‘Trump On’ (rising stocks USD and yields) has convinced many the trend is sustainable. A rather late conviction that is now seeing SPX starting to turn back down. Indeed a possible 13 hour SPX lead over the Dollar Index suggests the USD could soon follow:
Thu 16
0030 Australia Emp/Unemp beat
0700 Germany WPI – not reported
1230 ECB MPC Report
1330 US Building/Housing starts beat
1330 Initial Jobless Claims beat
1600 EU Leaders Summit
Thursday’s FT headline “Global stocks at record highs” was not the full story as many indices are trying but failing to join in the latest and most aggressive phase of the Trump uptrend. Its a reflection of the Trump era that both Janet Yellen saying the Fed could well raise rates next month AND a higher than expected US inflation release should drive the US markets to further new highs., This distorted or different reality is typical of the final leg of a medium term blow out. But the price action we are seeing is also typical of the middle or most aggressive phase of that blowout. In other words there is more to come later. This weekend we will outline the milestones of the 1929 and 1987 style blowout- a pocketbook guide to only the third such blowout in 100 years.
One of the milestones is the extent the other indices participate or rather don’t. And they ain’t at the moment but probably will later next week. Nifty has a window still spike down. Nikkei and FTSE are rolling back down in short term consolidation at least and DAX still scope for a nasty second corrective decline. Today all except NKY were flat. Maybe today’s ECB minutes could provide a Taper shock. Maybe not. (They didn’t – EUR only rose 60pips) But anyone trying to trade 2012-2016 correlations will struggle.
The forex mixed bag continued. The USD confirmed our suspicions of a reversal from some Fibonacci levels to encourage but not yet confirm a larger sell off. Although the Trump ‘triangle’ reflation trade (stronger yields, USD and stocks) appears to be back in vogue, be careful of making the same mistake as most in the Forex market of either forcing it (ie looking for sustained trend) or correlating too much. Even the Trump triangle seems to be going separate ways. AUD and CAD were flat, and GBP and JPY were only slightly up.
Even the Trump Yields may appear to be the driver but they are range bound in a bullish consolidation. Even though US stocks will likely attempt new highs on the back of slightly better than expected jobless claims, any renewed strength in yields and USD today should prove short-lived. This divergence should allow stocks the first decent correction since Trump’s ‘phenomenal tax revelation and see both yields and USD sell off again into next week.
The break down in correlation is not only now the 2017 norm but still highlights some interesting spread of cross trades. Euro crosses did indeed reverse yesterday but beware or risk crosses into next week eg EURJPY. You could be forgiven for thinking AUDUSD is quoted the other way round these days. But since it should fail a run at the highs, if this coincides with a break down in the USD again, then commodity currencies could be in trouble for the next week or so.
Last but not least our somewhat bizarre inverted Humphrey Hawkins Dollar Index fractal encourages our view of a whipsaw USD decline.
Fri 17
0930 UK Retail Sales miss
Global stock indices have reached an inflection point. This potential turning point is not so much in individual markets – as we are still a long way off a major top – but in the relationship between indices.
Sentiment turned violently two days ago in US markets as many perma-bears conceded a bull market. Although this is a necessary but not sufficient condition of a top, we suspect the reversal ie correction may be more in time than distance. This is supported by a repeating pattern in the DJIA uptrend that suggests the current retracement may end up going sideways.
As the other indices have largely refused to embrace this recent uptrend fully, it would seem to suggest they are even more vulnerable in the short term during this new US consolidation. And to some extent they are. But without wishing to over-emphasize a point, correlations mean little in the current market. Unless the correction in US markets can develop into a rout then there is real chance that next week will produce a turnaround in the US versus other indices and see other indices – notably the DAX – play catch up. This is reflected by a potential short term bottom in the DAX/SPX Spread.
As we intimated above, the equity markets only rose slightly today, mostly in a final ramp at the end.
Whereas the focus of our risk has rightly be centered on the US markets, we will look next week to leverage in other markets. The following outlooks identify where we are looking to buy or add to longs.
Friday’s Forex market remains fragmented. Around the central theme of Trump reflation and the interest rate driven USD debate, Forex continues to be driven by transitory side issues.
Having overdone the Trump inflation trade following Humphrey Hawkins and CPI, the USD remained relatively weak in order to diffuse an excessively and unjustified bullish sentiment. Yields after all remain stable within the range. In fact the compensating USD fall is also close to being overdone. A possible 11 hour Yield lead over the Dollar index suggested a further possible spike down today in USD should fade (after taking EURUSD bear stops) – indeed EURUSD did hit a high for the week, and then fade 60 pips. USD was up against gold, AUD, CAD and GBP, and 10-year yields were down.
This should allow USDJPY, overly hit by risk aversion, to recover. (SPX is still only 10 points from its all time high). Perhaps more excitingly this should similarly restrain Gold and therefore highlight a possible AUDUSD spike higher as a great selling opportunity in the next 48 hours.
Our suspicion of a Euro cross recovery except against risk currencies such as JPY proved valid. EURCAD EURAUD and EURGBP have rallied well but will probably fade into next week with a long US weekend ahead. Disappointing UK Retail sales should again have only a temporary effect.
Just like the week, fade away.
NEXT WEEK
Monday is President’s Day and US markets are closed. With only German PPI at 0700, there are no scheduled pointers to a market move, other than perhaps a continuation of the late session ramp in equities last Friday. There is another Eurogroup meeting at which Greek debt will be at the fore, any progress or deadlock may affect EUR. Of course, Europe is now looking at the German election (Schulz is now polling to beat Merkel), but the big story remains the French election, and the fortunes of Frexiteer Le Pen.
US retail is reporting next week, particularly giants WMT and HD on Tuesday. Some commentators are expecting misses, triggering a possible pullback in equities. Otherwise we have RBA minutes at 0030 in the Asian session, followed by RBA Governor Lowe speaking at 2130 after the US session. Commentators are expecting dovish remarks following recent poor labor market figures.
Wednesday opens in Europe with German IFO Sentiment at 0900 and UK GDP and 0930. There is also Canadian retail sales at 1330, but the big event is the monthly FOMC meeting minutes, released at 1900. Janet Yellen, of course, gave her Humphrey-Hawkins testimony last week, but could still surprise. Maybe Tarullo will go out with a bang.
In the absence of other major news for the week, we will be relying on our FOMC fractals.
Thursday delivers German GDP at 0900, and US Initial Jobless Claims at 1330, and the week finishes with Canadian inflation at 1330 Friday. None of these are regarded as high volatility releases, unless of course, as we always say, the beat or miss is material.
CALENDAR (High volatility events in bold)
Mon 20
0700 EUR German PPI
Tue 21
0030 AUD RBA Minutes
0830 EUR German PMI
2130 AUD RBA Governor Lowe speaks
Wed 22
0900 EUR Germany IFO Sentiment
0930 GBP UK GDP
1330 CAD Retail Sales
1900 FOMC Minutes
Thu 23
0700 EUR German GDP
1330 USD Initial Jobless Claims
Fri 24
1330 CAD CPI
DJIA matches the duration of the 1929 bull market this week
The DJIA (SPX) remains in an historic blowout to the uptrend from 2009. Although we have maintained our aggressively bullish stance during this time based on very similar price action to both 1929 and its copy, 1987, the countdown clock is wrong. It is wrong in time but not distance nor price. This week is the 415th week since the 2009 low exactly matching the rally before the 1929 crash and well beyond the 387 weeks into the 1987 crash. Thursday is 2002 days since the 2009 bottom, the same number of days from the 1921 bottom to the 1929 crash.
So is the market about to crash this week? It could potentially produce extreme volatility and what many will believe is the start of a crash. But it should only be a very small dress rehearsal. The candles of the 1929 birthday cake may quiver but they should stay alight.
The Current Uptrend Matches the 1920s Bull Market
But not quite as closely as the 1980s Bull Market
We frequently make the point that volatility is the hardest market variable to gauge. Direction is often much easier. There are many reasons why volatility (distance/time) can itself be so volatile. But the reasons all stem from a change in positions in the market due to a shift in one of the key FITS Drivers
Fundamentals – events,
Intermarket – another market movement,
Technicals – a break true or false –
Sentiment – the willingness of traders to keep or change positions.
For much of the 2014-2015 consolidation we became increasingly aware that this historic uptrend was taking longer than its two sisters but that it still needed the truly aggressive blowout to complete. But until Donald Trump’s election provided both the volatility and cause we were unaware of what would produce such dramatic volatility. Given the need to ‘catch up’ with the historic templates we assumed that the typical rising US rates, Dollar and stocks (‘Trump On’) associated with this last phase represented the very last phase.
However, of the four key characteristics of fractals or accurate historical comparisons, time or distance divided by time, in other words volatility, are the most variable. Context and price action are far more important.
Having arrived at the 1929 anniversary, it is clear that only time matches the very top. Donald Trump’s election did not represent the start of the last leg of the uptrend but only the most aggressive part of that uptrend.
The evidence is clear from both the 1987 chart and the narrative (context).
Indeed the potential volatility this week due to the Trump-Abe talks or indeed Janet Yellen’s Humphrey Hawkins speech on Tuesday and Wednesday, the day before 1929’s birthday would not be unexpected given the strong similarity between last Friday and January 22nd 1987. Even USDJPY is displaying a likeness to current price action.
What does this mean in practice?
1. Two way volatility is likely this week in many markets before a resumption of the medium term blow out in stocks.
2. We will change our Countdown Clock to reflect the historic price and percentages more closely – once we have seen the price action of the next 24 hours or so.
3. This revision does not affect our trading strategy or view on any market we cover. In fact it is an affirmation of that strategy.
4. But the revision will allow price action to reflect the narrative more closely and therefore increase the probability of our approach. Expectations of a Trump inspired inflationary growth due to increased government expenditure and tax breaks should be borne out most in higher inflated stocks. But until when? Until perma bears (those who continue to pick a top) have given up the ghost of a 1929 or 1987 crash. But more importantly, when the effects of an inflationary expansion funded by government borrowing at least start to show. When it becomes apparent the Trump Effect is not sustainable.
The jury on the Trump Presidency will have 4 years to sit. But for now, many of them are singing Happy Birthday 1929 and are too busy to blow out the candles.
This is the basis of a more detailed an revealing account of the 1929 and 1987 blowouts available to subscribers in the next 24 hours.
Next week we will outline the key FITS milestones in this bull market and in particular the early warning signs (most likely from Japan).
LAST WEEK
Mon 6
0000 AUD Inflation beat
0030 AUD Retail sales miss
1400 EUR Draghi speaks
2000 USD FOMC Harker speaks
Monday opened in Asia with Australia’s inflation beat and Retail Sales miss. AUD faded whilst NZD remained flat. NIFTY gapped up 50 points, which it then took two days to slowly fade. In Europe and the US, Friday’s rally on financials abated and US equities, the NKY and FTSE were flat on the day. Worries in Europe caused the DAX and EUR to fade, as did AUD, CAD (with oil) and 10-year US bond yields. Safe havens of gold and JPY were up, a classic risk-off day.
Tue 7
0200 AUD rate hold a/e
0200 NZD Inflation expectation beat
1330 USD Trade balance beat
Tuesday’s RBA rate hold cause a rise, and then sharp drop in AUD in the Asian session, dropping a net 0.6% (46 pips) which took all week to recover. NZD spiked up on an inflation expectation beat, but gave it up by the time Europe opened, where indices were flat as was gold and bond yields, although DAX recovered a little of Monday’s fall. NIFTY briefly spiked down to fill the weekend gap, and recovered.
The dollar was generally strong, as EUR and CAD almost exactly repeated Monday’s price/action falling further along with oil (which made a three week low, near the bottom of its current $51-$54 consolidation range), and JPY gave up Monday’s gains.
The spread between French and German 10-year bonds hit a four-year high amid fears that Marine Le Pen might win on May 7th. Greek bond yields briefly soared about 10% pulling back to 9.48% by the close. FTSE spiked up as GBP spiked down as Europe opened, (on the vote to trigger Article 50) and both promptly reversed as Europe closed, showing perhaps that Brexit risks are felt more strongly in the UK than elsewhere.
Wed 8
0900 INR rate hold (0.25% cut expected)
2000 NZD rate hold a/e
As we said last week, the INR rate decision would affect NIFTY. The rate was held at 6.25% against an expected cut and the index promptly fell by 0.72%. After a recovery, this behavior was repeated on Thursday, but then the index rose to finish a V-shaped week.
In the absence of news, European and US equities were flat, as was the dollar against EUR, JPY, AUD and even GBP this time (hence FTSE was also flat). NZD also didn’t move until the rate hold at 2000. Despite this being expected, NZD faded 100 pips (1.34%) during the following Asian session, and had not recovered by the end of the week. Oil started its recovery and took CAD with it, despite the EIA miss. Gold rose again, putting on $13 (1.12%), all during the European session, with price action similar to Monday. The only asset to continue the earlier two days price action was 10-year yields, which hit a bottom for the week of just under 2.34%, the lowest level since Jan 18th.
Thu 9
0700 EUR German exports/trade miss
1330 USD Jobless beat
President Trump promised a ‘phenomenal’ corporate tax announcement in the next two to three weeks and equities soared in all sessions. FTSE put on 50 points (0.71%), SPX put on 20 points (0.89%), DAX added 115 points (1%), NKY added 330 (1.75%). Of course part of the latter two’s gain was the fade in EUR (0.36%) and JPY (150 pips, 1.34%).
This was risk-on, so 10-year yields fell, as did gold, giving up Thursday’s $10 gain. NZD also fell, but surprisingly GBP and AUD did not, and CAD along with oil gently rose (WTI rose 0.9%, which is a lot for most instruments, but quite modest for oil) It is possibly therefore that JPY move was buying the rumor of the forthcoming Trump-Abe meeting rather than any dollar strength, as indeed the EUR fade may have been due to Greek worries.
The euphoria in European stocks was not shared in the bond markets, and although the French-German spread eased, Greek 2-year yield was back over 10%.
Fri 10
0030 AUD MPC Report
0930 GBP Mfr & Ind Growth beat
1330 CAD Emp/Unemp beat
1530 GBP NIESR GDP est beat (0.7% vs 0.6%)
A surprise on Friday was the resignation of Fed governor Tarullo. He wrote most of the Dodd-Frank rules, and his absence weakens those safeguards, and we saw IYF (US Financials ETF) soar 1.5%. Favorite to succeed him is David Nason, Hank Paulson’s #2 during the meltdown, but for once, not a Goldman alumnus (GS shares actually fell on Friday!)
SPX continued with Thursday’s rally in the US cash session, making new all-time highs with the DJIA. This time the RUT and NDX joined in. This follow-through day was not, however, shared by the non-US indices which were flat, the NKY even fading slightly, as JPY recovered about a third of Thursday’s move. FTSE rose slightly. GBP had faded, but recovered a little with the NIESR GDP estimate beat at 1500. USD was flat on Friday, as EUR continued to worry about Greece and France. NZD and 10-year yields were flat, and like the day before CAD and oil continued to rise, the former no doubt helped by the employment/unemployment beat at 1330. Gold rallied into the close, which probably helped AUD which followed it.
NEXT WEEK
Last week’s much vaunted Trump-Abe summit didn’t produce anything economically substantive on Saturday, but keep listening. The conversation most accentuated Trump’s preference for Japan over China, although this would appear to be more military than economic, as he cancelled TPP three weeks ago, the whole point of which was to prefer other Asian nations over China.
Trump’s tax plan hints, which drove the markets last week are not due in substance for another two or three weeks.
In Europe, keep watching the French election polls, Fillon being ahead of Macron makes the nuclear option, Le Pen, stronger. Greek 2-year bond yields rose 1% last Thursday to an eight-month high, and ratings agency Moodys have warned of numerous credit risks. Greece has a €7bn payment due in July, and currently it looks like they will default without another bailout.
No important ERs on Monday, but Trump meets Canadian PM Trudeau, and Steve Mnuchin is expected to be confirmed as US Treasury Sec around 1900 (when GS is trading!). Wilbur Ross’ confirmation as Commerce Secretary (responsible for NAFTA) is also expected. INR inflation data is released, estimate 3.24%
Tuesday’s Asian sees Chinese inflation (CPI and PPI) at 0130, following by German inflation and GDP at 0700. The European session continues with CPI and PPI from UK at 0930, and €Z-wide GDP at 1000, along with the German ZEW Sentiment Survey. No US data today, but we see Janet Yellen’s first testimony to the new Congress for two days starting at 1500. This may be the main event of the week, if she amplifies the road map for interest rates in 2017. Commentators are expecting the headlines to occur at the beginning of her session.
US inflation comes in at 1330 Wednesday, expected to be slightly up at 2.4%, the best since 2012, and partly dependent on the continuing rise in oil prices. Also published are Retail Sales, where an improvement is expected as well.
Asia opens on Thursday with Australian Employment/Unemployment at 0030. The German Wholesale price index is at 0700, and US building permits and housing starts at 1330. The ECB MPC report is at 1230, followed by a G20 leaders summit starting at 1600, with the first outing for the new US SecState Tillerson.
Finally on Friday, we have UK Retail Sales at 0930. DefSec Mattis is speaking at the NATO conference in Munich. He is likely to tell the members, mostly Eurozone countries, to increase their defence spend. Remember public spending drives currencies up not down.
Calendar w/c 13 Feb. Important items in bold but any strong beat or miss will move markets.
Mon 13
No scheduled news
Tue 14
0130 China PPI/CPI
0700 Germany CPI/GDP
0930 UK CPI/PPI
1000 €Z GDP
1000 Germany ZEW Sentiment
1500 Yellen speaks
Wed 15
1330 US CPI/Retail Sales
1500 Yellen speaks
Thu 16
0030 Australia Emp/Unemp
0700 Germany WPI
1230 ECB MPC Report
1330 US Building/Housing starts
1330 Initial Jobless Claims
1600 EU Leaders Summit
Fri 17
0930 UK Retail Sales
The answer is the cynic or the patient pragmatist.
Many (more than most believe) have been quick to jump on 2017’s USD weakness as the beginning of a new USD downtrend. Although we believe this will be the ultimate verdict of 2017, we also believe it is too early. Why? Because it is not supported by interest rates. The Dollar has weakened while interest rate differentials have remained relatively stable. Miracles may exist but not in financial markets.
