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That the rout in bond markets over the past week or so hasn’t really disrupted the more positive tone in stocks and other risk markets is remarkable on some levels but also an example that we likely saw a period of peak pessimimism and the associated FOMO in bond markets as traders and investors scrambled for yield before it disappeared. But the bond market sell off continues with US 10’s at 1.90% from a recent low around 1.4% – some move, do the math on that :S.
But stocks are still bid because there is enduring positivity about the chances of a breakthrough between the US and China. And you that this is the case because bonds are offereed, as is gold and silver, while copper has caught a bid. While prices in stocks rise toward resistance the fact that there is some sense an interim deal might get done will keep a bid in the market – at least until the FOMC possibly undertakes a hawkish cut mid-week.
And of course in what is a huge week for central bank decisions including the BoE and BoJ, not to mention many EM nations, the focus early doors Monday is going to be on the fallout from the weekend attack on the Saudi facility which has knocked out around half of the Kingdoms capacity in one fell swoop.
The Week That Was…
Now for the week ahead, let’s dive in.
Key Themes driving markets
Oil is going to open the week bid after weekend attacks on Saudi oil facility
On Saturday Saudi Arabian authorities confirmed that around 5.7 million bpd of productive capacity had been temporarily knocked out after – Houthi apparently – attacks on the facilities. Crucially though the new Oil Minister Abdulaziz Bin Salman said the Kingdom’s export customers would be supplied from inventories.
We won’t know the real impact of the attacks – in terms of how long this capacity is knocked out for – for a couple of days according to Amin Nasser, CEO of Saudi Aramco who – according to Platts – emailed a statement saying, “work is underway to restore production and a progress update will be provided in around 48 hours”.
So we have a window of uncertainty where sellers might be a little nervous and the bulls will have the whip hand. But in the same way where the financialisation of Crude Oil has seen a recent battle between those who believe a slowing economy will hurt oil demand and those who believe that the OPEC+ plan to continue to press inventory levels lower has lead to a broad range, so the same forces will now battle at some higher level at which oil prices seem ridiculous to the global growth slow down folk or those who understand how long the Saudis can supply from stocks and the rest of OPEC+ can step in to bridge the Saudi gap.
You’d have to think there are contingencies.
The open Monday could be very interesting if we haven’t heard any timing from the Saudis and I have a sense of where the technical levels might be in WTI and Brent. But that said, the reality is where, how fast, and how high oil prices really go is going to be a function of how much information is available at the open and subsequent trade before things settle down. And how much emphasis traders put on the Saudi statements about supply from inventories or of the Trump Administration saying it can tap emergency reserves if necessary.
I won’t pretend to know the answer to that, only to say this is a big outage, how long it last and how quickly OPEC+ can fill the void is going to be crucial to the outlook. To the technicals then – using Brent for this week’s chart.
For Brent the range top comes in at $68.62 and old trend channel resistance at $70.62. That seems like the most natural places for sellers – if they are game – to get involved. In WTI terms the levels of resistance are $58.58/85, $60.90, $63.93 then similar bottom of old trend channel at $67.74.
You can see from the above that I’m looking to fade this rally at some point – but lets see how long the outage is going to be before I rush in.
Could we be on track for an interim trade deal?
China is playing the thaw in relations that they have sought in the lead up to the 70th anniversary of the CCP on October one masterfully. They have pushed the Hong Kong protests from the front page, they have agreed talks, they appear to be buying more US soy – even as they finalise an agreement with Argentina to buy which will allow them access to the world’s biggest soymeal producer – and they have been able to get President Trump to delay tariffs by 2 weeks to avoid the clash of the anniversary and the new tariffs coming into place.
It may all come to nothing given the mercurial nature of President Trump. But, I have to agree with AGF’s Greg Valliere who wrote Friday that maybe there is now available a Plan B on the China Treade Dispute. Valliere said (his capitals):
“Both sides agree that about 90% of a trade deal is completed; negotiators have made that assertion for the past few months. So why not sign a deal on that 90% and leave the remainder for additional talks that could last through the winter? That idea seems to be gaining traction as both sides look more conciliatory.