The Forex market is, or rather should be, driven by interest rate differentials. It is why after all we reversed our EURUSD long at 1.0815 as the differential had already turned lower.
And yet research shows the correlation between interest rate differentials and currencies is not as strong as people think. In an immediate time frame (ie rate announcement) and the long term we all know the link is there. So what about in between? It is there but disguised by a varying time lag that seems to defy quantitative analysis. It is skewed because interest rate consideration are not always to the fore. In other words, money is flowing in and out of currencies for some other reason.
It is why, at Matrix, we employ a FITS (Fundamental, Intermarket, Technical and Sentiment) scoring system to highlight what is really driving a market. If our F rating is constantly a 4 or 5 out of 5 for the EURUSD, the correlation between the 3 month EURUSD differential and the currency pair presumably should be high. However the Dollar has weakened in part due to recent political rhetoric from the new administration as President Trump seeks to regain a competitive advantage for the US. With such an unprecedented start to a new Presidency perhaps we should introduce a FIRST rating system instead to include an R for Rhetoric because it clearly has had an effect.
But that impact on the flow out of the Dollar has been on ‘Sentiment and not supported yet by either a sustained US inflation undershoot or higher economic growth, inflation and interest rates elsewhere. But sentiment can be quickly or slowly broken. It took six months the last time interest rates and the USD diverged over very bearish Chinese RMB and bullish USD sentiment.
This time we expect it to be quicker then not, quicker then not. Simply because the market will remain in a vacillating limbo between ‘words’ and ‘action’. Previously the fast stream of strong expansionist rhetoric from Donald Trump served to strengthen the USD, stocks and interest rates – unsustainable in the longer term if unfunded by tax. Donald Trump or his advisers know that a revival in US manufacturing cannot be maintained (without exports) with a continually rising Dollar (not even mentioning NAFTA and its possible impact on the US auto sector).
So talking the USD down serves a purpose but can only be sustained with action. And the only way to weaken the USD would be concerted intervention, a revival of QE or a collapse in the US Bond market due to a runaway budget deficit. None of these are likely..yet. What is more likely is continued improvement in the US economy with the consequent fear of rising inflation and interest rates particularly if Donald Trump enacts his expansionist rhetoric. That sentiment will support the Dollar until it is broken again by political currency rhetoric.
Earlier this week Business Insider published a condensed version of our FOMC Special. This highlighted a potential conflict later in the year between an inflationary Presidency and a Federal Reserve that seeks to counter that inflation. Until action speaks louder than words the war will be phoney as indeed is the Dollar downtrend.
So what will benefit most out of US growth and a rhetoric checked Dollar? Stocks not bonds.
As Zero Hedge pointed, referencing our stock market view. The extreme can get more extreme:
In the words of Take That:
Just have a little patience
I’ll try to be strong, believe me
I’m trying to move on
It’s complicated but understand me
‘Cause I Need time.
The market continues to react not just to the new world of Donald Trump and his controversial policies but the less flamboyant central banks of the world. Overall we saw a gentle net rise is SPX, but a fade in USD preventing the effect moving into non-US indices. FTSE and GBP continued to do their own thing as the machinations of Brexit continue.
The previous week ended with the US GDP Miss and set the context for a series of Central Bank meetings that prevented a USD recovery and the GDP (average) Fractal from continuing for the whole week.
Mon 30
The week started with almost an exact repeat of the previous Monday with bullish sentiment breaking over the weekend with a Trump immigration ban inspired sell off in stocks. Interestingly traditional correlations came back in line with VIX Gold and JPY rallying the latter enervated by BoJ concerns for Tuesday. DAX and NKY were down, pushed by the German inflation miss at 1300 and SPX gapped down and followed suit despite the US Consumption beat at 1330. It made a slight recovery in the late US session. Gold was up and oil was down, both trends which lasted until Thursday, but currencies were mixed. EUR and GBP were down, although the latter recovered, however CAD and JPY were up and AUD was flat. Bond yields were volatile but flat, as they were all week until Friday.
Tue 31
The BoJ rate decision was an hour late at 0300 and a non-event (a 45 pip drop recovered in 30 minutes). Stocks sold off again after the BoJ, swiftly followed by the USD following the BoJ Fractal. This was fueled by month-end hedge fund re-balancing which stopped exactly at their 1600 deadline. After that SPX DAX and NKY and bonds recovered a little. JPY EUR and CAD were sharply up, the latter two helped by the Eurozone 1000 triple beat of CPI, GDP and unemployment, and Canada’s 1330 GDP beat. FTSE and GBP did their own thing (in reverse of course) as they did all last week, and the rest of this week.
Wed 01
Wednesday was a relatively non-eventful day in anticipation of a non-eventful FOMC. Only oil, the market least affected by interest rates moved out of it’s range even after what was the most uninteresting Fed rate set meeting for months. Indices (FTSE in USD of course) were fairly flat, as was gold and USD pairs. This was despite a strong 81k (46%) beat on ADP Payrolls, in a week when ADP and NFP estimates were only 10k apart, and US Manufacturing PMI beat at 1500, although this did recover a fast opening drop in SPX.
Thu 02
Thursday set up the rest of the week with both AUD and GBP breaking to new highs in front of the BoE meeting, which was a 9-0 rate hold at 0.25%. Carney’s talk of interest rates going either way with higher growth but lower inflation sent the GBP crashing back down.
SPX NKY and DAX were flat again, and USD was muted. Only AUD rose, no doubt mapping gold. GBP fell more as a function of existing positions and, in the end, was only giving up Wednesday’s gains. Oil received an early boost with news from Trump of deregulation of the transparency rule on payments to foreign governments but gave this up later. Bonds were quite volatile and yields rose again.
Fri 03
Non inflationary growth had seemed a thing of the past until Friday’s NFP beat at 1330 confirmed the special UK-US relationship with the US posting higher payrolls but less than expected wages growth. Unusually for 2017, the USD sold off to their lows while stocks rallied back to their highs. DAX in euros hadn’t woken up since Wednesday choosing to ignore the move while the ‘real’ market DAX expressed in USD rallied in its place.
The Trump announcement boosted the equities effect further with the retail lending regulations being eased, with 4.5% rises in Goldman Sachs (GS) and Visa (V) for example. Goldmans at 7.91%, is the largest component of the DJIA by weight. The USD slight fade gave a boost across the board to currencies, but the true effect was yields gave up all Thursday’s gains.
The weekend sees Angela Merkel address her party at 1100 Saturday, and on Sunday, Bill O’Reilly from Fox interviews Trump in the Superbowl LI pre-game show around 2300, just as the futures markets open. Wild statements in tiny volumes can cause wild swings.
A much quieter week than last week will allow our NFP and FOMC fractals to unwind. There are very few significant European or US scheduled economic releases all week.
The week opens with Australian inflation at 0000 and Retail sales half an hour later. During the European session, the UK parliament starts three days of detailed Brexit examination, and ECB President Draghi speaks to the European parliament.
Still with Australia, the AUD rate decision (expected hold at 1.5%) is reported in the Asian session at 0330 Tuesday. US Trade Balance is released at 1330.
Wednesday sees the RBI rate decision on INR at 0900. The market is pricing in a 0.25% cut to 6%, and a hold would depress the currency and probably help NIFTY. Back to the UK, where the Brexit debate is scheduled to conclude, with a vote at 1900. The RBNZ rate decision (expected hold at 1.75%) is at 2000, with a speech by the Governor four hours later.
Thursday’s European session sees German imports, current account and trade balance at 0700 and US Jobless claims at 1330. We don’t cover MXN, but there is a rate decision at 1900, it is expected to rise from 7.5% to 8%.
Friday is a little livelier, an RBA monetary policy statement at 0030, and an EU extraordinary summit reporting at 0600. In the UK we have Manufacturing and Industrial Production growth at 0930 and the NIESR GDP estimate at 1500. Canadian employment and unemployment figures are at 1330. Also on Friday, Trump meets Japanese PM Abe, and if there are any ‘currency manipulation’ remarks, this may boost JPY against the dollar.
As we go into FOMC today, the market is preparing for a battle. Since Donald Trump’s election in November the prospect of inflationary growth and consequent Fed tightening has driven the US dollar higher. However more recent political rhetoric from the new administration has weakened the USD as President Trump seeks to regain a competitive advantage for the US. As the Fed, on the other hand, is responsible for controlling inflation (and employment) with now higher interest rates and other monetary tools, Donald Trump is not helping them to their job. Could today’s FOMC meeting therefore produce “a shot fired that was heard around the world”? We think not. As the US is still in a phoney war.
We believe this will be a recurrent and growing theme throughout the year. The Fed Chairman Janet Yellen’s bid to keep inflation in check with higher rates will support a Dollar that Donald Trump seeks to weaken to make the United States more competitive against previously weak(ening) currencies. In, short, an inflation versus devaluation Dollar. This continuous shifting in the market’s focus between a weak and strong USD suits our view of a slow whipsaw turn led more by growing inflation elsewhere than a politically neutered greenback.
A weakening USD and a stuttering bull stock market sets the scene for today’s interest rate decision.
Only six weeks after the 0.25% rate hike at the December meeting, it appears only 25% of the market is expecting a rate hike by March 2017. With no press conference and a high probability of no rate increase today, attention will be focused on the statement. This is particularly the case after the last meeting’s change in the dot plot when the FOMC perhaps surprisingly indicated its intention to raise rates a faster rate throughout the year to forestall Trump inspired inflation. Janet Yellen was at great pains to insist they are not behind the curve.
We can expect two things from the statement:
1. No change in Fed outlook as it remain evenly balanced both from an economic and political standpoint. Moderation in recent economic performance (evidenced by the recent GDP miss) and only a modest increasing in inflation will give little cause to adjust the dot plot. It would look foolish to change things only a month after particularly as inflation appears still to be heading towards target over the term. The language of the statement may well change from ‘accommodative’ monetary policy to a slightly more dovish ‘modest’. However the Fed is likely to sound constructive on economic growth projected to be 2.9% in 2016. Previous meetings in 2016 have held the Fed back from raising rates due to concerns over both China and Brexit. But with no such apparent geopolitical risks to the fore it will barely raise a mention. We also doubt there will be much if any reference to the new administration’s fiscal policy so early in the Trump presidency when the extent of his fiscal expansion is unclear. However this may change later in the year if an inflationary Trump inspired weaker Dollar combines with an even greater inflationary increase in government expenditure that is not financed by tax. The tug of war over inflation and USD could begin.
2. The markets will therefore move based more on current trading positions and expectation than anything in the statement. At MatrixTrade, we continue to track how markets move into such events particularly so we can benefit from a consequently predicted move after the event. It is interesting that there is often a noticeable difference between statement only meetings and those with press conferences. This is mainly due to lower expectations of anything dramatic from a statement only meeting but also that the reaction tends to be faster than in a nuance by nuance delivered press conference.
This is what the FOMC fractals are currently saying on two of the markets we follow.
Subscribers to matrixtrade.com can see how the recent price action is following FOMC fractals on these and a wider range of markets including EURUSD USDJPY and the most consistent FOMC performer, Gold.
Fragmentation Means Plenty of Opportunity! – Jan 29
The markets are becoming increasingly fragmented.
Markets do not always move together at the same time but they do normally tend to keep some sort of correlation or coherence in the near term (ie one month). However their cohesiveness continues to break down in 2017. This suggests firstly certain established trends are close to completion and reversing and secondly that there are significant cross or spread opportunities in the shorter term.
At the start of the year we explained how traditional inter market relationships frequently break down for 2-3 weeks as traders seek and over pursue different early year trends. However, this has persisted for the whole month of January and suggests the major prevailing trends lack breadth (ie they are often moving in isolation or isolated groups) and therefore will not be sustained.
This is particularly true of the stock markets that have seen some Indices rally strongly but not others. The DJIA, SPX, DAX (and possibly soon Nikkei) have all enjoyed new highs following Donald Trump’s Inauguration (and the Trump Fractal). But it appears the Russell, FTSE, and the French CAC have been refused admittance to the party. We doubt this break down in correlations (fragmentation) will last long. In fact many of the correlations are delayed eg Nikkei leading the normally lockstep USDJPY by 36 hours. But it does suggest the causes of the previous post Election uptrend (eg rotation out of bonds into US stocks) no longer have the same breadth and therefore no longer have the same force to sustain the move. This is supported by the continued similarity to the 1929 and 1987 blowout and crashes as evidenced by the (even now fragmented) countdown to a major DJIA top To keep abreast of how this blowout is developing continue to check http://www.matrixtrade.com/freemembers/
It is also true of the uptrend in the key US 10 year and other associated yields (Bunds). Correlations will return to normal (ie fragmentation end) when the markets turn. Indeed yields have also entered the last leg of (at least) the initial uptrend} projecting a reversal in both yields and stocks soon.
The result of this fragmentation has most keenly been felt by the USD. If you went by the Forex market alone you would not think we lived in a Trump dominated world. Both GBP and EUR went in opposite directions this week. But the greatest evidence of a fragmented short term market comes from the USD-US Yield relationship. The correlation hasn’t gone away. It was just delayed by 136 hours..
Correlations will therefore only return to normal (ie fragmentation end) when the markets turn. Although yields have also entered the last leg of (at least the initial uptrend) projecting a reversal in both yields and stocks soon this will probably not translate into a universal reversal in the typically lagging Dollar.
It is beyond the remit of this newsletter but not the writer to wonder whether Donald Trump is more likely to cause fragmentation than division. In other words what we are seeing now in markets may not be temporary. However, this does create more opportunity in the shorter term particularly in the area of ‘staggering fractals’ – where markets repeat each other with a delay. Take advantage while it lasts.
“However fragmented the world…. it is an inexorable fact that we become more interdependent every day.” Jacques Yves Cousteau
In President Trump’s first week in office overall continued the trend from last week of indices rising higher whereas DXY had a V-shaped week, finishing roughly flat.
In the absence of news on Monday, the week started with a typical post Trump event disappointment as the market sought confirmation and detailed of the expansionary election rhetoric. In the Asian session, NKY fell (as did USDJPY as usual), and NIFTY gave up a brief ramp. The trend continued into Europe with DAX falling 1% on the open, and SPX falling 0.6% at the US open, although some ground was recovered by the end of the day, as it was with oil.. FTSE’s volatility was much less. It ended flat for the day and indeed all week, consolidating inside a 1% range. EUR, AUD and gold were similarly flat, CAD rose slightly. GBP, this week’s most volatile currency rose constantly all day to put on 1.5c (1.2%).
Tuesday was a day of two different sets of expectations. In Europe, the UK Supreme Court ruled against the UK government pursuing Brexit without a parliamentary vote. This overshadowed the UK PSBR beat at 0930. As this was universally expected, it provided the classic buy the rumor sell the fact, before GBP rallied again because many expected the post ruling sell off. This is a common case of over-anticipation in markets- The Double Whammy.
After the previous 6 days of ranging and the Monday Trump disappointment sell off, the market did not expect and was caught off guard by a resurgent stock market assisted by a recovery the day before in US yields. The European session bought USD against EUR and AUD, but the positions reversed in the US session after a PMI beat at 1445, when SPX sharply rose all day as much as 19 points (0.84%) before giving up a little at the close. Other indices joined in, and EUR and AUD, and particularly CAD ended the day higher as well. Gold started a decline which lasted all week.
Wednesday was a blowout. It saw Japanese, German and US stocks and bond yields rally aggressively following the now well established post-Trump template. However this was not uniform with FTSE and CAC and most surrogate currencies ignoring this uptrend, except CAD which hit a weekly high (USDCAD low) of 1.305, before fading slowly for the rest of the week. This was despite a flat day for oil, ignoring the EIA miss at 1530. GBP resumed its upward trend, probably part of the reason why FTSE faded. In recent weeks, the momentous Trump world has meant the economic calendar has had less effect than usual. We told you last week about the two other events that topped and tailed Wednesday (in GMT). It was therefore almost gratifying to see the slight miss on Australian inflation at 0030 cause an instantaneous 50 pip (0.7%) spike down, increasing to 1.1% by the end of the Asian session. Similarly the NZ CPI beat 21 hours later caused an NZD 0.55% spike up, after an instantaneous flash spike down of 0.3%. The Kiwi could couldn’t hold the gains, and had faded 1.24% to 0.7222 by the end of the European session on Thursday, exactly where it started in Europe the day before.
On Thursday, correlations continued to skew. Stocks that are taking part in the post inauguration rally maintained their gains (FTSE RUT and CAC are not at the party) and the USD finally reacted to rising yields, rising across the board. Even GBP took a breather, and actually faded the GDP beat at 0930 by 111 pips (0.88%), only reversing at the US Jobless Count miss at 1330 (which had little effect on other pairs). The market is being driven by flow not the textbook. Oil rose sharply in the early US session, putting on 2.3% in a couple of hours for no particular reason. However it gave up the gains in three spikes down the next day.
The Japanese inflation miss (2330 Thursday) slightly weakened the yen on Friday, pushing USDJPY to a weekly high of 115.37 by 1330.. EUR, AUD and gold made small recoveries both still well down on the week. Conversely bond yields gave up some of the gains from earlier in the week. Indices were largely flat on the day as they consolidated their (very small in the case of FTSE) gains.
Next week clearly has potential to be volatile. Any day soon Donald Trump is likely to table the end of NAFTA (North American Free Trade Agreement). Although the outcome of what are likely to be prolonged negotiations will be unclear for a while, history has a very interesting precedent. We find many of the best instances where markets repeat themselves through logic rather than human or programmed scanning of markets. It may not be a surprise but it is certainly amazing that USDCAD is repeating the same price action as CADUSD during the negotiations before the start of NAFTA during the 1990-1992 period. We will continue to track this price action closely. Indeed a shorter term magnified version is available to subscribers on our USDCAD page.
Even without any NAFTA announcement, the week promises to be very busy indeed. The weekend is already full of politics, with the German SDP picking their candidate to run against Angela Merkel in December, and the second French Socialist primary. The outcry over the Trump Muslim ban’s effect on tech giants remains to be seen. We have three rate decisions this week, including the all-important US Fed, the first such decision in the Trump Presidency, and the first time since November that the rate set and NFP are in the same week. Trader are expecting a hold at 0.5%, but the ‘dot-plot’ will reveal future intentions. You can see probabilities change on a daily basis with this useful CME Group tool http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html
Monday is relatively quiet with German inflation at 1300 and US Consumption at 1330.
The Tuesday Asian session opens with the BoJ rate decision at 0200. Although the -0.1% estimate, unchanged for over a year, is highly likely, previous events have shown yen volatility. The press conference is later at 0630. As we have seen with EUR, that may generate more volatility than the rate itself. Indeed, since USDJPY continues to mark out very similar but smaller scale price action to the whole of 2015-2016, the heightened volatility represented previously by the US Election day provides an excellent possibly two way trading opportunity. We will certainly be around looking to trade and issue trading signals through what would well an exciting session. This and a much magnified version of this chart will be available by Monday close on our USDJPY analysis page.
The European session see Eurozone GDP and inflation at 1000. As this is a combination of all 19 Euro countries, only a big departure from the estimates of 1.7% and 1.4% would affect the single currency. The UK government starts the Brexit debate they were forced into by last week’s court ruling. GBP may be volatile again this week. Finally we have Canadian GDP and some PPIs at 1330, normally of little consequence, but worth watching as CAD has been volatile recently, and also Governor Poloz releases a speech an hour before the figure. Sentiment is improving on the Keystone Pipeline news, and as Trump’s fire is pointed at the other NAFTA partner, Mexico.
Manufacturing PMIs are reported for four countries on Wednesday: China at 0200; Germany at 0855; the UK at 0930; and the US at 1500. All are well over 50 (the point between contraction and expansion, equivalent to the zero point on GDP, CPI etc.) so no big moves are expected. The Chinese data reaction may be muted, as the stock exchanges are closed all week, and are therefore unable to give a lead to other Asian markets. More Brexit fun as UK Trade Secretary Fox is questioned by the British parliament’s trade committee. As always in NFP week, we get a hint to Friday’s figure with the ADP Payrolls figure. The estimates are very similar (168k ADP, 165k NFP), so a substantial beat or miss will move markets. However, as stated above, the big news of the day is the Fed rate decision at 1900.
The UK is in the spotlight on Thursday as well. The rate decision is at 1200, and unlike other countries, the UK publish how many of the MPC voted for an change. After the UK Jan 17th inflation beat, there is a small possibility that it won’t be 9-0 this time. Even one vote to raise (usually McCafferty) could raise GBP. The BoE has form on this, they didn’t implement a widely expected cut last July. Otherwise we have US Jobless Claims at 1330, and BoJ Minutes are due at 2350.
China has more Manufacturing PMIs at 0200 on Friday, just before the markets re-open after a week. The equities gap will be worth noting, as plenty has happened in the world in the first week of the Year of the Rooster. The big event of course, is NFP at 1330. As usual we will be employing our traditionally accurate fractals across a number of instruments.
Wed 01
0200 China Manufacturing PMI
0800 ECB Meeting
0855 German Manufacturing PMI
0930 UK Manufacturing PMI
1315 ADP Payrolls
1500 US Manufacturing PMI
1900 US Rate Decision & Minutes
Thu 02
1200 UK Rate Decision/QE/Votes
1330 US Jobless Claims
2350 BoJ MPC Minutes
Fri 03
0145 China Manufacturing/Services PMI
1330 US Non-farm Payrolls
Action Will Speak Louder Than Words This Week – Jan 20th
Following our forecast of a Martin Luther King range bound Week rather than Day, next week promises to be one of the most interesting if not exciting markets in a long time. A week when some of our key themes for 2017 should come to the fore. The seeds sown by Donald Trump’s Election, the UK Decision to leave the EU and the OPEC Agreement should all come to some sort of fruition this week. And indeed volatile or variable volatility should remain a thorn for many traders as last week’s lack of volatility could blossom into, in some cases extreme, two way volatility. Not a market to miss.
One of the major market tenets set after the US Election was the unusual and ultimately unsustainable triangle of rising US interest rates, rising stocks and rising Dollar on the back of a potentially expansionist new President [The Trump Effect]. Since the beginning of 2017 this triangle appears to have broken down as stocks have stayed strong but bond yields and the USD have retraced as the market has sought and so far failed to receive confirmation of this potentially inflationary boom. Indeed many have also jumped on Donald Trump’s comments about the Yuan strength as a call for general USD weakness. Ultimately we believe that will be the end result of the Trump Presidency but not quite yet.
The first 2-3 weeks of the year are often deceptive as previous correlations break down temporarily [into a new framework that often resurfaces later in the year] as traders seek and pursue different new trends. January sentiment is probably the most uncertain of the year. It is therefore no surprise that the EURUSD appears to be following what we have now named the ‘Uncertainty Fractal’ that the market followed during equally uncertain times in the run up to the Greek, British and Italian Referenda.
We blindly assume uncertainty is bad for a currency but often uncertainty surrounding a negative impact event keeps the market within the range until there is greater resolution. The UK Government’s decision to refer the terms of Brexit to Parliament and the Pound’s sharp rally last week was eloquent testimony to this and probably further evidenced by the UK Supreme Court’s decision this week that could well end the current wave of uncertainty.
The early year break down in correlation is often manifest in erratic ranges that are typically ended by a market realignment on an event. Despite the lack of detail contained in the inauguration speech, this could be such an event and trigger another unsubstantiated and therefore unsustained phase of the triangle. This is supported by the now well evidenced Trump Fractal that served us well during the US Election campaign and indeed after. The US stock market [SPX] tends to act in a consistent even if often counter-intuitive way before, during and after every Trump event so far.
If these two triggers are not enough to destabilise [and re-stabilise] markets then the weekend OPEC news promises to create possibly the most exciting Oil market we have seen the projected [Washington] Oil low in February. Sustained strength? With gross long positions in NYMEX futures and options among speculators at the highest on record, all we need is the now for pundits to call a major bull market.
LAST WEEK
The week started dominated by weekend reports that Theresa May’s would, on Tuesday, indicate Britain’s possible exit from the single market to achieve border controls. GBPUSD promptly traded down 180 pips (1.47%) in the Wellington session.
Monday was Martin Luther King day and US markets were closed. Markets were generally flat despite the early action. In the Asian session NKY fell sharply by 2.4%, but NIFTY rose gently putting on 34 points (0.4%) no doubt helped by the Indian trade and inflation beats at 0630. Without US volatility GBPUSD had only recovered 20 pips by the end of the day.
Tuesday’s European session was all about GBP. British PM May was finally decisive about Brexit, and gave parliament her 12-point plan (ironically also the number of stars on the EU flag). Having already started well with a CPI (inflation) beat at 0930, GBP soared all day, filling the weekend gap with ease, putting on 3.2% by the end. Although many have attribted this to a decisive May speech. the opposite is true. Sterling rallied because of the greater uncertainty surrounding the hitherto bearish Brexit process and, we believe, is front running the Government’s defeat in the Supreme Court on Tuesday. Either way the euphoria probably helped Sterling to its best day in 8 years and the produced a correlated drop in FTSE from our major 7360 target,
Elsewhere, although SPX was flat, we saw a steady and pronounced fall in USD all day against commodities and currencies. The benchmark USDJPY fell 176 pips (1.55%) on the day. This may be attributed to Trump’s remarks on the Chinese currency being undervalued — CNY hit a 2017 high – which many have chosen to mean Trump favors a weaker USD. Note however that the USD weakness did not extend to 10 year yields, which started a rise which lasted all week.
Wednesday was flat for indices (except for NKY which tracked USDJPY), whereas the USD reversed Tuesday’s weakness. Gold gave up all the previous day’s gains as did EUR, AUD and JPY. Oil faded sharply, as low as $50.89 at one point (3.55% down), although it fully recovered by the end of the week. UK Wages/Claimants at 0930 and US inflation beats at 1330 had little effect. The other story of the day was CAD following 36 hours behind GBP. After the earlier fall in oil, it was the BoC rate hold at 1500 which trigged a sharp exit from the loonie. It ended the day 217 pips (1.67%) down and continued to fall for the rest of the week.
Equity markets were flat again on Thursday, as was USD this time with correlations breaking down as the market tried to pursue recent disparate trends. GBP and AUD rose (the latter despite mixed employment figures at 0030), but JPY and CAD fell. The ECB rate decision, as always created volatility. Interestingly, it is often the remarks not the figure that cause the effect. The hold decision at 1245 hardly moved EUR, but Draghi’s remarks at 0130 about inflation (or rather, the lack of it) and QE caused an instant spike down. However, after giving up 80 pips (0.74%) to 1.0588 in minutes, the single currency had fully recovered an hour before the end of the US session, and ended the week just shy of 1.07.
Friday started well with China’s GDP and Retail Sales beat at 0200, and as JPY fell, NKY rose, to finish a V-shaped week only 0.79% down after a low point of -3.43% on Tuesday. Conversely, after ranging all week, NIFTY gave up 62 points (0.74%) on Trump protectionist fears. DAX followed NKY with a spurt up at the European open, and then ranged all day. GBP faded 78 pips (0.64%) on the UK Retail Sales miss at 0930, but recovered it all in the US session. FTSE of course reversed. The FTSE/GBP link is starting to look like NKY/JPY these days.
The real pattern for the day was USD rising in Europe (against EUR, AUD, JPY, CAD and gold) and then fading into the Trump inaugural speech. AUD, EUR and GBP all made V-patterns for the day. We can see this most clearly through CAD, which gave up 100 pips in the European session, and then recovered that territory despite a CPI (inflation) miss at 1330. And notably, even 10-year yields faded into and after the speech, despite ignoring earlier USD stumbles in the week. Oil just rose all day, helped by weak USD, but more likely on OPEC remarks of “so far so good” prior to their Vienna weekend meeting to police output cuts.
At the US Open, SPX had an fast spike up 0.35% on the open which completely faded away as the speech followed the inauguration at 1200EST (1700GMT). Trump’s inaugural speech was strong on rhetoric but not detail. Equities, bond yields and USD all faltered whilst he spoke and did not recover by the end of the session.
NEXT WEEK
Next week see the first week of the Trump Presidency in action, and all eyes will be how fast and what extent he makes good on his campaign promises. There is now building concern, especially outside the US, that he may not. Actions speak louder than words, and in any event, history has shown that like communism, autarky does not create economic growth.
During the weekend OPEC met in Vienna and confirmed that most countries are adhering to the output cut deal, indeed OPEC and Russia are ahead of schedule, and Saudi Arabia, Algeria and Kuwait have made even deeper cuts than required. Expect oil to rise next week, along with proxies such as CAD and NOK. Also on Sunday are the French leftist primaries, although these are of little significance, as Fillon for the Republicans is ahead in the polls.
Monday is a quiet day for news, on Tuesday we have the long-awaited Brexit ruling by the UK Supreme Court. A decision to force parliament to debate it (and perhaps modify the terms) would be positive for GBP, although last week’s events have somewhat reduced the effect. Also of significance is the Italian Constutional Court’s ruling on the law rejected by voters in December. Also on the calendar are German PMI at 0830, UK PSBR at 0930, and US Manufacturing PMI at 1445. Turkey and South Africa also have interest rate decisions.
Wednesday starts with Australian CPI at 0030 (est 1.3%), and ends with NZ CPI (set 0.4%) at 2145. If these inflation figures come in higher, they could lead to rate rises, and accelerate the already impressive rises in these currencies this year, even against the surging US dollar. Between these two Asian sessions, senior White House officials meet the Mexican Foreign and Economy Ministers.
On Thursday, Europe opens with the German Consumer Confidence report at 0700. At 0930, UK GDP figures are released. After that UK Brexit Minister David Davis takes questions in parliament, and Eurogroup President Dijsselbloem speaks at a Brexit conference. Expect GBP volatility. Japanese CPI is published at 2330 just before the Asian session opens.
Chinese markets close on Friday for the Lunar New Year, and do not re-open until the following Friday Feb 3rd. Traders may take the opportunity to unwind positions this week, which may cause unintended consequences in other markets. The only economic release of significance is the US GDP at 1330, coupled with durable goods orders.
Sun 22
0000 WTI OPEC Cuts Audit
2300 EUR Draghi speech
Mon 23
No news
Tue 24
0000 GBP Brexit Court Ruling (9-10am??)
0830 EUR German PMI
0930 GBP UK PSBR
1445 USD Manufacturing PMI
Wed 25
0030 AUD CPI
0900 EUR IFO Business Climate
2145 NZD CPI
Thu 26
0700 EUR German Consumer Confidence
0930 GBP UK GDP
2330 JPY CPI
Fri 27
0000 CNY Chinese New Year’s Eve
1330 USD US GDP & Consumption & Durable Goods
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Is The Trump Effect Over? – Jan 15th
The Trump Effect has not resumed in the New Year. Is it Over? No.
The start of the year is often characterised by an apparent break in sentiment from the previous year as traders seek new trends. Often these trends do not materialise as the fundamentals have not changed from the previous year. The first two weeks of the year often also therefore sees a temporary break down in correlation as traders pursue these different often conflicting possible new trends.
This has been the story of 2017 so far. The key US triangle of rising rates, rising stocks and rising US Dollar that dominated the last 7 weeks of 2017 has not been maintained. The dollar has inverted falling more as stocks rose and yields recovered from retracement for most of the week. Perhaps prophetically we expect this to be a feature later in the year.
The reason why this disconnect has happened in the last week or two has primarily been uncertainty surrounding the extent to which Donald Trump will pursue his expansionist election rhetoric and therefore maintain the Trump Effect. We expect almost the opposite this week in anticipation of his inaugural speech with yields recovering after Monday and the Dollar on hold. One of the key variables for the week will be stock volatility and whether they continue to fail or indeed break their recent highs. Momentum will also therefore be key after next Friday.
The other joker in the pack this week is Brexit: initial hardline Brexit leaks over the weekend possibly followed by the anticipated UK Supreme Court Ruling. Sterling has similarly been caught up with and skewed by market sentiment. As Sterling has continued to fall into what is widely seen as a bullish ruling against the government, opportunity abounds for potential 2 way volatility. (See previous UK Ruling Email and our condensed Forex Outlook for 2017.
The fuller version of our 2017 Forex Outlook is available to subscribers in premium posts as are Indices and Commodities 2017.
LAST WEEK
The week started on Sunday with the UK Prime Minister indicating a more hardline Brexit and the possibility the UK could leave the European single (trade) market. Sterling closed Monday over a cent down driving the (inverse) FTSE) higher to successive new highs all week. Monday was otherwise mixed for equities. German trade figures at 0700 kept the DAX flat (as was EUR until late into the US session when it rallied, SPX and NKY faded through all three sessions. All currencies and gold rose against the dollar except CAD, probably because WTI faded all day. 10-year bond yields were down. NIFTY started an uptrend which lasted until Wednesday.
Tuesday was a flat day for currencies and yields, except EUR which gave up Monday’s rally. DAX and SPX were also flat, although the latter managed a 14 point (0.62%) rally at the US Open which had faded by the close. FTSE made another all time high, gold and oil continued their Monday patterns.
Wednesday saw FTSE open with a slight gap down on Wednesday, but this was soon recovered as it joined DAX and SPX to rise firmly. USD reasserted itself, and all currencies and gold fell, although EUR, AUD and CAD recovered in the US session. GBP ignored the trade beat at 0930 and the GDP estimate as expected at 1500. CAD was following oil’s reversal (despite the EIA miss) which rose sharply until the end of the week. The NKY and 10-year yields fell, the latter affected by the auction at 1800. The major event of the day if not the week was Donald Trump’s first news conference as President Elect. With the market seeking confirmation or denial of his expansionist policies, the erratic and volatile belied the absence of detail. The end result was disappointment and a sharp but shortlived sell off into Thursday, reminiscent of the Trump inspire spike down then ramp surrounding the election.
DAX gave up all its previous day’s gains on Thursday fading 163 points (1.39%), the sharpest pullback for over a month and a 2017 low. SPX, ignoring the Jobless beat at 1330, also faded 17 points (0.75%) although unlike DAX, it recovered this completely by the close. NKY also faded through all sessions. NIFTY was flat for the rest of the week, after opening 0.9% higher and immediately giving it up. USD opened by fading against gold and currencies, and bond yields rose. It recovered against all except AUD by the end of the day. EUR which had been rising all week reversed after the ECB MPC accounts at 1230.
Friday largely reversed Thursday in equities. Although NKY was flat, SPX, DAX and FTSE were up. USD was flat against everything, except CAD which rose slightly despite oil fading. The US Retail Sales and other misses were ignored. FTSE finished the week with another ATH of 7133, 118 points (1.63%) up on the week. Save two minus 2-point doji’s this index has not posted a red daily candle since Dec 14th.
NEXT WEEK
The two dominating events this week are Donald Trump’s Inauguration speech and the possible UK Ruling. Indeed with reports on the weekend front running Theresa May’s Tuesday speech as hardline Brexit we should see another weak opening for Sterling. But as Monday is Martin Luther King day and US markets are closed this should again prove shortlived. Also on Monday the India trade deficit and inflation figures at 0630 could be a possible catalyst for a continuation of our long held Nifty outlook. BoE Governor Carney speaks on policy issues at the LSE at 1830, when US and European markets are closed. In the very unlikely event that he says anything momentous, it will be picked up in the Asian session. Also the UK Brexit Supreme Court ruling could come any day this week but more likely Wednesday and less likely Friday.
Tuesday sees UK PPI and CPI at 0930 and German ZEW sentiment at 1000. UK Prime Minister May is speaking again on Brexit. Has the time for saying ‘Brexit means Brexit’ finally passed. Sources apparently suggest otherwise. Keep GBP on your watchlist.
The annual Davos Summit starts on Wednesday thru Friday, where speakers are important enough to move markets. The agenda is on weforum.org. The day also sees a lot of economic releases: German CPI at 0700, UK earnings and unemployment at 0930, US CPI at 1330, CAD rate decision at 1500, and a Janet Yellen speech at 2000. This is Yellen’s final speech under the Obama administration. If she has been given her marching orders by Trump, she may be more forthcoming than usual.
Thursday has Australian employment and unemployment at 0030, and the ECB rate decision at 1245 followed by a Draghi press conference at 1330, although little action is expected
Friday’s main news is Chinese GDP at 0200. We have German PPI at 0700, followed again by UK news at 0930. This time it’s retail sales. Finally Indian USD reserves are reported at 1130.