WE STILL THINK A COMPREHENSIVE DEAL is many months away, but real signs of progress are possible when talks resume in October. Beijing is buying soybeans again and has offered concessions in free trade zones in China, while Donald Trump is delaying some tariffs and considering other concessions”.
Now I can’t fall into the trap of thinking President Trump will do something because I would, or maybe most folks would because clearly he’s shown himself not to be that guy. But I’m with Valliere. This would be a very elegant way to de-escalate trade if President trump wants to. It’s a big IF and an important one for markets. But he did say last week he might be open to an interim deal – so we’ll see.
Critically China will probably require some reduction in tariffs for even an interim deal to get done. But, eithyer way, we can probably have a few weeks more where both sides are spinning positive messages.
Correlations are almost back to normal – so things have settled down
There is still plenty of Green and a bit of red. That reflects correlations of greater than plus or minus 0.75 ove rhte past 30 trading days. But what you don’t see here is the universal panic of almost full green and red we did a few weeks back. Rather what we have is what we could term more “normal” correlations.
So, crisis averted thanks to China deciding to buy time on trade.
That means the bond market rout isn’t having the impact it could have more broadly
This reversal in bond rates – bond prices – has been extremely aggressive and reminds me very much of 1994 when US and global bond markets came under intense upward pressure. back then US 10’s rose from the nadir in 1993 in the low 5% region to a peak around 8% in November 1994. As a young interest rate portfolio manager it was a trying time and I learnt a lot from great mentors – thank you Greg Michel and Peter Whitty.
Now I’m not saying this is the same thing and certainly not saying that we are going to see a reaction of that magnitude. But as I explained to paying subscribers early last week in keeping with my style as a FI portfolio manager I would want to keep the running yield on bonds bought last year (when I went bullish) and am using futures to hedge that position until the bond rout has run its course. At the time I said the current targets for 10 years bunds are a run toward -0.40% while for US 10 year Treasuries it is the 1.87% region.
We’ve seen US 10’s move through that level and they are at 1.901% on Friday’s close while german 10’s are up at -0.45% now. But as I also told subscribers – and Twitter – I don’t want to make the easy mistake of prematurely extrapolating the recent reversal into something more pernicious. But there is a technical setup which suggests US 10’s may actually head toward 2.00/2.10%.
2.10% is just the garden variety retracement as it represents the 38.2% Fibo of the of the move from around 3.24% last year. Bond rates in the US and across the globe have moved far and fast from the recent lows. But as I also told Subs last week my sense was we’d seen a pessimistic cresendo in bonds rally so hard on worries about trade and growth and that the rally was fuelled by FOMO when it comes to running yield – and a little bit of reach for capital gain.
Things never turn out well in global finance when bond managers are worrying more about the RETURN ON their capital not the RETURN OF their capital.
Now, while the reduction in tensions has played a part in the bond market rout so to has the subtle shift in the german government’s position on the possibility of Fiscal stimulus. Last week that tack was signalled when the finance minister said there were many many billions which could be deployed to shore up the German economy. Then of course we had mario Draghi’s dovish surprise – to me at least – while he emplored the governments of Europe to get busy on the fiscal front.
And over the weekend Olivier Blanchard made the right case for the combo of fiscal and monetary policy. get off the pot Pollies. So of course we’ve seen European bond rates lead the global reversal in many respects and it doesn’t look done yet.
German 2-10 spread (top), German 10’s (middle), German 2’s (bottom) – TradingView
Stocks still bid but nearing important resistance – a deal might be coming though
The rally in global stocks continued this week with more positive noises about trade and some signs in the data that the US economy is nowhere near as rubbery as some folks thought. It was an interesting weak where the small cap Russell 2000 well and truly eclipsed the performance in the bigger indexes by many percent and as there was a rotation from growth to value.