Expect markets to slow right down at 1700 (1200EST) as Donald Trump is sworn in as 45th President of the US, and the world listens carefully to his inaugural address. Will it be anodyne and statesmanlike, as his victory speech was, or will we hear rhetoric in the manner of his tweets? Given his track record so far, all bets are off. The themes are foreign trade, deregulation (particularly for energy), and ‘draining the swamp’ (includes reducing the effect of lobbying). We will be watching EM currencies (particularly MXN of course), and defence (indeed all heavily lobbied) stocks, as well as SPX and the dollar generally. What he doesn’t say can be as significant as what he does.
How will 2017 be more dramatic than 2016? – Jan 8th
LAST WEEK
The first week of 2017 was also the first NFP after the Trump rally, and the week the DJIA nearly hit 20,000.The first week of the year was unusual in 3 respects.
Firstly, the DAX rallied aggressively to new highs while other indices were closed. This move led many other markets throughout the week. Secondly the key 10 Year US yield led the Dollar lower and Gold higher for most of the week while stocks also rallied, the first time the ‘triangle’ has broken since the election. Although it is easy to read too much into the frequent correlation breakdowns in the first week of the year, this may be a sign of things to come later. Thirdly, the stock rally not only represented a delayed ‘Santa rally but also highlighted how Donald Trump’s election has destabilised the normal market dynamic.
The first week of 2017 was also the first NFP after the Trump rally, and the week the DJIA nearly hit 20,000.
Monday was a holiday in most markets, although the DAX was open and rallied sharply by 200 points, to then consolidate in an 80 point range for the rest of the week. Forex markets were open and show a slight USD appreciation.
Tuesday saw PMI beats in Germany and the US but these were ignored. Equities faded, but there was another slight improvement in USD. The most notable event was oil. After reaching $55.20, its highest level for 18 month, the price suddenly dropped 5% in three hours in the US session. There was no news, so this is likely to be short-term profit-taking, especially as USDCAD remained flat.
Wednesday was NKY’s first 2017 session, where it promptly rose 2%. DAX and SPX continued ranging. The UK PMI at 0930 didn’t have any effect, and FTSE ranged until Friday. USD started to fade especially against CAD, and oil started to climb back up. USDJPY accelerated its decline after the non-event FOMC minutes at 1900.
Thursday saw NKY gave up some of its New Year spike, but US and European equities and oil were flat on Thursday, despite the (delayed) ADP jobs miss and oil EIA beat. USD and 10-year yields continued down, which allowed all forex pairs and gold to reach their peak for the week.
Friday’s NFP was a slight miss (156k vs 178k) but average earning increased and the previous month was revised upwards from 178k to 204k. Markets acted like a beat, and the DJIA, SPX and NDX (Tech 100) all rose to all-time highs, the DJIA reaching less than half a point off 20,000.
USD had a similar day against all currencies and gold. 10-year yields rose after falling all week. The UK FTSE also reached an all-time high as GBPUSD faded more than the other USD pairs. Only oil was flat on the day. Unusually USDCAD tried to buck the trend after strong Canadian trade figures, but gave up and rose after an hour to two.
NEXT WEEK
Another quiet week for news which begs the question whether prevailing trends can be continued. In this respect Monday may well be an important guide to sentiment. Although Monday has some German trade figures at 0700, but there is little else until the UK GDP estimate at 1500 Wednesday. The biggest event of the week is the ECB MPC accounts and report on Thursday 1230. Finally on Friday US Retail sales are issued at 1330. Note that the following Monday (Jan 16) in Martin Luther King day, and US markets are closed.
2016: You Reap What You Sow
Just as the US Election was arguably the event of 2016, Hillary Clinton’s ill-omened blast at Republicans in March was probably the quote of the year. When she said “You reap what you sow” she wouldn’t have known that she was not only describing her own campaign but also the prognosis for financial markets in 2017.
2017 will likely go down in history as a consequence of an event driven 2016. What we continually described as a year of earthquakes, 2016 has sown potentially earth-shattering seeds that should only fully bear fruit later in 2017 if not as late as early 2018. To appreciate what financial markets will do this year, one has to understand what really drove the trends of 2016 and gauge whether their causes will continue with the same force.
This is the first part of three articles that
There was a lot of noise before during and after the sometimes ‘violent’ events of 2016 from politicians, electronic trading floors and mainstream/social media. This noise may have disguised what was really going on [to the eternal shame of pollsters] but fundamentals will ‘out’ in the longer term.
Sentiment has a habit of appearing to break or adjust over holidays, but a new calendar will not herald a new market unless fundamentals also turn. Markets are a continuum and there is, as yet, no reason to believe that Asian deflation, UK’s Brexit, EU instability, OPEC’s politics, Central Bank tardiness and Trumpflation will cease to drive markets.
“Don’t judge each day by the harvest you reap but by the seeds that you plant.”
Robert Louis Stevenson.
Like any other year, 2016 has been characterised by a search for a safer higher return. But this year that quest has been quite different. The world has been and still is dominated by low yields either from a reluctant US Fed suffering from a QE hangover or other G7 nations pursuing anti-deflationary policies. At the August peak of the global bond market, total negative yielding debt amounted to $13.4trn. Even now after the Trump inspired bond crash it still stands at $11trn.
Throughout the year money has been quick to leave the arguably less safe low yield havens and seek a new home with a positive return as soon as it appears less threatened by geopolitical risk. The unprecedented series of political events this year has brought a succession of often violent, but certainly exaggerated flow of funds ending the year at the expansionist Trump Towers.
The start of 2016 was brutal testimony to this market continuum. Despite shrugging off the first US rate hike on December 16 2015 with a typical year end stock rally, 2016 began with an also typical post first hike rout of 10%. This was attributed at the time to fears of a Chinese economic slowdown and weakening currency. The S&P500 (the closest proxy to ‘risk appetite’) fell 12.9% in 14 days: the worst ever start to a year and hard to forget. Indeed the 30 day 10% Trump rally since the November 8th election, has prompted many stubborn bears to anticipate another January post hike sell off, even though the second rate hike does not historically carry the same weight and we are yet to see the expansionist Donald Trump’s true colors. The price action of many markets is in fact more akin to the end of 2014 than 2015.
Another delayed response to the US rate hike was the long awaited start of a 29 week 31% gold rally This not only mirrored a similar aggressive gold ramp after the first rate hike in 1999 and the Washington Gold agreement of September 1999 but continues to serve as a template for many reversal markets since – as has the subsequent deep prolonged retracement.
The most notable market following this ‘Washington’ template has been oil. After setting a low of $26.05 in January, West Texas Intermediate has spent the year recovering to close near its outstanding $54.51 high, well beyond our conservative $45 ‘Washington Gold’ target but still short of the more ambitious $75.
Anticipation of November’s deal in Vienna to freeze production, followed by non-OPEC producers agreement to reduce supply, has taken oil above the $40-$50 range, an equilibrium previously high enough to satisfy OPEC members but arguably not high enough to stem the demise of US frackers.
It is curious how a political supply and demand driven ‘black gold’ has followed a similar path to the more precious commodity. But similar events to the 1998-2000 Oil price collapse and subsequent OPEC inspired recovery help explain parallel price action.
January also shocked the market when the Bank of Japan introduced a negative interest rate policy. The initial effect was also negative, dumping Japanese Bank stocks, JGBs and the JPY. But where, as traders we are blessed, is that markets often move in sequence and not together. It took a full 10 months before Japanese markets followed through also pursuing the 2000 template with a more aggressive reversal in USDJPY and the Nikkei. The after effect of this earthquake has plenty of historical precedent.
The UK’s Brexit Referendum was another seemingly unique earth shaking event that had plenty of precedent. Not only was EURGBP following a similar template to the 1992 pre-ERM exit
but GBPUSD also tracked the same path that EURUSD did prior to the 2015 Grexit vote. This is what we now refer to as the ‘Uncertainty Fractal’.
We mistook the projected Cable spike of 1.50 before a dump as a ‘buy the Remain rumor sell the fact’ and were unaware, at that point, how wrong exit pollsters could be. The Leave result shook most markets temporarily (setting a map for later US and Italian votes) and trounced both Sterling and UK yields as both investors and traders ran for cover. Interestingly the three month EURGBP differential had anticipated this move as soon as the Referendum was set in February.
GBPUSD has been within a series of downward shifting equilibrium ranges ever since, culminating in the Fat Finger capitulation spike of October, with two consequent ironies. The first is that Sterling weakness has served to drive FTSE higher primarily because many FTSE 100 companies receive significant non-GBP revenue. The second runs counter to the orthodoxy that currencies hate uncertainty. Under Brexit, greater certainty over the actual cessation process has sought to weaken GBP further and uncertainty has ironically supported the Pound. Both legal wranglings over Article 50 and Trump’s apparent pro Brexit UK stance have produced notable rallies.
For many in the market, Brexit provided a welcome diversion from the constant ‘dot plot’ speculation over the Fed’s second rate hike. It was shortly after that hike that US yields set a low that many (including ourselves) believe is the end of the eight year bull market in bonds. The effect was more noticeable in emerging markets where a higher Dollar, driven by US bond yields, was felt most notably by the Turkish Lira, Argentine Peso and Mexican Peso. The latter also took the brunt of Trump’s anti Mexican campaign.
Many market orthodoxies have been turned on their heads this year, not least after the US Election. Whenever the radical Trump fared well in the US Presidential campaign it was immediately received badly by markets whereas the prospect of a status quo Clinton Presidency was welcomed. However, as we pointed out at the time, Trump dumps were swiftly unwound ending up net higher and Clinton relief rallies soon faded as did her election night. The reaction to the result was no exception with SPX following a similar pattern to Brexit with an aggressive spike down and rally to (now 10%) above its pre-Election Day high. The prospect of business friendly fiscal expansion not funded by tax has driven investors further out of bonds, and into stocks and the dollar. For the first time since 2000 we have rising US interest rates, US Dollars and US stocks; a triangle associated with the last leg of a bull market in stocks.
The FOMC reaction has been to raise rates by the expected 0.25% but also perhaps uncharacteristically indicate a more aggressive dot plot tightening to circumvent Trumpflation.
The Italian Referendum on December proved another volte-face rather than the feared earthquake. As Italy voted overwhelmingly to reject constitutional reform, markets followed both the Brexit and now US election templates – spiking down then ramping. They seemed to rejoice not so much at Prime Minister Renzi’s resignation but more because there was now nothing to stop a further blossoming of the Trump rally. German Bund yields continued to rally (encouraged by hints of ECB Tapering) in a very similar fashion to 2011 which was a forerunner of another EU crisis. Another seed for 2017?
Quiz of the Year 2016
Here is a quiz which you should answer easily if you were trading this year. Every question has one answer a, b, or c.
1. To the nearest dollar, what was the lowest price of WTI Crude in 2016?
a. $22 b. $26 c. $29
2. The Brexit vote was on June 23rd. How much had the FTSE index moved by the close of the month (June 30th)?
a. +3.3% b. -5.45% c. -9.88%
3. Which currency joined the Swiss franc in having a negative central bank funds rate in 2016.
a. Euro b. Japanese yen c. Norwegian krone
4. On Oct 7th, GBP fell 6% in a few moments. Why was this?
a. Trump election b. Brexit date confirmed as Mar 2017 c. Trader’s ‘fat finger’ error
5. This year, GBPUSD fell to it’s lowest level since when?
a. 2009 b. 1985 c. Before 1971
6. Which is the only currency to have risen against USD since the Trump election?
a. Canadian dollar b. Mexican peso c. Russian ruble
7. On Jul 15-20 2016, the Turkish lira fell by 7.36% against the dollar. What was the reason?
a. Attempted military coup d’etat b. The CBRT cut interest rates c. Isbank required a bailout
8. EURUSD dipped below 1.04 in December, it’s lowest level since
a. inception b. 2002 c. 2008
9. USDJPY has had a stellar run since the election, but how well has it done for the whole year (Jan 3 – Dec 24)?
a. -2.35% b. +2.35% c. +4.29%
10. Three major stock markets were approaching 20,000 on Dec 24, but which of the three had already been there this year?
a. Dow Jones Industrial Average (DJIA) b. Milan Italia Borse (MIB) c. Tokyo Nikkei 225 (NKY)
11. Which investor sold all his Apple shares at the end of March 2016. A month later they had dropped 20%
a. David Einhorn b. Carl Icahn c. George Soros
12. World markets plunged in January. What was given as the cause?
a. Europe b. China and emerging markets c. The US dollar
13. Which currency pair has, since June, formed a head and shoulders pattern, now in the final phase?
a. EURJPY b. AUDUSD c. NZDUSD
14. The most expensive traded stock in the world had a good year, putting on 27% to a price of $248,000 per share on 24 Dec. What is it?
a. Priceline b. Berkshire Hathaway ‘A’ c. Google ‘C’
15. On 2 February 2016, which company overtook Apple to have the largest market capitalisation in the world?
a. Facebook b. Microsoft c. Google
16. Which pundit, in January, said WTI Crude wouldn’t see $44 again, “in my lifetime”?
a. Jim Cramer b. Bill Ackman c. Dennis Gartman
Is Santa Coming Twice? – Dec 18th 2016
LAST WEEK
Last week was not all about the Fed rate hike on Wednesday,. It was all about the dot plot. To some it may have been a surprise that a widely expected 0.25% increase in the US was apparently not fully priced in. But it was the Fed’s revision for interest rates in 2017 that moved markets.
Without news, Monday saw a slight USD fade against most major currencies, and a similar fade in all indices except DAX, which rose all week. After last week’s upswing, oil started a fade which lasted all week.
Tuesday saw all indices rise but pre-FOMC divergence started. The SPX rose particularly sharply, the NKY, DAX and FTSE more gently. All currencies had a flat day, except for GBP which had a slight blip (faded same day) after the UK CPI beat at 0930.
The US Retail Sales miss at 1330GMT on Wednesday was shrugged off, SPX actually rose, as all eyes were on the Fed rate decision at 1900GMT.
As expected the FOMC announced it would increase the federal funds target rate from 0.5% to 0.75%. Despite the move being widely expected, USD immediately ramped and gold fell hard. The reason was that the Fed announced it anticipated raising rates 0.25% three further times in 2017. With a strengthening labor market nearing full employment and inflation moving more rapidly toward targeted levels, this proposed further tightening of monetary policy was over and above a declared wait-and-see approach towards President Trump’s expansionist agenda. A far more aggressive stance than expected and than we have seen previously. But one that suggest the Fed is more than aware of the risks the Trump agenda carries even if they would not openly admit it.
Most markets move in synch with higher rates and a higher dollar except for oil which remained unmoved (despite the EIA beat earlier in the day). Indices rose initially and then sold off, the first negative stock reaction to a Janet Yellen Press conference since March 2014. The exception was the NKY which moved in tandem with a rampant USDJPY.
Thursday’s European session saw DAX and FTSE rise, possibly in reaction to the falls in EUR and GBP caused by the Fed decision. The US session saw SPX recover a lot of the ground lost the previous day. USD continued to rise against other currencies,
Friday saw the USD rally pause, except against AUD and NZD which continued to fall, the latter touching a six-month low. However, only GBP showed any real recovery, although EUR rose slightly, possibly assisted by the 1000GMT CPI figure. Unlike DAX, SPX started to fade, whilst FTSE held steady.
NEXT WEEK
Monday’s Asian session has the BoJ interest rate decision at 0300. No change from -0.1% expected, but the accompanying policy statement may affect the yen, weakened by over 12% since the last one.
Tuesday 0030 sees RBA Minutes (but not a rate decision), and Wednesday sees the weekly WTI EIA report at 1530.
A whole raft of US data comes out Thursday 1330. Personal Consumption, Personal Income, and Jobless Claims are not as important as Durable Goods orders and GDP. The latter is an indicator for future rate hikes, so watch USD.
GDP is also reported for the UK on Friday morning at 0930.
Welcome to the 1929 Style Blowout! – Dec 11th 2016
LAST WEEK
The week started with a no vote in the Italian referendum. After an initial dump out of hours, the market shrugged it off (sell the rumour, buy the news) and on MondayEUR rose sharply (even more so against JPY). Equities also rose sharply giving up some gains later in the day. WTI faded to start a ratchet down into Thursday.
In Tuesday’s Asian session, the NKY followed the lead of Europe and the US. The AUD rate hold at 0330 had little effect, the currency ranged all week with a slight upside bias. European and US equities gently rose, whereas GBP, which had been rallying on the hope of a Brexit delay, gave up, perhaps on the realisation this case would drag on, and gave up 195 pips (1.52%) in 24 hours. The GDT auction (+3.5%, a miss) at 1430 had little effect on NZD which gently rose all week.
Wednesday’s Asian session saw the NIFTY dump 100 points in anticipation of a rate cut that didn’t happen. RBI held at 6.25% and the market recovered the next day, to continue its rise to add 2.1% for the week. The UK GDP estimate (as expected) at 1500 reversed GBP to a 61.8% recovery of the loss by the following day. The CAD rate hold at 1500 had little obvious effect, but CAD had been appreciating all week, despite the fade in oil. Last week of course, Canada posted good beats on payrolls and GDP. The EIA beat at 1530 had little immediate effect on WTI, although it did reverse as the European session opened the next day.
Thursday was the big day this week. The ECB did not change the interest rate, but announced a scale back of its QE program from €80Bn to €60Bn a month. This was seen by the market as a taper, and after an initial 76 pip spike, EURUSD fell 2c to $1.06 within three hours. It fell further on Friday, but given the earlier ramp, finished the week 1% down, and not as low as the panic dump immediately after the Italian referendum.
USDJPY which had been ranging, rose sharply, putting on 200¥ (1.75%) by the end of the week to a 10-month high. All equity indices continued to rise particularly the NKY, which is strongly locked to USDJPY and made an 2016 high. Gold pretty much followed JPY down, as it had been doing for the whole week. Oil continued to rise for give a V-pattern for the week.
Friday’s US session saw yet another acceleration in equities and something not seen for 18 years – the DJIA, SPX, COMP (main NASDAQ not tech), RUT and DJT (Dow Transports) all closed at all-time highs. The DJIA has risen 10.5% since the election and only needs to rise a further 1.18% to reach the psychological 20,000 mark.
WEEKEND NEWS
This weekend saw an announcement that for the first time since 2001, OPEC and non-OPEC members would jointly cut output. WTI and CAD should be affected on Monday. Also there seem to be two new legal challenges to Brexit, the Jolyon Maugham crowdfunded case to be filed in Ireland’s High Court, and Wilding/Yalland request for judicial review. It is not clear how this case is different from the Miller case already before the Supreme Court, but this news may give GBP an early boost this week.
NEXT WEEK
All eyes next week are on Wednesday for a widely anticipated rate hike by the Fed from 0.5% to 0.75%. The market is likely to be volatile in both directions. Given a wide expectation of buy the rumour sell this fact this may well present an opportunity to re-enter trends at better levels.
There is no significant US news before then. Tuesday sees German CPI at 0700 and UK PPI at 0930. The normally significant December US Retail Sales (Black Friday) is at 1330 Wednesday, but the big event is at 1900.
Thursday sees German PMIs at 0830 and UK Retail Sales at 0930, but more importantly, a UK rate decision. Consensus is no change at 0.25% / £435Bn QE.
Finally on Friday, there is the German wholesale price index at 0700 and Eurozone CPI at 1000. These trade indicators do not normally move markets much, unless there is a very significant beat or miss.
The Italian Job – Dec 4th 2016
LAST WEEK
In the week after Thanksgiving, we can give thanks there is more to global markets than Donald Trump. NFP may have provided a finishing flurry but the week was dominated by Oil, Sterling and increasingly expectations of today’s Italian Referendum.
Monday saw WTI up, but equities and GBP down, taking a breather from last week. CAD however, started a rise which lasted all week, obviously massively influenced by oil. EUR fell hard in the European session, but seemed to recover with ECB President Draghi’s speech, and ranged for the rest of the week, rising slightly on Thursday.
Tuesday’s US GDP beat kickstarted DJIA into another stellar week, hitting yet another all-time high just before Wednesday’s session. This sentiment did not extend to SPX or RUT, which only saw a brief blip upwards cementing the typical previous Black Friday top. Both continued to fade all week.
Conversely GBP had a great week rising from an early Tuesday low of $1.24 to finish the week at $1.2733. Much of this can be attributed to the markets somewhat dangerous discounting of this week’s UK Supreme Court ruling on Brexit, However it finished strong on the back of comments about UK’s access to the single market. Brexit minister David Davis said Britain would consider making payments to the EU budget in return for access to EU markets and the EU’s Dijsselbloem suggested the EU may find a way for the UK to access the internal market. GBPUSD rose by 1.86% from last weeks close and EURGBP returned almost to September’s low.
On Wednesday early reports from the OPEC meeting confirmed that cuts had been agreed, and WTI ramped an impressive 10% on the day. Oil continued to rise on Thursday, giving a gain for the week of $6.28 (13.8%) and closing Brent at new 2016 highs. The ADP jobs beat gave DJIA a brief new all-time high of 19224 exactly the bullish triangle target but then faded for the rest of the week in what appeared to be a ‘Trump’ unwind. Similarly USDJPY rose to a new high of 114.83 and then reversed. AUDUSD also fell sharply, losing 1c (1.29%) on the day, but recovered most of this later in the week.
Thursday saw DAX, DJIA, SPX and USDJPY all start to fade, as the Trump effect continued to give way to concerns about the Italian Referendum on the Constitution. Many have cited this vote as the biggest threat to the European Union; an exaggeration maybe but enough to produce a weekend squaring.
This nervousness was perhaps typified by DAX that saw a 250point decline in 48 hours retraced 61.8% on the back of NFP. With the Italian vote and ECB on Thursday, we can expect this volatility to continue.
NEXT WEEK
Today Voting in the Italian Referendum ends at 2300 local time (2200 GMT). Exit polls are expected at 2200GMT and the actual result around 0200GMT.
Monday and Tuesday see the UK Supreme Court Brexit appeal. GBP has already been appreciating on an expectation of the government losing (which delays Brexit).
Tuesday’s Asian session has the RBA interest rate decision at 0330. Eurozone GDP is at 1030, and US trade balance (a topical subject) at 1330.
Wednesday sees the UK GDP estimate and CAD rate decision, both at 1500, followed half an hour later by WTI EIA stocks.
The main event on the week is on Thursday, the ECB rate decision at 1245 followed by Draghi’s press conference at 1330.
The only signficant news on Friday is UK consumer inflation expectations at 0830.
It’s Not All Trump – Nov 27th 2016
This was the third week of the Trump effect. Money has continued to flow out of the US bond market, concerned by Trump’s reflationary plans into the US stock market driving up the USD, weakening other currencies and some stock markets. The SPX joined the DJIA and RUT in making record highs, and DXY made a 13-year high.
Monday saw a sharp ramp in GBP, which was partly sustained throughout the week and the FTSE did not fall. ECB President Draghi spoke at 1630 having little effect on ranging DAX and EUR markets. Similarly Tuesday UK PSBR beat had little impact on FTSE or GBPUSD which also ranged, for once in sync rather than inversely. EURGBP now appears to be the key currency driver of FTSE.
Wednesday’s UK Autumn Statement (formerly known as the mini-budget) disappointed, and saw a sell-off in the FTSE, although the index recovered by the end of the week. The European session also saw a 150-point DAX sell-off back to the 10600 support level. It only recovered 100 points by the end of the week.
The much bigger story was the convincing beat in US Durable Goods orders (4.8% vs 1.5%) which sent the already strong USD and US equity markets up sharply. USDJPY put on nearly 2% in 3 hours, and another 1.5% later in the week, although this second gain faded by Friday. EURUSD dropped 0.81% to touch its lowest level since March 2015.
It also notably sent GOLD to an aggressive 3-month low and FTSE and even the NDX tech index sold off heavily after the Durable Goods beat (the DAX had already sold off). This reflects the enormous money flow out of the US bond market into the best performing instruments since the election, the DJIA and Russell and USD itself.
AUDUSD suffered a 0.8% (60 pip) pullback, but this was recovered, and the pair ended up 1.55% on the week. A different story for NZD, which had lost 1.12% by the middle of the Asian session, and only managed a 0.6% gain for the week breathing light into one of our priority trades: AUDNZD.
The US equity markets took a little longer to respond, but were very strong all week, the SPX rose 1.35%, the DJIA rose 1.47%, and the RUT rose 2.26%, all finishing the week at all-time highs.
An afterthought on Wednesday was the Oil EIA beat at 1530GMT. Although it caused its usual spike, 2% in this case, this pales against the 5.8% rally into Tuesday and the subsequent 6.7% decline for the rest of the week amidst fears of no cuts at next week’s OPEC meeting. The Trump effect is now less pronounced in oil, and OPEC sentiment reigns.
The NIFTY remained a victim of the strong USD and weak Rupee for much of the week touching levels not seen since May 25th but recovered to close a mere 7 points over last Friday’s close.
Thanksgiving Thursday and Black Friday were relatively quiet providing a much welcome respite to recent volatility. Friday’s UK GDP met expectations and GBP typically gained against USD. US Markets continued their rise.
NEXT WEEK
Next week is NFP week again, and with little news in the early part of the week the market should be subject to two way volatility in line with our NFP fractals. However, it is also the final week before the Italian referendum next Sunday which has, along with the weak Euro, already disconnected DAX from SPX.
A US rate hike on Dec 14 is more than 80% expected. Since the Trump effect is reinforcing the hhigher yield stronger USD trend, the reaction to NFP should show the extent to which the market is already positioned or indeed has an even greater appetite. ECB President Draghi speaks on Monday at 1400. Watch out for references to Italy.
Tuesday sees German CPI at the later-than-usual time of 1300 US GDP and Consumption is at 1330.
OPEC meet this Wednesday, and of course we get US ADP employment, the ‘sneak preview’ of NFP at 1330, as well as more US Consumption data
Thursday has US Manufacturing PMI at 1500. On all these, look for misses which may cause a sharper pullback than usual on USD. Traders are looking for excuses to sell, in particular the US indices, which are now very expensive, especially to non-US investors.
Friday’s non-farm payrolls is the first since the election, and the last before the next rate decision, so it is of particular importance. Also Friday will be the last trading day before the Italian referendum on Dec 4th. A ‘no’ vote will put the Euro under immense pressure. A ‘yes’ vote should cause the DAX and EURUSD to soar.
Can Italy Trump Brexit? – Nov 20th 2016
LAST WEEK
Last week was still largely dominated by the Trump effect, and the unstoppable rise of USD prompted by continued weakness in the US bond market. As we have said many times, non-US indices are affected by their denominating currency. The further fading of EUR and more prominently JPY kept the DAX steady and caused the NKY to rise all week.
On Monday, the DAX reached a high of 10800, and then faded. Draghi’s speech managed to put 1c back on EUR, but this effect was lost the next day. SPX also saw a 20 point drop, to touch a weekly low on 2156, however it then rallied for the rest of the week. DJIA however, which considerably out-performed SPX last week actually hit its (all-time) high of 18971 at the European open, and then ranged all week.
The NIFTY also faded down every day this week, to eventually settle around last week’s Trump panic spike low of 8040.
Tuesday’s German CPI miss had a slight effect on the DAX, but it rose again as EUR weakened to eventually rise back towards the 10800 top. The FTSE hit 6821 in a quiet 80-point range inside week. GBP was not helped by the CPI miss at 0930, but had already given up it’s USD counter-trend and faded all week touching pre-election lows on Friday. The US retail sales beat at 1330 just accelerated the US indices and USDJPY.
Wednesday started with AUD joining the currency fade after a couple of days of being flat. The European session saw a much larger 200 point fade in the DAX which then ranged for the rest of the week. One notable upward mover this week was Oil. The 1530 WTI EIA miss was hardly a blip in the constant upward movement, caused partly by hopes of an OPEC cut, but still less than half of the $10 (19%) fall in less than a month,.
By Thursday, the momentum was set, and the US Housing and Jobless beats were not needed. USD continued it’s relentless rise, as did, to a lesser extend the SPX. Gold had been holding steady after it’s huge fall last week, but as the US opened, it gave up and by Friday morning had dropped another 2% to hit a low of $1202, and finished the week at $1207.
Friday was quieter, but saw further USD gains as the indices held steady.
NEXT WEEK
Thanksgiving week is fairly quiet for news, as the US moves into holiday season. As the market gets used to the prospect of a Trump Presidency, its focus should start to turn ostenisbly back to the prospect of a US rate hike in December. The market is also still watching Trump build his cabinet, particularly in the financial area.
ECB President Draghi speaks on Monday after the European session, and UK PSBR is at 0930 Tuesday.
The big day is Wednesday with German PMIs at 0830, US Jobless numbers and Durable Goods, WTI EIA Stock levels at 1530, and the main event, the FOMC minutes at 1900. A rate hike in December is largely priced in, so any dovishness could cause a sharp move down in USD.
Thursday is Thanksgiving, followed by Black Friday, the shopping day. There is no US news to speak of. German GDP is reported 0700 Thursday and UK GDP at 0930 Friday. As always, look for large beats or misses. We will start to monitor the usual Black Friday – Christmas template for stock indices to see if they can maintain their usual [deceptive] pattern.
The Italian Referendum on Sunday December 4th should however start appearing on people’s agenda. It is remarkable how late many funds leave managing their risk in front of such high risk events. These concerns typically have an increasing impact on markets the closer the get to the vote itself. Volatility is here to stay.
New Trends Emerge – Nov 9th 2016
The markets remain torn between central bank monetary policy – most notably the US Fed in December – and the more immediate concerns over the outcome of Tuesday’s US election. However the closer we have got to the election, the more this and uncertainty has dominated.. This week has started with a FBI-Clinton rip but last week was a very different story: as the market was ripped apart by increasing Election uncertainty.
LAST WEEK
Monday was very quiet in the markets, ignoring the as expected Eurozone CPI and GDP figures, but perhaps the sharp $2 (4%) drop in oil perhaps tipped the complete breakdown in equities which started the next day.
Tuesday Asian session saw the JPY and AUD rates held; JPY hardly reacted, but AUD quickly rose 60 pips, although this gain had faded totally in 24 hours. Gold reached its weekly high, and then consolidated for the rest of the week, as did its current sister, EURUSD
As Europe opened, the DAX, FTSE, NIFTY and NKY and SPX futures, and oil all fell sharply, starting a trend which lasted all week, more or less ignoring all the news. The ISM beat in Tuesday’s US session had no effect.
On Wednesday, the Fed unsurprisingly held the interest rate at 0.5%, causing hardly a ripple. USDJPY bounced 25 pips, having already lost 200 pips since the day before, and even this faded in Thursday’s Asian session. Gold gave up $20 into the Fed, but recovered shortly afterwards.
Thursday saw GBP receive a significant boost after the British courts ruled that Parliament must debate Brexit. Typically as bearish uncertainty became uncertain GBPUSD advanced 175 pips in three hours, holding on to those gains, and finishing up 320 pips for the week to a post Fat Finger new high, the first time since Brexit that it has regained a recent high.. The rate hold at 1200 was as expected, and did not have much effect.
Unlike equities, USDJPY finally found a bottom at 102.60, and slowly consolidated into the end of the week creating strong parallels with 2 previous tops and tipping the current strong recovery.. Similarly USDNZD found a top. USDCAD even started to rise, the only major currency to fall against the dollar this week due to the weakening oil price, which ended 11.3% down on the week.
Friday’s NFP produced only the second miss out of the last 10 Octobers and was temporarily interpreted as ‘bad news is good news’. However SPX followed the Miss fractal almost to the tick as it made marginal new lows. This was the ninth straight day of decline for SPX, the worst run since December 1980. As traders started this week with a big sigh of relief, they still may end up holding breath as, until the election result, uncertainty reigns.
NEXT WEEK
With limited news next week, we expect market movements to be entirely dominated by the result of the US Election. Once the result is known, look out for black swans in the reaction to the result around the world.
There is a GBP inflation report and GDP estimate on Tuesday. After last week’s ramp, misses may give traders an excuse to sell GBPUSD. Wednesday sees the NZD rate decision but movement on USD will probably outweigh any reaction.
Calendar – All Times GMT:
Sun Nov 6
2350 BoJ Minutes
Tue Nov 8
1000 GBP Inflation Report
1500 GBP NIESR Report Estimate
Wed Nov 9
0000 US Election
Voting finishes 1900EST. Three passes:
1. Exit polls, which precede the voting close. Needs to be a landslide to sustain move.
2. States start to report, again, would need to be decisive.
3. Approx 3GMT for Ohio (bellwether state).
2000 NZD Rate Decision
2000 NZD Monetary Policy Statement
Fri Nov 11
1450 CAD Boc Governor Speech
LAST WEEK
A very strong week on economic news started with a Japanese trade beat and German and Eurozone PMI beats. The NKY and DAX duly rallied, whilst EUR and JPY stayed subdued. Their turn came later. DAX and SPX faded in the US session. USDCAD strangely faded a huge 120 pips after the US bell only to recover 61.8% as the Asian session opened, and the rest of the drop as the week went on. The NKY continued to rally all week, and as usual, so did USDJPY.
Tuesday saw another German beat on IFO, and again the DAX rallied, slightly beating Monday’s high to hit a 2016 high of 10830. Traders obviously thought this was enough as DAX faded for the rest of the week, partly because EUR was rising, after weeks of decline. GBP fell sharply (120 pips) as BoE Governor Carney prepared to speak at 1430, but recovered 76.4% in a few hours, as he gave reassurances on Brexit (the price/action being similar to the ‘fat finger’ crash earlier this month). ECB President Draghi spoke an hour later. A small 50 pip bump down didn’t stop EUR’s rise throughout the week, adding 1 cent by Friday. A WTI stock miss after at 2030 after the trading pits had closed had little effect, as it declined steadily during this first week of the new monthly contract.. But expectations of AAPL’s Q3 earnings overshadowed much of the SPX/DJIA day and it didn’t disappoint. Better than expected earnings helped produce a new 2016 AAPL high of 121.85 after hours, only to reverse sharply as the third consecutive quarterly (YOY) revenue decline hit home.. opening a full 7% lower the next day. Surprisingly neither DJIA nor SPX seemed particularly fazed.
Wednesday 0030 saw AUD CPI beats, which immediately added 60 pips to AUD, it’s high point for the week. Gold also hit an interim high. The currency then faded until a slight recovery, probably short profit-taking on Friday. More US beats PMI beats (1345), ramped markets in the US session which had faded in Europe.
Thursday’s UK GDP beat (0830) gave a brief 70 pip spike. This faded immediately and was repeated, then decisively sold in the US session, as were equities after the US Durable Goods miss at 1230. Like AUD, GBP only recovered in Friday’s US session. The NIFTY, which had been declining all week, hit 8550 support and bounced back up to halve the hi-lo decline.
Friday would have been a good day, the DAX faded or further EUR strength, and took the US futures with it, but distinctive beats on US GDP and consumption at 1230, equities rose against a flat dollar (USDJPY) until this week’s black swan, the FBI re-opening of the Clinton Email case. The DJIA immediately dropped 150 points (0.8%), USDJPY reversed from new highs with EUR and CHF strengthening sharply. GBP reacted slightly, but CAD and AUD did not react at all. A typical risk-off adjustment that has been strangely absent for many recent stock market falls. However, DJIA and SPX recovered 61.8% of the loss before the end of day but currencies also typically lagged this recovery.
NEXT WEEK
Next week should potentially be very busy.
GBP will be in the spotlight for much of the week with the rumour of a Carney resignation gaining traction over the weekend.
On top of this four interest rate decisions, NFP on Friday, and the final week before the US Election. It is also daylight time delay week. Europe’s clocks go back, but the US doesn’t. The US session still starts at 1330GMT, but DAX and FTSE now start an hour later at 0800GMT.
Monday opens with Eurozone GDP and CPI at 0900. A beat on both could well spike the EURUSD recovery.
Tuesday sees the JPY interest rate decision at 0200 followed by the AUD half an hour later which only needs a nudge to extend it decline. Before the US session, are ADP (the ‘sneak peek at NFP’), US ISM Prices paid at 1300 and manufacturing PMI an hour later.
Wednesday is FOMC rate decision day. The market is pricing in a hold (92% likely), and indeed a hike six days before the election seems inconceivable. We are therefore more likely to see a muted version of our FOMC fractal in operation.
History shows that the effect will run into Thursday (China PMI at 0045), and the BoE rate and QE decision at 1100 will probably only affect GBP. US PMIs at 1245 and 1300 are well over 50, so even a miss is likely to uneventful.
Finally, on Friday, we have the last NFP before the election. The September NFP template is likely to provide a clear although again election-muted guide Eyes will remain on the Clinton FBI investigation, and any further outrageous talk by Trump. We will similarly be watching out for MXN weakness all week as a barometer of a Trump win .But don’t forget Mexico’s loss would be AAPL’s gain as Trump has promised to lower taxes on repatriated foreign profits, an enormous advantage to AAPL and many Nasdaq 100 companies.