For me, though I recognise there was a bit of quant messiness in the relative performances, the moves represent a mild recognition that maybe things in the US might turn out a little better than investors had thought. So we had a self reinforcing positive loop for a changte in data, sentiment, and smaller cap stocks performance.
US Retail Sales YoY(blue) v US GDP Annualised(black) – TradingEconomics.com
Take retail sales for example, it’s no surprise with a still strong jobs market, relaitvely robust wages growth, that retail sales are still printing fairly solidly. Data released Friday showed a rise of 4.1% year over year in August after the month printed a stronger than expected 0.4% to follow the previous month’s outsized 0.8% growth rate. Of course I could cue those who will tell you consumers usually do better than the actual economic growth levels show and recession can still occur.
I’ll accept that and stay on guard because it’s clear the US economy is actually slowing. But it is also clear that the data fits the Fed’s entreaties the US economy is doing okay a little better than the handwringing recessionistas. You know my view, another rate cut this week and it will facilitate a mid-cycle positive tap on the economic accelerator which can keep the US expansion going a little longer still. And if the Fed feels the need to cut again in the future it can do it all again.
So we’ve got a more supportive backdrop for stocks and you can see in the weekly chart below the low last week was pretty much on the wedge trendline that the S&P broke down below and then has rallied back through last week. It is still below the top of what might be a giant megaphone so the 3045/50 region – not to mention the record high around 3026ish – could offer decent resistance.
S&P 500 Physical Weekly – TradingView
In terms of the outlook it is worth reiterating that structurally the JimmyR still has a long signal on the weekly charts while the dailies are are now crossing and the MACD daily system has been long since August 28. The weekly MACD system went long last week – Monday – as well. So, my rhetorical expectation we’d head lower is in abeyance for the moment as 4 of the four methods I use to determine trend are all long.
And, given the trade war is a handbrake on global growth and because in varying degrees where the US markets – especially the bellwether S&P 500 – drive overall global stock market sentiment then that has also seen my systems and sentiment long global stock indexes individually as well.
The result of course, is that the DAX and others have run higher and hit my 12400 target I was talking to Subs and mentioned here last week on the break of 11850. It’s not all beer and skittles though because as Subs know I reduced positioning in the DAX when it hit 12400 Thursday. Doh, as Homer would say. Overall net long though still and the DAX looks like it is running back toward recent highs around 12660/80. Though there is some resistance in the 12600 region from the old trend channel bottom.
USD Index (DXY) Weekly – TradingView
The USD looks like it’s heading back to support, perhaps much lower
Whereas we had a month or two of the USD (in DXY terms) trading up and down last week’s down week was the first back to back down weeks for the DXY since the weeks ending the 20th and 27th of May. That in itself is only an interesting statistic if we can glean any insight from it – either technically or fundamentally.
For me the important point is that while folks are getting a bit more excited about a trade deal – interim or otherwise – the USD suffers for a time because that would in effect mean the US Administration is taking its foot off the throat of the Chinese and other EM economies and currencies – which is what we saw last week with USDCNH down at 7.0454, around the 38.2% retracement of the last leg higher from 6.81back in June/July.
USD Index (DXY) Weekly – TradingView
So, as I look at the DXY below it seems this correction may continue so I’m looking at the set up and watching the bottom of the channel which at present is still just around 96.00. And, as I’ve been saying for a couple of weeks it’s not beyond the realms of possibility that we see a ratchet down toward that level. The 15 week ema is at 97.50/55 and the 30 is at 97.20. They should offer some support on the way lower.
Turning to the the Euro now and the ECB eased, the Euro fell out of bed – aggressively so – but then bounced – also aggressively – from the recent low at 1.0925 and ended the week at 1.1073. For me it still needs to get up and through 1.1111 to really kick but that is possible given mario Draghi seems to have stepped beyond what many of his senior colleagues thought prudent. That suggests no more stimulus from the ECB unless their is a crisis – notwithstanding 20 billion Euros a month of QE is continued stimulus.