LAST WEEK:
Three factors have dominated what has been a generally but not uniiversally range bound week.
1. US Rate Hike. The market is increasingly discounting a December rate hike. This had led to a still depressed Gold and US equities and continued weakness in EURUSD.
2. EUR weakness. The big story of the week was the further breakdown on EURUSD both into and through the ECB rate hold on Thursday. The pair has declined 3.34% this month primarily on US rate hike fears breaking the June low this week to close at 1.0884, a level not seen since March. This weakness has ironically held up other currencies against the USD in their ranges but continues to push DAX into its 2016 highs.
3. US Elections. The markets have already been nervous about the outcome of this historic election but this nervousness should increasingly dominate over the two weeks and therefore arrest possibly reverse some recent trends.
Monday was a quiet day, although there was a sharp drop in the NIFTY on general sentiment, and a $2 drop in WTI at the US Open, as traders wound down long positions ahead of Oct 20 contract expiry. The NZ CPI beat at 2145 gave NZDUSD an instant 40c lift, which continued to rise for three days.
Despite mixed Chinese data (including GDP as expected) at 0200, Tuesday saw equities rally across the board in the Asian and European sessions, and all currencies except EUR gained against USD. Even unloved GBP managed to join in the trend, touching the previous week’s high to the tick by 1500 (and exceeding it by 7 pips the next morning). About the half the gains were given up in the US sessions, as USD fought back. Contrary stock AAPL hit a high (in it’s German listing) just before the US bell, and declined all week.
Oil spiked up to a new 15-month high of $52.22 on the EIA beat at 1330, then faded for the rest of the week, although staying above the psychological $50. The BoC rate hold was noticeable, USDCAD spiked down 80 pips on the news to September’s low, to the roundpoint 1.30, but immediately reverses, and that was the low point for the week as it rallied to end the week on a 7-month high. USDJPY touched last week’s low at reversed at the same time.
Thursday’s Asian session saw a sharp rise in the NKY without news, so probably linked to the reversal in the yen. The Australian employment data miss gave traders the excuse they needed to sell the technically extended AUD (see last week’s report), and it sharply reversed, taking NZD with it. Unlike the NKY, the NIFTY also reversed down, to consolidate into the end of the week. A German PPI miss at 0600 stalled DAX into the ECB rate decision at 1145 (hold). However the effect of the rate hold on EURUSD caused a major disconnect as US traders bought DAX and sold SPX. The former (denominated in EUR) had risen 1.6% on the week by the end of the session, compared to only half that (0.8%) on the SPX.
Friday’s Asian session saw profit-taking in NKY and SPX (also being monthly option expiry date), but a fading EUR muted this in DAX which gave up a few points, and then rallied in the US session when SPX reversed the Asian position, to finish less than a point under Thursday’s close. The UK PSBR miss at 0830 knocked 60 pips off GBP, and FTSE duly rallied 30 points, giving up some later in the day.
NEXT WEEK
Monday is PMI day, for Germany and Eurozone at 0730 and the US at 1345. All are comfortably above 50 so little effect is anticipated.
Germany business sentiment is at 0800 Tuesday and then both BoE Governor Carney and ECB President Draghi speak within an hour of each other during the US morning session. Given the ECB rate hold last week, the former is more likely to move markets.
At 0030GMT Wednesday we have Australian CPI, a miss could bring AUD down further. US services PMI at 1345 is estimated at 52.4 so contraction is very unlikely (PMIs only tend to move markets when they cross the 50 figure denoting a move from expansion to contraction or vice versa)
A miss on Thursday’s UK GDP at 0830 would hurt the fragile GBP, a currency where traders these days seek an excuse to sell. The only major US data is Durable Goods at 1230.
Of course by Friday the US election will be only 11 days away. A Clinton victory is expected and partly priced in by (reflected by MXN and Nikkei gains this week) but Brexit has probably taught the market not to be complacent any more about the democratic process. We believe this nervousness will exaggerate very clear historical precedents into and out of US elections. The (more exclusively US) Russell Index may well become our focus for the run in. Friday also sees German CPI at 1200 and US GDP half an hour later. If one misses and the other beats, look out again for DAX/SPX disconnect, although our fractals show than only CB rate decisions cause this.
This week was FOMC week, and the consensus was hawkish. Ms Yellen never quite says rate hike, but additional comments from other Fed members drove the market that way. It was also the week that the Euro finally capitulated from it’s two month ranging to break the significant 1.11 to the downside.
The week started with the second Clinton/Trump debate after weekend revelations about Trump’s comments on women. MXN and N225 duly rallied, and this continued in DAX and SPX in European and US sessions. These gains disappeared on Tuesday and Wednesday, a fade into FOMC which accelerated on hawkish (rate hike likely) minutes and comments.
Thursday’s Asian session saw a sharp drop in both the NIFTY and N225 (and USDJPY), following China trade figures misses, a reversal up of AUD and NZD (see below), and a substantial reversal of oil’s fortunes, rising sharply, although nowhere near as high as Mondays $51.50 high, a few cents off the 2016 high on Jun 9th. The combination of rate hike and China continued into the European session, but reversed somewhat in the US session, after the SPX touched a one-month low at our 2114 target. The SPX ended down 1.22% for the week, whereas the DAX, boosted by the slide in EURUSD added 0.85%
The effect of FOMC was noticeable in USDJPY, which broke to new highs before the release and spiked later to an 11-week high of 104.63: more noticeable than EURUSD which had been fading all week following the break of it’s two month range. GBP had a slight respite from it’s woes when British PM May announced a parliamentary debate on Brexit, traders thinking it might ‘soften’ the UK’s approach. GBPUSD rose 2 cents as Tuesday’s Asian session opened, and held half of that gain for the rest of the week. However, BoE Governor Carney’s remarks on Friday criticising the government contributed to a ‘soft’ close for the week. The FTSE stayed near all time highs, mainly as an effect of the price of GBP; an effect we pointed out immediately after Brexit, but which has been now picked up my mainstream media. The FTSE expressed in USD is still fading fast. We are opening a new analysis page on FTSE with signals at the start of this week.
AUD and NZD had been broadly falling into and out of FOMC on USD strength, touching the 200 day MA but AUD reversed sharply on Thursday’s European session and all day Friday. This can be put down to the unusual and interesting decision to switch 5% of RBA reserves from EUR (interest rate 0%) to KRW (interest rate 1.5%). NZD only joined in the rally briefly, before resuming it’s downward course. A knock on effect was that AUDNZD came within 12 pips of an 8-month high, and EURAUD touched a 10-month low.
NEXT WEEK
Monday sees Eurozone CPI at 0800GMT, a miss could send the DAX back down to last Thursday’s 10350 low. NZD is similarly vulnerable on their CPI at 2245GMT, as is GBP on UK CPI on Tuesday.
Wednesday’s China GDP at 0200GMT will set the tone for the day. We expect Canada to hold 0.5% at 1400GMT, meaning that CAD will probably stay locked to oil. Similarly, Thursday’s AUD unemployment (0030 GMT) and EU rate decision at 1145GMT are not likely to surprise. The EU press conference at 1230GMT will probably set the tone for the rest of the week, with US jobless claims at the same time, as there is no important news on Friday for once.
Short of one possible surprise we are seeking early this week, most markets should continue to be driven by sentiment (around US interest rates, US elections and Brexit). This suggests more violent whipsaws. But out of these some new trends should emerge.
Good Luck
A Week of Misses
Sterling was the big story this week. The week and month started with Mrs. Theresa May, British PM, announcing a timetable for Brexit, causing GBP to slide down all week after last week’s stability. At this point greater certainty over the Brexit process will continue to hurt Sterling.
Early on Tuesday, the RBA rate hold reversed Mondays AUDUSD rise which then went into decline all week, closing 73 pips on the week. NZDUSD declined all week after another GDT miss at 1405GMT (-3.0% vs 1.7%) taking AUDNZD above 1.06 for the first time in 3 weeks. But Tuesday’s big event was a fast $40 (3.05%) drop in Gold, started possibly by a sovereign sell, but then accelerated as the $1300 psychological round point was breached. This fade continued for the rest of the week, and metal had lost 4.6% by the Friday close.
SPX followed gold down, shedding 22 points (over 1%), although unlike gold it recovered all this ground the next day symptomatic of its 30 point week long range.
The gold drop also saw a sharp uptick in EURUSD although this only lasted until Wednesday mornings, when it continued to repeat the downward pattern it had done earlier in the week. This was not a simple flight from USD though, as USDJPY continued to rise steadily throughout the day, lagging the Oil rally perfectly.
On Wednesday the NIFTY duly reversed following our amazingly accurate template . Importantly It had an inside week, only ranging 200 points, and did not react to US and UK events. There was little other important news for indices except that DAX completed its Deutsche Bank inspired recovery ready for. Friday’s NFP.
However, without warning, a black swan flew in during Friday’s Asian session. At 2307GMT Thursday, an already battered GBPUSD was hit by some Asian trader, or more likely, their algo, selling the pair down by 6% to $1.1841 in minutes. It recovered 4.5% of that drop within an hour – a trading opportunity we sadly missed – but the damage had been done, and volatility continued. It faded again to a genuine low of $1.2227 in the morning, and finished the week at 480 pips (3.72%) lower.
After that, this month’s NFP could be seen as an anti-climax. All our NFP fractals strongly projected a miss (156k vs 175k) and invoked our now favourite NFP Gold play which fits neatly into a broader historical outlook. USD behaved more logically than equities and faded against JPY and EUR, reversing the week’s trend as a rate hike looked less likely. However SPX repeated yet another ‘Screw(B)all by spiking to around Tuesday’s high, before repeating that day’s action almost exactly, returning to roughly the pre-NFP point, with a small fade on the bell.
Oil continued its steady rise all week, following last week’s OPEC production cuts, rising 6% to a four month high of $50.74 by Friday morning, but giving up nearly half of that to close back under the psychological $50 level. However, one beneficiary of the GBP and Oil activity was the FTSE100. It has heavy oil weighting, and most of its companies have large USD revenues. (I will refer to this at Friday’s Investor Show as we reveal some exciting analysis in a new FTSE page) As GBP behaved just as it did after Brexit, so did the FTSE, helped of course by the price of oil. It rose 200 points (2.9%) on Monday and Tuesday, only giving up a quarter of that to profit-taking.
NEXT WEEK
The second Clinton/Trump debate will probably define Monday, and watching MXN in the Asian session may provide clues. If German data at 0600GMT misses badly, we might see a breach of last week’s support of 10455. A miss on the ZEW survey on Tuesday 0900GMT would give a second excuse for that.
Otherwise Wednesday is the big day, with FOMC minutes at 1800GMT. We will be following our usual fractal on our analysis pages. Traders will be looking for hints of a rate hike after Friday’s slight miss on NFP.
There is the first EU Extraordinary Economic Summit for over a year on Thursday, but unless something ‘extraordinary’ comes out of it, the FOMC remarks should still have a lingering effect when China CPI is published at 0130GMT Friday.
Retail sales at 1230GMT and Consumer Sentiment at 1400GMT may will also affect Friday’s market, as may possibly a speech by Janet Yellen at 1600GMT, although coming two days after the Fed minutes, that is unlikely.
We should be back to full trading this week except for Friday when I will speaking twice at the London Investor show. There is still time to book your free ticket by clicking on this link
http://www.eventdata.co.uk/Forms/Default.aspx?FormRef=LISA6Visitor
and using the voucher code MATRIXTRADE. Also all attendees to my presentation will get a nice surprise.
TRADING
Despite distractions, we made +818.8 points (+7.36%) on closed trades, and are showing +654.3 points (7.29%) on trades still running based on Friday’s closing prices (mark-to-market). After deducting last week’s mark-to-market, this gives us a creditable net total for the week of 962.3 points (+7.06%), particularly as there were virtually no trades on Wednesday and Thursday due to handling subscription launch hiccups. As a result of the launch we missed a few good trading opportunities.
This brings our total since we started on 3 June to +12767.0 points (97.28%). Particular highlights on the week were long EURGBP and USDJPY trades opened last month which crystallised 813 points.
Ed Matts
Founder, Matrix Trade
The market was erratic this week with traders seeking direction from the first US Presidential Debate but getting it (literally around the neck) from two unscheduled events: the OPEC agreement to freeze production and Deutsche Bank meltdown and recovery.
MatrixTrade activity and therefore return for the week was a relatively smaller 383.5 points (1.73%) as we sought to avoid the anticipated erratic moves and protect our almost 40% (5289 points) return for September.
LAST WEEK
The market largely ignored Draghi’s fateful comments about less momentum to recovery on Monday as they eagerly looked to the opening Clinton/Trump debate after the close. This proved to be more of a shot ‘fired in anger’ than one “heard around the world” (Emerson) but it was certainly noticed in Mexico as MXN appreciated 2% during, in what is widely seen as, a victory for Clinton. With Japan also being seen as a possible target for Trump protectionism, the NIKKEI rallied 2.2% helping SPX gain 0.84%.
But any such relief was shattered early on Tuesday as concerns over Deutsche Bank’s liquidity hit home following its potential $14Bn fine from the US, sending DAX down a further 1.94% in a 4.13% decline from the top to bottom. This return to the recent low set up a very similar S&P consolidation to FOMC the previous week that in turn led to a similar stop seeking false break before retreating again. (and also repeated on Friday’s Q3 Option Expiries).
The Screw(B)All:
This whipsaw price action summed up the erratic nature of markets for the week with the noticeable exception of Oil.
Oil had ranged until this point even shrugging off the EIA beat until the surprise announcement that OPEC in Algiers had agreed to cut production, announcing a 750k bpd drop from their August output around 16GMT on Tuesday. This saw Oil rise by 9% from its post beat low, ending the week even higher at $48 and so promising a difficult but stronger test of the highs. In the meantime Gold largely ignored this move ending the week down $20 (1.49%) at 1315.8, closer to its 3 month post Brexit consolidation low. Similarly GBP had a surprisingly quiet week following the noise from Tusk and others about Brexit at the rather dull EU summit that helped restrict EURUSD to a 100 pip range all week. Only USDJPY (that broke back up through the pivotal 101.20 to the 101.74 61.8% target), AUDUSD and NZDUSD showed more promise on the back of the stock market rallies but even these Australasian currencies did not stray from a 1% range all week.
Perhaps the Deutsche Bank story best sums up this erratic week. Renewed concerns over the Bank’s capitalisation and contagion were blamed for the markets’ sharp early fall on Thursday. However, indices just as likely took their lead from the 140 point collapse in the Indian NIFTY earlier. Having already lost 100 points (1.12%) from thee week’s high, Indian ant-terrorist raids across the Kashmir border into Pakistan gave us the capitulation we were seeking. Only a small recovery by the end of the week begged many questions. But a continued remarkable historical similarity to June has so far provided all the answers.
Despite yet another recovery on a strong US GDP showing of 1.4% (vs 1.3%) on Thursday, the market was again gunning for Deutsche Bank on Friday morning, breaking DAX down to a new 2 month low to 10185. Indeed as a EU CPI Miss pushed EURUSD closer to its 1.1120 key support, It was reported that DB was nearing a lower fine settlement of $5.4Bn, prompting a swift market recovery that was continued in New York until the almost inevitable Option expiry (OPEX) volatility.
The markets may have travelled a long way this week but they haven’t got very far.
NEXT WEEK
The main issue for the next week (that starts with Chinese and German holidays) is ‘sustainability’:
1. Whether a likely GBP hit will be sustained following the weekend announcement from British PM Teresa May that GB will invoke the Brexit Article 50 in March next year and whether a strong UK GDP estimate on Friday can alleviate Brexit fears.
2. Whether Monday’s US PMIs will stay above 50 or the RBA keeping rates on hold on Tuesday will continue to have little effect on the markets.
3. Whether the Oil freeze and rally can be sustained (subject to pullbacks) and to what extent this will affect other markets (notably JPY).
4. Whether Wednesday’s ADP leading into Friday’s NFP will provide more impetus for a US rate hike in December and whether this will be shot down by the next Presidential Debate on Sunday.
Whether? It’s frozen but still liquid.
MatrixTrade
After a record breaking September (39.8%), Matrix is about to enter subscription mode implementing many of the lessons we have learnt in the last 4 months free access. One such lesson is that there is a difference between trading and sending out signals. Until we gradually introduce some of the refined changes such as and a private twitter stream with some of the many shorter term scalps or automated copycat trading accounts, our focus is sending out timely clear trade signals that clients can act upon immediately. For this reason we have very briefly delayed the subscription mode to implement a much quicker SMS alert system. We will keep you posted.
Ed Matts
Founder MatrixTrade
PS LONDON INVESTOR SHOW October 14th 2016
I am surprised but pleased that Matrix has been recognised in its infancy. I have been asked to speak at the London Investor Show about our innovative approach to macro trading and what really drives markets as well as join the panel for the main event ‘After Brexit ‘ with Nicola Horlick, Justin Urquhart Stewart, and John Hughman (editor of Investors Chronicle).
Tickets are normally £25 but we have arranged for free entry for MatrixTrade.com subscribers. If you follow this link and use the voucher code MATRIXTRADE you will get a free ticket. For those in Northern England, I will also be speaking at the Leeds Investor Show, entry normally £20, and again we have arranged free entry with the voucher code MATRIXTRADE. The link for Leeds is here
In a week dominated by expectations surrounding central back meetings, the market was driven more by sentiment surrounding policy than the actual policy itself. (‘Disappointment about Disappointment’)
Matrix exploited these moves based on similar previous events to good effect but not to the extent we could have due to a, perhaps understandable, risk aversion. We returned 897 points for the week or 8.2%.
MARKETS
All four big players, Kuroda (BoJ), Yellen (Fed), Draghi (ECB) and Carney (BoE) spoke this week. Only BoJ strengthened its currency, but maybe only BoE wanted to.
USDJPY had a complex week. The BoJ ‘window dressing’ rate hold caused strong volatility with a 100¥ spike up followed by 200¥ decline by FOMC announcement. The strength of JPY caused a not uncommon flight to EUR instead of JPY on USD risk off. This was stopped by Draghi on Thursday. Although we had a suspicion the market was following similar price action to June, we waited until it was proved right.
BOJ Chart
It was a textbook (or practical manual) week in the stock markets which rose all week in anticipation of the forthcoming rate hold by the Fed on Wednesday. The market followed our FOMC Fractal unerringly and set up a classic sentiment play: The Double Whammy
The Double Whammy
Neither the market nor Janet disappointed us and stocks broke higher and USD weakened. But only to see a news–absent Friday typically causing both SPX and DAX to give up 38.2% (Fibonacci) of its previous gain.
The anticipated EURUSD rally was far from instant, climbing 1cent by the time Draghi spoke on Thursday mainly about shadow banking compliance. However his almost throwaway remark dismissing problems with low ECB rates was the excuse traders needed and the pair faded exactly half the gain by 1800GMT, exactly 24 hours from FOMC. It then started to climb again throughout Friday.
One place where money is not flowing these days is GBP, as the UK government continue to dither on Brexit to the opprobrium of EU’s Tusk and the rest of the world. Being clearly not over-extended, it tracked EUR from FOMC until Thursday night. However, BoE Governor Carney’s speech on Thursday, similarly dodging the real issues, and talking about green finance, caused GBP to fade 2c (1.5%) throughout Friday, recovering slightly into the close, but adding 1.17% to our still favored GBP short, EURGBP.
Oil had similar price action this week, but Friday’s fade was enhanced by Middle-Eastern non-agreement in cuts (again) causing a 4% drop on the day, wiping out nearly all the gain for the week. Gold was more or less an inverse USD play all week despite procrastinating for a few hours on Thursday afternoon. A sign of things to come?
AUDUSD had a cleaner ramp after FOMC but again this only lasted until the ECB speech. The pair was clearly driven by USD news rather than anything domestic.
A different story with NZDUSD however which suffered from both Tuesday’s GDT (milk price) miss (1.7% vs 7.7%) and the RBNZ rate hold, three hours after the Fed on Wednesday. NZD was the only major currency to fall against the dollar, and indeed the AUDNZD chart showed a clean linear rise since Tuesday.
NEXT WEEK: All Roads Lead to Rome (or the White House)
The forthcoming week may appear light of similar market moving news. But this does not mean it will not be volatile. The week starts (ignoring RBA comments early Monday) with the first of the much heralded Punch & Judy show, the first of the TV debates between Clinton and Trump.
In itself, the debate would normally be non-consequential for markets (except internal US sectors eg Pharmaceuticals) but this is no ordinary election. With global concerns over a (protectionist) Trump victory, a strong showing by the Republican candidate (lagging by 5% in the polls) could possibly trigger a surprising market reaction. Otherwise a continuation of historic FOMC and BOJ templates through ECB Monday; BOJ Tuesday into US Durable goods on Thursday (followed by Janet Yellen speech) and GDP on Friday could still contribute to one of the most exciting fractal plays this year.
For whatever reason, a number of markets have started independently following the same pattern into a previous momentous move. This striking analogy is covered in the analysis and trades of the affected markets. Ironically it could have the complete opposite effect on GBPUSD.
TRADING
Trading is always easy in retrospect. A lot of our previous trades came good this week, and we increased our cash closed points for the month by 1,330 points. However, this meant that running trade profit (mark-to-market) was lower, and our net total was an additional 897.1 points (8.19%), bringing our total for September to a record-breaking 4475.7 points (31.35%) and 11494.2 points (89.27%) since we started on 3 June.
Much of our analysis was pretty accurate this week. And yet despite some notable Gold and GBP trades, we failed fully to capitalize on some of the projected central bank moves. But successfully trading is as much about protecting capital and risk management than getting it right.
MATRIX
As we enter the final week of general free access, we will again be increasing the number of markets most notably the clearest index in recent times, the Nikkei and long awaited NZD and GBPJPY trades.
Matrix is as much a project as a trading company or business. Our innovative approach to macro trading is bearing fruit. But it has and will take much more research and resources to develop this unique but well grounded approach. If you wish to continue with us into what promises to be a highly volatile trading environment you will be helping to reinvest into, what we strongly believe will be some highly profitable new approaches. Our subscription schedule can be found on http://www.matrixtrade.com/subscriptions/
Either way the last 3-4 months free period has been instructive. If you able to help promote Matrix through retweets and spreading the word, then we will be able to roll out further developments much quicker.
Ed Matts
Founder Matrix Trade
The market may have been disappointed last week and may be next week. But we are not. As generally cleaner September price action has continued, we made 1205.9 points (8.64%) for the week, taking the month’s total to 3578.6 (23.16%) and 10597.1 (81.08%) since we started in June.
Following the violence of the previous Friday, the market seemed to suffer from post traumatic stress disorder for most of the week, moving quickly but, as yet, not sustaining any move. It will therefore seek remedy and direction from this week’s meetings of policy makers.
LAST WEEK
On no particular news, the US stock market opened the week with a sharp rise but only a 50% retrace of the previous Friday’s rout. After this, in a week of mixed economic news, the markets spent Tuesday and Wednesday retracing into a classic double bottom. This prompted a recovery that seemed to ignore the raft of pre-market US misses. It was as this rally faded that the US announced a huge fine on for Deutsche Bank that saw the stock lose 8.5% and dragged DAX down to a six week new low (reasserting one of our favourite themes for 2016 – the DAX disconnect with SPX)
Oil had a very sharp 1.5c (3%) rally on Monday afternoon as sentiment again turned bullish, but then declined all week, ending at a 5-week low towards the lower end of the 40-50 range. Gold has similarly had a lacklustre week drifting back down to retest the 1302-1375 range lows.
USDJPY continues to ignore its classic correlation to equities probably more confused by the BOJ policy rift than its traditional link to 10 year US Notes. It was quite volatile in its clearly pivotal and arguably nervous 101-104 pre BOJ range, ending the week with a slight rally on Friday’s CPI beat.
This CPI beat finally provided the catalyst for EURUSD to break its week long 50pip range losing 90 cents by the end of the day with some citing nervousness ahead of this weekend’s EU meeting. Will this be the 5th failure above 100 on the Euro Index in a year? Indeed it was front running from EU’s Tusk and his claim Theresa May would invoke Article 50 (and the 2 year Brexit deadline) by February that prompted an even greater 250 pip fall in GBPUSD, accelerating EURGBP to a three-week high.
AUD and NZD were relatively quiet for most of the week but Friday’s break down also seemed to confirm a significant reversal from Kiwi’s 15 month new high.
Arguably the contrarian call of the week was AAPL. Following the much heralded normal post-announcement disappointment the no-surprises iPhone 7 launch confirmed our view of an aggressive ramp. AAPL had its best week ever rising over 12% to $115, a 2016 high but also our major target. Time to Swatch views?
Namaste to our 250 new followers from India after the launch of our NIFTY50 coverage..Nifty is the most fractal of markets and has no overlap with the US. It therefore started the week with a huge SPX inspired 150 point (1.68%) gap down that duly faded below 8700. Although the Tuesday’s gap up also faded, history and indeed lacklustre economic news suggests it will continue to frustrate those seeking sustained trend.. at least for a while.
NEXT WEEK
Since 2008, the combined explosion of HFT trading and central bank policy driven markets have produced very consistent price action before and after meetings. As traders get nervous and scale down in front, repeating robots dominate. But after the meetings both combine and react often in a similarly predictable way as well.
In a week starting with the EU Summit, where Angela Merkel said “We need solutions for Europe and we are in a critical situation” they are unlikely to find any quick answers. This may not help Brexit GBP at first but we doubt this new bout of weakness will be sustained.
Indeed this theme of disappointment from central banks and therefore markets is likely to continue all week: it is how the market is positioned in front of these meetings and then reacts that is important.
But this time we expect pretty much all ‘disappointment’ moves after the meetings to fade. The big day will be Wednesday. With BOJ meeting we can expect some volatility in JPY and Nikkei early doors but with probably only a defense of its negative interest rate policy, it is not likely to be sustained …not at least until the Fed’s quarterly interest rate decision later. With only 15% of the market allegedly predicting a US rate hike this month and only 30% by December, the usual scanning of the statement and (GDP downgrading) dot plot is likely to weaken indices and strengthen the USD for a short while only. But the big question is whether the subsequent reversal will be sustained through (side issue of RBNZ) and yet another Thursday speech from ECB President Draghi. And Friday’s German and US PMIs should have little effect, unless of course they slip below 50 which would cause a third Friday sell-off in a row.
Ed Matts
Founder MatrixTrade
The week started quietly with a (US Labor Day) NFP hangover but ended with an ECB inspired crescendo. Following weeks of choppy trading, the return of September has produced much smoother price action. Our 13.96% return for the week reflected this with strong and accurate conviction trading resulting in Matrix’s most profitable 7 day run so far.
MARKETS
The first three days of the week, devoid of any important news, saw sleepy summer equity volatility continue. The US VIX opened the week at 13.88 and drifted down to 13.18 by the end of Wednesday.
However the ECB provided what we were looking for: an equity top and a return to clean volatile price action. The selloff started early Thursday and continued with a vengeance on Friday, with the SPX shedding 2.75% to close at 2121, the largest decline since Brexit. The VIX added 25% from its mid-week low. The DAX remains a more erratic and subdued version of SPX until it can break the 10388-10806 range.
Action returned in the oil market, which had put on 8% by Thursday afternoon, partly because of hints of Middle Eastern output cut co-operation, but largely because of the strong EIA stock level beat (-14.523 vs +0.225) on Thursday. However the end-of-week sell-off eroded half this gain maintaining a choppy 40-50 equilibrium range.
In currencies, Tuesday’s moderate US ISM miss (51.4 vs 55.0), gave traders the excuse they needed to short USDJPY, which was already showing technical negative divergence. The pair dropped 1% immediately on the news, and then another 1% by the end of day. The second fade in these circumstances will often recover on a piece of good news, and in this case it was EIA beat that exactly cancelled it.
But the main focus of the week was Thursday’s ECB meeting providing EURUSD with an adapted classic: “Buy the Rumor, Buy the Fact Oops SELL!.” With the ECB’s monetary options now limited and the continued uncertainty surrounding Brexit, they could not but disappoint. Draghi again confirmed continued quantitative easing until “at least” March 2017 as they seek to reconcile lacklustre growth with the dangers of over-extended loose monetary policy.
Sterling started the week well with a PMI beat on Monday morning and GBPUSD got a further lift from the US PMI miss the next day. It then plotted a mirror image of its price action, ending the week slightly below where it started helping EURGBP gain 1% to keep the hopes of a post Brexit trend alive.
AUD and NZD more or less followed the equity markets although Tuesday’s Dairy report enabled the Kiwi to make a 16 month new high of 74,80 before retracing to the previous 73.00 resistance suggesting it may be lagging behind the herd of crashing equities. Not a good place to be.
TRADING
‘Back to School’ and lessons learnt? Following an erratic and challenging August, cleaner price action enabled us to report a 1253.88 point (8.62%) gain for the week, our best week since we started on June 3rd this year. Although the post NFP Gold ramp (based on a consistently profitable NFP fractal), and USDJPY/EURGBP recoveries assisted, our conviction of a SPX (DAX) top into ECB paid off an aggressive excellent risk return short. If September continues with this less erratic market action, then it bodes well for the sound risk/return – probability set ups that Matrix thrives on.
MATRIX
As Matrix approaches subscription mode, we are adding greater coverage and more markets (most notably EURUSD, AAPL and the Indian NIFTY this week) and preparing to implement many of the much needed changes to the current beta mode.
Thank you for your overwhelming support and constructive comments. Matrix is all about evidence: not just evidence based analysis and trading but also user experience.
Ed Matts
Founder, Matrix Trade
The market is slowing but surely shedding the choppy erratic trading of the last 8 weeks indicating a return to clean volatile price action. As a result largely of two particularly volatile trending days we made a gain of 1056 points in the week.
MARKETS
After last week’s hawkish Fed comments from Jackson Hole, the dollar and equities remained bullish all week, and drifted up gently until Thursday lunchtime, so this report is primarily about the last 36 hours of the week.
The only sour note was the PMI miss on Thursday afternoon, critically crossing the 50 line, which causes USDJPY and SPX to crash fast, although in both cases, half the fade recovered immediately, and Friday’s NFP finished the job, and then some.
Friday’s NFP was a miss (151k vs 180k) but you wouldn’t think so from the market reaction. This relatively small miss still highlights the volatile unreliability of this economic measure and indeed the FED’s data dependent policy. it was low enough to suggest a rate hike postponement, but not so low as to worry people. It therefore caused SPX and DAX to behave as if it were a beat, the classic spike up on the news, and then the same distance again in the cash market. DAX did even better as it added the 60 pip drop in EURUSD to it’s gains.
AUDUSD and GBPUSD duly rallied on this dovish news, the latter having been boosted on Thursday morning by PMIs crossing the right way (53.3 vs 49). NZDUSD tried, but failed after a couple of hours and fell back. Surprisingly, after a quick 120pip round trip south, USDJPY rallied hard after NFP, touching a one-month high of 104.32, although building negative divergence along the way.
It is not surprising that NFP has ‘woken up’ the market, as vacations end, and volume returns.The question is whether they will stay awake next week during and indeed after Labor Day.
TRADING
Our trading week centred around two days and two particular trends. Following the PMI missed we were able to re-enter SPX longs and picked up DAX at the lower end of its range to ride them both back up into resistance. How long it stays here we are not convinced. On Friday NFP was most notable for the again stellar Gold NFP fractal that signalled a buy on the dip at least until Tuesday.
Ed Matts
Founder, MatrixTrade
August has been a difficult and challenging month for a number of reasons. Producing a lower than targeted return highlights a number of lessons for the future.
MARKETS – The 3 V’s of August
August is often a slow month due to Vacation, Volumes and Volatility. In contrast to the July chop which predominantly produces range with variable volatility, August ranges can be deceptive as they occasionally produce the early stages of new trends.
The stellar NFP beat on August 5th set the tone for the whole month. SPX had flirted with 2150, but the NFP delivered a 35 point ramp pushing DAX to effective new highs for 2016 allthough both have consolidated these moves for the rest of the month.
USDJPY was quiet, ranging 101-102.50 for the first half of the month, then an even tighter 100-101 range (psychological parity support) for the second half. The pair, and by inference the dollar in general showed little interest in the FOMC report on the 17th, but did react to the hawkish rate hike hints coming out of the Fed’s Jackson Hole conference. The report ramped the pair by 150 pips immediately, and had added another 120 by month end, to finish a shade off the monthly high at 103.33.
The widely expected GBP rate cut finally happened on August 4th, and together with US NFP, cable shed over 3 cents in two days, and took the whole month to recover, finishing roughly where it started. Generally positive UK GDP data has, for now, put paid to fears for a post Brexit UK and therefore GBP collapse.
AUDUSD also ended up close to where it started. It showed a little bit more volatility, rising 3.2% to a double-top of 0.774 in the middle of the month, but giving up all it’s gains and finishing 1% down for the month at 0.7521.
This variable volatility has been reflected by commodities seeing both Gold and Oil failing to sustain rallies and therefore continue within their ranges.
Overall, the general low volatility, as seen in the steady decline of the VIX all month, has closed markets not that far from their opening levels.
TRADING
Given our generally accurate analysis in many markets for much of the month, a +8.53% return may be positive but still disappointing, 13% below our targeted rate.
However, a view is not a trade and begs the reasons for this underperformance.
It is tempting but also instructive to identify the excuses for a disappointing performance..as once these lessons are addressed it should bode well for a better return in the shorter term and future Augusts. Illness at the start of the month followed by vacation dominated our performance as a (misplaced) lack of confidence in judgement predictably led to a risk aversion with either unnecessarily tighter stops in a generally whipsaw month or a reluctance to risk more capital with wider stops on correctly identified potential trend moves. Despite our view of bottoms in GBPUSD USDJPY (and by extension GBPJPY) and DAX twice, we did not exploit these opportunities and therefore have been forced either to join the moves late at worse levels and or even fade them. Failing to take profit to make up for this underperformance (eg AUDNZD SPX and GBPUSD) has compounded this disappointment.
Now that I am fully recovered, and remain confident in our views in a generally cleaner September trading month, I am confident that we get back to our normal levels of profitability.
MATRIX
The month has also been instructive for Matrix’s development particularly in our trading signals. Just as there is a crucial difference between a view and a trade, we have rapidly learnt the differences between a trade and a signal. The current manual (and I should stress ‘real’) trade signal and recording system has been challenged on a few occasions due to market volatility. A most notable example was an SPX long that we had highlighted before the Janet Yellen Jackson Hole speech. By the time the trade was opened, recorded posted on the website but not yet tweeted it was near the profit level. Although these (and many other shorter term trades) are currently omitted from Matrix’s record, the impending automatic trade and communication system for our signals should alleviate many of these issues. A private Twitter stream will also serve as a back up. Again excuses that, when removed, hopefully bode well for September and the launch of our subscription service.
Ed Matts
Founder Matrix Trade.
PS We are starting analysis of EURUSD, AAPL, and the Indian NIFTY50 this week in the run up to the start of the subscription service, partly to showcase some of our innovative new approaches, but also to prepare for what we believe could be one of THE trades of 2017.
This has been a difficult and strange week in the markets. August’s traditionally low volume often causes unusual moves. Normal correlations often break down as the market tries to push possible new trends where few exist with the notable exception of the US stock markets.
The German DAX disconnected from the SPX on Tuesday, The DAX had risen 250 points, or 2.4% by 9pm, whereas the SPX rallied less than 0.5% and was flat by the end of the session. The DAX, remaining slightly overbought, continued to rise gently all week, for no fundamental reason, trade reports being mixed, and EURUSD was gently rising as well.
Indeed the SPX is at it’s lowest volatility level since 2014, and this is reflected in the VIX index which has been oversold all week. And yet this was the first week this century that all three US indices SPX, DJIA and Nasdaq Tech 100 have hit all-time highs in the same week.
Some further odd moves occurred. On Wednesday, the RBNZ made a widely-expected rate cut, yet the currency spiked up, not down, and by nearly 2%. 24 hours later it had gently drifted back to where it started. GBP attempted a half-hearted 60 pip rally on Tuesday morning, but the US session put paid to that and the pair has faded all week producing a new post-Brexit 3 year high for EURGBP.