So over to fiscal policy and in that regard it would be supportive of growth, European bond rates, and thus Euro positive. IF, if, it happens.
Techically though, a break of 1.1111 opens 1.1150, then 1.1200/20 then 1.1280. Much wood to chop given the strength and persistence of this downtrend.
EURUSD Weekly – TradingView
Sterling had another wild week week breaking up and through the recent break down level at 1.2435. Given the run under 1.20 recently this is a powerful rally. As well it might be as a chastened BoJo seems to actually be working toward a deal once more.
Nothing like the scent of a terminal premiership to get one focused on policy not oneself hey Boris????
Anyway, as the chat continues of the hope of a deal and BoJo’s hands are tied on a hard Brexit by the parliament then the Pound can continue to rally. Especially given it’s broken resistance. 1.2600 seems a reasonable target now and if that breaks we might even be talking about 1.28. What a roller coaster ride.
GBPUSD Weekly – TradingView
A nice time for specs to get long Oil it seems with a big uptick in WTI longs shown in the CFTC data Friday. As noted above there is still plenty of limit available for more longs, so that can drive prices even higher still if the Saudi facility is out for a bit. Currency markets strike me as vulnerable if this USD move gets a wriggle on. We have seen a small diminution of AUD shorts, though specs seem to dislike the Pound immensely. So if the USD keeps falling we may see some squaring after the decent bouces. AUDUSD likely needs to get above 69 cents and run toward 70 though.
US 10’sshorts were reduced which I find interesting in the extreme. But there is still room for further selling as positions are opened up for any dips to be offered (yield terms).
The week ahead
The week kicks off Monday with China’s Triple treat of fixed investment, retail sales, and industrial production. Indian wholseale prices are out we get speeches from the ECB’s Coeure (which could be very interesting) and Lane. Italian inflation data is out along with Russia’s insdustrial production. And in the US we get the release of the NY Empire manufacturing index.
Tuesday we get the RBA minutes to the latest meeting which might be interesting if they reflect disqueit with the lack of fiscal spending and what happens to lower rates. But the board probably won’t let that out even if they did discuss it. Chinese house prices are out and in Germany we get the next update of the ZEW data. The Euro Area version is also out. In Canada we get manufacturing sales, Russian PPI is out and then in the US we get industrial production, manufacturing sales, and the NAHB housing market index. And of course Tuesday late we get the API inventory data.
Wednesday is South Korean export and import prices, Japanese trade, and in Australia Westpac releases the leading index of growth. Italian industrial orders are out along with South African inflation with inflation data also released for the UK and Euro Area. ECB Guindos is speaking and then its South African retail sales and Canadian inflation. In the US it is building permits, housing starts, and the EIA inventory data. Russia releases its GDP and unemployment.
And of course the big one Wednesday is the FOMC decision and Fed Chair Powells press conference. 2pm Washiington and then the presser is at 2.30pm.
Thursday kicks off with Asia reacting to what the Fed does and Powell says and then forex and rates traders will move onto the Australian employment data and then the BoJ interest rate decision. With the ECB gone, the Fed going, the BoJ might get busy too. If for no other reason to ensure the Yen doesn’t catch a bid. Indonesia also has a rate decision while the Saudi Arabian and Brazilian central banks release their decisions between the Fed and the Asia open.
Also out Thursday is the Euro Area current account, UK retail sales, Italian construction and current account, another speech from the ECB’s Coeure, and then the BoE interest rate decision and associated minutes and vote cut. Canada’s ADP employment data is out, the Philly Fed is released in th US along with jobless claims and existing home sales. South Africa has an interest rate decision to be announced and Argentinian GDp is out at 3pm New York time – might be interesting for the ARS.
Finally Friday and we get Japanese inflation, or lack there of. Germany release its PPI, the BoE’s quarterly bulletin is out, as are Canadian retail sales and Euro Area Consumer confidence.
Central Bank week, HUGE – especially the FOMC.
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