Most unusual was Friday’s reaction to the US retail sales miss (0.0% vs 0.4%). This release rarely produces aggressive moves. However, on this occasion reactions were violent, gold immediately spiked $18 (1.12%), and USDJPY plunged by 1%. Gold held this spike up for three hours on hot air and then retraced quickly.
Trading
The last week was Matrix’s first losing week after 10 successive winning weeks. Although it is easy to blame this on short term illness and a market I normally vacate because of its vagaries, these are excuses. Our analysis has generally been right and yet illiquidity is still producing inconsistent volatility that challenges sound risk/return strategies. We are in a market where it is better to position for emerging trends towards the end of August or enter and exit short term trades when potential trend moves fail to materialise. In other words, be flexible where you don’t have conviction.
Sunday August 7th 2016
Markets
The first Monday in August started typically with a reversal..in a fundamental news driven week. China’s manufacturing PMI crossed 50 for the first time since February 2015, pushing the S&P to a 2183.34 all-time high. But Europe didn’t agree, and poor US PMIs didn’t help. Both DAX and SPX faded all Friday’s gains on Monday, and then erased two weeks gains on Tuesday but set the bottom for the week.
Tuesday saw the RBA cut rates and AUD summarise the week in 24 hours. A sharp drop was completely unwound. Attention then shifted towards RBZ’s monetary policy helping our highly tipped long-term AUDNZD trade.
Oil’s oversold condition and 50% fib support prevented any serious negative reaction to the miss on EIA figures on Wednesday and climbed the rest of the week.
Thursday was the big day this week with the much anticipated 0.25% UK rate cut. The BoE didn’t disappoint and GBPUSD duly fell 1.5 cent following the same rate cut price action as AUDUSD 2 days earlier.
Friday’s NFP similarly followed SPX’s historical ‘Beat’ pattern producing a near-record figure, and 75k above estimates (against a beat of only 9k on Wednesday’s ADP). This immediately lifted the USD with USDJPY attempting to complete a week’s V into the close. Indeed, the strong close for US markets suggests they may be entering the most emphatic phase of the pre US Election cycle flagging both the recent JPY and Gold trends. Gold exemplified the week’s volatility by more than wiping out Thursday’s BoE inspired ramp due to the combination of a strong dollar and risk-on sentiment – perhaps tipped by CHF’s flight from quality earlier in the week.
Matrix and Trading
Matrix ended the week up 6.1% maintaining our mantra ‘consistently ahead’ with a typical daily average of +100pips. But it didn’t start like that as illness got in the way of what should have been a very profitable first Monday of the Month play. If I am not 100% mentally or physically I reduce trading activity and therefore didn’t capitalize on the expected DAX ramp and reversal. It is not so much my judgement that is affected but my judgement about my judgement. Trading is as much as about yourself as the markets.
Evidenced based trading is just as important as evidence based analysis. History remains an invaluable guide. We more than made up for a slow start to the week thanks to fractals for the UK rate cut and NFP but also nailing Gold up and down based on identical price action at the start of July. However without wishing to overanalyse, history has a history and I failed fully to anticipate the different contexts between AUD and GBP. The UK rate cut aggravated Brexit concerns and attracted new sellers into the market that didn’t appear on AUDUSD, This highlights a fundamental flaw in common sentiment analysis. If sentiment readings suggest the market is very short and there is bearish news, nevertheless textbooks tell you it can only rally. That was the case with the Aussie. But the textbooks don’t teach you about capacity. In Cable’s case, the rate cut encouraged a new wave of Brexit selling from those waiting nervously on the side-lines most notably corporates. They more than made up for many traders like us who were short but thought and still think it could bounce.
“The game taught me the game. And it didn’t spare me the rod while teaching.” Jesse Livermore
Never stop learning….
Ed Matts
July is often a challenging and frustrating month for traders. Trends are often put on hold and ranges often spike. Therefore a 22.5% return for the Matrix’s second month is more than satisfactory but this consistency with a similar June return, by no means, tells the full story.
Markets
1. As the aftermath of the UK’s Brexit vote predictably failed to provide any follow through in the July chop, arguably the biggest story of July was NFP on the 8th. After the worst NFP in years in June (actually revised even worse down from 38K to 11K), the July figure was a near record the other way, 287K vs 175k. This report effectively killed any ‘sell in summer’ doctrine, and the markets rallied strongly to new all time highs on SPX and DJIA. the one sustained July trend we were seeking. Underpinned by good earnings, we expect this trend to continue but punctuated by the usual August sell off.
2. The post-Brexit confusion continued with BoE Governor Carney indicating there might be a rate cut. So when rates were held on the 14th, we saw an immediate 2.5 cent rally in GBP, which faded and was repeated the next day. Since then the currency has ranged in a 2 cent range. UK markets are likely to remain a minefield with the occasional explosion amidst the continued uncertainty likely to limit moves in both directions. Similarly in the absence of concrete news, EUR volatility has declined constantly since Brexit, despite a 1 cent spike following the US rate hold.
3. The non-story of the month was FOMC. The minutes on the 6th had little effect on the markets, neither did the MPC and rate hold on the 27th, except, unusually, for Gold, that started a decline after the first meeting that carried on until the rate hold, which caused an instant $16 spike, suddenly bringing our lacklustre mid-month trade back into life. Gold is likely to vacillate with signs of potential US inflationary growth and scare stories from Britain, Japan, and even Hilary Clinton it seems.
4. If there was ever a market that exemplified a July chop driven by rumour and sentiment it was the JPY. USDJPY rose a volatile 6 yen in the middle weeks of July, and after botched leaks on July 26th, premier Abe announced the actual stimulus plans for Japan a day later, wrong-footing pundits who expected a return to 107 yen. Clearly the package was underwhelming, as USDJPY and the Nikkei faded together (the pair have been in daily lockstep since 2005), driving USDJPY down to around 102 by the end of the month. Violently going nowhere. Similarly AUDUSD has been range bound with much less violence, the RBA rate hold this month having much less effect than previous months.
Trading
We should be more than satisfied with a 22.5% month return but July has been a story of missed opportunity caused by sudden shifts in very short term volatility. Although we have stayed long SPX the entire month, the fact DAX has shrugged off the disconnect with the US suggests we may have missed a trick. We were also stopped out of subsequently good trades by 3 spikes on GBPUSD, AUDUSD, and USDJPY. Although the losses were relatively small, we missed out on probably more than 10% profit due to the July chop which also threw us a BoJ dummy that also saw us jettison a previously excellent view. As usual we reduced the number of July trades but even resorting to options, where post-Brexit volatility allowed, has not escaped the intermittent July chop. This time next year we will look to time fades more cynically and trade the stops outside of non-trending July ranges. Note to self.. stop trading oil! After 10 successive winning trades earlier in the year producing more than 100% return, I can’t recall a winning trade. Again political fundamentals challenge even sound technical setups.
Matrix
Matrix continues to receive excellent feedback in its current beta mode with 3.5k regular visitors and many enquiries about the Academy planned for later in the year. As we approach the end of beta and the start of subscription, I am confident August will prove a more predictable, more tradeable, and less frustrating month. And yet I would be happy with another 22%. And further proof of our mantra.. consistently ahead!
Ed Matts
Founder of MatrixTrade
June has been one of the more exciting and interesting months in the markets for a long time. It has provided volatility, sometimes extreme, but also resilience. It was also the first month of Matrix Trade.
MARKETS
The shock suffered by the markets on the morning of June 24th after Brexit vote dwarfed two events that in any other month would have been momentous.
On Friday June 3rd, NFP came in at 38K, three-quarters below the estimate of 164k, the worst miss in years. And yet the market recovered well because US rates would remain on hold.
Also exceptional was June 15th/16th. After the Fed announced no rate change, a similar status quo was announced within 24 hours by the BoJ BoE and SNB…rare for four CBs to announce in such a short period. After FOMC, again equities and USDJPY spiked down, and again equities quickly recovered. The markets then decided Brexit was not going to happen, and equities soared to a monthly high. Even the dollar joined in. When the shock result came in, the risk off spike down was ten times as big as the earlier ones, and yet once again, within 2-3 days it had recovered only really leaving Gold and GBP at crisis levels. Again the prospect of easy monetary policy appeared to support the market despite systemic risk. The moral of the story is one of resilience and nothing, not even Brexit, appears able to detract the continued impact of US Fed ZIRP as has been the case since 2008
TRADING
June could perhaps better be known as the month of the contrarian. In a month where it has arguably proved reckless to anticipate it has been equally dangerous not to anticipate as most moves have been unwound or at least not sustained. The consequently high levels of extreme volatility also made defensive strategies dangerous However, careful risk management and both short term patience and timing have provided many excellent evidence base trading opportunities.
Although we did not carry any open exposure into Brexit 22.5% return for our first month shows an emphasis on short term and swing trades has been rewarded: most notably +13.5% in DAX and most notably not WTI where quasi permanent volatility remains challenging for sound risk/return strategies. We suspect July will see this pattern continued but with less violence. Moreover as uncertainty surrounding Brexit may ironically provide a false sense of security this could allow certain non-Brexit related trends to develop.
MATRIX
We decided to launch Matrix in a beta mode not just to identify potential technical difficulties but also identify what potential clients really wanted. The information we have gathered from the many compliments and suggestions will allow us to develop Matrix in a way that caters to the broad range of needs but in a way that allows us all benefit from continued volatility.
Ed Matts
Following one of the most violent moves in Sterling history it is worthwhile drawing lessons.
This is how one Matrix customer, a very experienced options trader who has followed me for 20 years, traded Brexit…on evidence based analysis and evidence based trading. In other words what is the most likely price action and what is the best way to trade it to maximise gain and protect capital.
The essence of this trade was that the more likely Remain result would cause the market to rally, or at least not fall by very much quickly. And more importantly, that implied levels of volatility were too high, even under a Brexit scenario where the price would fall sharply but not as sharply as implied volatility suggested.
THE TRADE:
A PUT SPREAD closing on the Friday after the vote where puts – right to sell – are bought at two different levels. In this instance puts BOUGHT with a right to sell at 1.40 on Friday’s London close are more than paid for by the SALE of a much larger number of cheaper puts with the right to sell at 1.30 and 1.28.
The key is identifying the right strike prices and the correct expiry based on evidence.
DETAILS:
Sold GBPUSD 100m 1.30 puts at 26 cents – $260,000
Sold GBPUSD 100m 1.28 puts at 25 cents – $250,000 Receive $510,000
Buy GBPUSD 20m 1.40 puts at $1.825 -$365,000 Cost $145,000
10:1 put spread, expiry Friday 24th June 4pm London time.
Trade done 6th-7th June, 17 days to expiry. Spot about 1.45. Volatility around 25%
Effectively net long.
If Remain and Sterling stays above 1.40 profit = $145,000.
If Brexit but above 1.30, then profit = $145,000 + profit from 20m short from 1.40. Closed = $530,000
Total profit: $675,000
Potential loss: If Sterling closes below 1.30 then loss = loss from £100m long 1.30 and £100m long 1.28.
RATIONALE:
Price Action:
The Re-GREXIT fractal showed Sterling testing but holding the 1.3850 low before the vote and then rallying to spike the 1.4750 high to above 1.50 but then falling slowing to new lows. This would presumably therefore be a Buy the Rumour Sell the Fact on a Remain result and therefore not trade below 1.30 by Friday’s close.
Volatility: On a Brexit, sterling would clearly fall more dramatically. But potentially how much?
Historical volatility from BoE records going back 100 years show that a maximum daily shift would still not see Sterling close at or below $1.30 particularly in the face of likely Central Bank intervention and likely squaring up before the weekend.
LESSONS LEARNT:
Win or Lose – Always note the lessons learnt. As this customer highlighted:
It is better to be wrong and make money than be right but broke.
-EM
GBPUSD has continued to follow the RE-GREXIT template into today’s vote. This has implied the expectation, if not the fact, of the UK voting to remain in the EU. Our analysis based on a strong similarity for the last 6 months between both the Remain – Leave polling differential and the previous Grexit referendum in itself currently projects a 11.1% in favour of Remain at the imminent close of Poll.
However, markets have a tendency to overshoot in a state of euphoria in either direction and often exaggerate. Indeed the comparison with Grexit curiously shows Sterling fading above 1.50 and breaking back down for at least another attempt at the lows. The issue is how long or how low it will be sustained.
This opportunity and more individual detailed analysis of UK markets are now available to those registered at MatrixTrade.com.
GBPUSD continues to follow the RE-GREXIT template into Thursday’s vote.
“This striking similarity has and still clearly implies the expectation, if not the fact, of the UK voting to remain in the EU. A comparison of previous price action and polls over the last year suggests a price of 1.4750 actually equates to margin of greater than 10%.” said Ed Matts of research company, Matrix Trade.
The template and the impulsive rally since last Thursday’s 1.4010 low both support a break higher to a potential Grexit-type spike of 2.18%. Although this allows a pre-BREXIT reality check back to 1.4400-1.4310 (50-61.8%) it does suggest one of two things – either a larger margin in favour of Remain or more likely a euphoria spike to as high as 1.5090.
It is from this higher level that GBPUSD gets potentially really interesting. For as GBPUSD fails to maintain the break of 1.4750-1.4800 then it is at risk of a classic “buy the rumour, buy the fact … Oops SELL!”
For further information go to the GBPUSD page.
Note: There are some parallels with the late swing to the NO Vote in the GREXIT referendum held on July 5th 2015. But the strongest parallel is with market sentiment and the GBPUSD now and EURUSD in JUY 2015.
As the markets enter the final week before the Thursday June 23rd Brexit vote, a late relief rally has taken Sterling away from the critical BREXIT LEVEL. Is the Pound saying something about the outcome of Thursday’s vote?
“The Sterling dollar rate has mirrored the movement in the Brexit polls for the last year. The recent shift in favour of the Leave campaign and Sterling weakness shows that 1.4240 is the key Brexit level.” said Ed Matts, of research company MatrixTrade.com
Sterling touched a low of 1.4010 against the US Dollar on Thursday before tragic events in Yorkshire served as a catalyst in favour of the Remain Campaign. It opened sharply higher in Asia at 1.4460 following two weekend polls that gave the lead back to the Remain camp.
“Sterling has been tossed around like a cork on stormy waters the last few weeks as the polls have swung violently. But this four cent rally that started after Jo Cox’s tragic death anticipated this weekend’s polls and shows how important 1.4240 is to the markets.”
“Markets hate uncertainty so I strongly doubt this rally can be sustained before Thursday. But it will get very nervous and excitable if it goes below 1.4240 again.”
The chart shows a steady shift during 2015 in favour of leaving the EU was mirrored by a 10% decline in the value of Sterling against the Dollar but it also shows how in 2016 it has swung violently around but mainly above 1.4250.. the level where the LEAVE vote is seen to equal the REMAIN vote pollsters. There have been times when the market appears to have led the polls such as Thursday as traders saw events that could lead to a change in the polls.
Gold has continued to follow the 1999 template and provide a lead for other markets.
Gold is frequently loved and hated by many traders. One reason is that it is seen as different things at different times…and often the wrong thing. Classically Gold is regarded as a commodity of intrinsic value and therefore a safe haven at times of crisis or a hedge against inflation. But at times it is also seen as a financial asset (or currency) that can be speculated like any other. If there were ever a market that demonstrated the need for our variable FITS analysis (fundamental, intermarket, technical, sentiment) it is the ever changing Gold. Knowing what is driving Gold at any one moment and how that can vary is key to trading and profiting from it. Also knowing what is driving Gold will also help decide what is or will drive other related markets.
So what has driven Gold in 2016?
We have made a great play of the Washington Gold trade…a carbon copy of the 32% rally following the Washington Gold agreement of September 1999. This is partly because we waited so long in 2015 for it complete a similar down drift to 1999 before the highly leveraged long. And yet there was nothing overtly akin to a central bank restriction of Gold sales in late 2015 or early 2016. So presumably it is not a fundamental move? Wrong. Three months previous in 1998 there was a US Rate rise.. the first of a possible new tightening cycle. Two months before the 2016 Gold rally there was a US Rate rise. (Both were also preceded eerily by an Asian crisis and Oil price collapse).
Coincidence? Fate? Probably neither. What it suggests is that we are in a similar stage of a similar economic (or inflation) cycle. Perhaps, more importantly for the trader, this suggests other related markets may do similar things and demonstrate similar technicals and sentiments.
Analysis and trading strategies on www.MatrixTrade.com (available to registered users tomorrow under Gold in our commodities section.) will show how we seek to take advantage of this Matrix Trade
It is fitting that Gold is the subject of Matrix Trade’s first article.
Gold set the standard for 2016. A quiet messy start to the year leading to an exceptional rally followed by a possibly prolonged deep retracement. If you missed that rally you may have missed THE action in Gold for 2016. But not to worry.. you can trade it again..
And read this email possibly again that we sent out to thousands on March 9th 2016.:
Many will recall the strong similarity of many markets at the end of last year we drew to the 1998-2000 period.. The most striking trade was the Gold ramp in September 1999 where Gold rallied 32% in 10 days on the back of the Washington Gold Agreement. It was exactly this template that enabled us to get heavily long in the last week of January for the recent Gold ramp.
That confidence (or probability) and leverage was enough to be THE Trade of 2016. But thankfully that is only the beginning of the Matrix Trade.
A Matrix is where variables can be combined to create a better or more optimal result.
Where Fundamentals, Intermarket relationships. Technicals and Sentiment (FITS) combine, clarity and therefore probability and success increase significantly. When that clarity combines with volatility. the result is very powerful as evidenced by the Washington Gold Trade. If it FITS..trade it. If it FITS a lot.. trade it a lot.
But when that market is related to other markets that also show similar FITS but at different times or stages… then you have a series of Matrix trades or one larger Matrix and one larger Trade.
That is what is happening now. The Matrix Trade. “
It is why we issued a buy signal at the Oil low and still have that Matrix Trade. It is also why we are confident we can all continue to gain from it…
Part II of the Gold Standard will expand on why we sent out that email. Gold should continue to follow the 1999 template and provide a lead for other markets.
To launch MatrixTrade.com, Ed gave a presentation at the inaugural London Forex Expo show on Friday 3rd June. This has been recorded, and you can watch it here. The subject matter is USD/JPY and earthquakes!
Matrix was launched on 3rd June at the London Forex Expo show in London. On the same day, which happened to be the June Non-Farm Payrolls day, Matrix founder Ed Matts gave an interview to Zak Mir of Tip TV, the London-based daily finance channel.
