Now I Am Getting Worried

Originally published by AxiTrader

Market Summary

Now I am getting worried.

We have seen another dead cat bounce for US stocks while US 10-year Treasuries are slipping down and through 2.8%. Currently trading at 2.77, which is just below the level I’ve pegged (which is actually 2 points below the actual level) for a break and run toward 2.60/65%.

I’ll talk more about that in the main section below.

The quick summary is that US tech is under pressure again with the Nasdaq down 3.32% (it lost 1% in 20 minutes earlier) with Facebook (NASDAQ:FB), Twitter (NYSE:TWTR), and others getting creamed – mostly for company-specific reasons. That’s turned sentiment in the Dow and S&P\, which have been slipping for the past few hours and are now down 344 points, 1.43%, and 46 points, 1.73%, respectively for both indexes.

Because this weakness has come in the past few hours, Europe missed out on it and had a thoroughly good day with the DAX up 1.56% and FTSE 1.61%. It looks like they’ll have some reversing to do when they open this afternoon.

And reversing is what local players are doing with the SPI down 60 points, 1.03%, at the moment to unwind yesterday’s rally and put the focus back on the downside when the S&P/ASX 200 opens this morning. Watch out if 5,770 breaks – we could see another 100 points.

On currency markets it’s been a night where the US dollar got its mojo back and has benefitted from some more weak EU data, uncertainty in ECB comments, and – it seems – some recognition perhaps that perhaps not everything is a damn sell dollar excuse. Loretta Mester’s comments on rates yesterday certainly juxtaposed with the mild dovishness of ECB speakers overnight.

Anyway, the US dollar is so strong – relatively and only in the sense of compared to recent weakness – that even with the stocks sell off it’s holding ground against the yen with USD/JPY largely unchanged at 105.38. Euro is down 0.34% at 1.2401, the pound dipped half a per cent to 1.4154. Of the commodity bloc, of the majors actually, the Aussie dollar has been the worst performer and is at risk of a break and run toward 75 cents. It’s at 0.7675, down 0.9%. Traders will be eyeballing 0.7670 and a potential air pocket below it.

The kiwi is half a percent lower at 0.7263 and the Canadian dollar has lost just 0.3% with USD/CAD respecting support and trading at 1.2880.

On commodity markets the US dollar strength has knocked gold back $8 to $1345, copper is up a little but still below $3 a pound at $2.975, while oil has fallen 1% in WTI terms and 0.6% in Brent. I’ve got a cool LT WTI chart showing why below (in the full note for later). Iron ore is down again as well.

On the day today, we have nothing in Australia except for me co-hosting Sky Business for 2 hours from 12pm today with Ingrid Willinge and Henry Jennings. Tonight it’s the GFK confidence data in Germany, CBI trades in the UK, and the 3rd read on US Q4 GDP.

Folks it’s end of month, end of quarter, end of financial year in some parts, and Easter. So this can be a messy week which doesn’t necessarily convey any real signals about April and May. That said, watch the 10’s. A rally below 2.78% is indicative of AA shifts which could further roil markets in the month and months ahead.

Here's What I Picked Up (with a little more detail and a few charts)

International

• Recall I’ve been writing a lot about volatility, its uptick, and the implications recently. I’ve also been banging on about the bond market and how important it is both in price terms – 2.78% for the 10’s – and what it says about asset allocation shifts. I’ll get to bonds outright in a sec but first I want to discuss a little survey I saw on Bloomberg this morning. Bloomberg reports, “About 70 percent of institutional investors are “somewhat concerned” that a 20 percent correction in the US stock market could come within the next two years. Almost 60 percent of those polled say the S&P 500 Index will underperform its 20-year annual average return in 2018, and half say the current market cycle is approaching its end, according to a survey released Tuesday by money manager Commonfund. The survey was conducted in mid-March and included 200 institutional investors from endowments, foundations and public pensions”.

• I want you to think about what that means behaviourally. To me it speaks to uncertainty and caution. It speaks to a little more money in cash and bonds (yes even at these rates). It speaks to selling the rally, not buying the dip. It speaks to not feeling a rush to get to market to buy stocks when you get fresh money or a new allocation. In essence, it speaks to risk asset price deflation as traders and investors wait and see where things work their way to. In many ways the expectations in this survey set up the very occurrence. It may take ages to get to a tipping point, but it will come. As I wrote Friday, “Whether this is about to turn into a massive rout of stocks, precipitate a big fall in bonds, and push the USDJPY down below 100 is an open question. But the probability is rising that we see stock price globally enter a bear market. That would mean a further 10% fall below the February lows”.

• Okay, the chart says everything you need to know. The background to this is a market that has been heavily short. CFTC data released last Friday showed the big specs increased their net short position from 271,369 contracts the week before to 313,304 last week. 4 weeks ago the short was 214,480 and 12 weeks ago the short was 83,666. So the question I’ve been asking is who is left to sell. Which is partly how we can get a bond market rally. Of course, it’s a bit late coming given recent stocks volatility. But you can see why 10’s stayed elevated last week in that positioning data. But it is breaking lower now and a close down here suggests a run toward the 38.2% retracement level of 2.59%. So let's say the target is 2.60/2.65%. Imagine where stocks will be if that happens.

• Momentum is a wonderful thing. It just keeps rolling until it doesn’t. Take the anti-US dollar trade at the moment, nothing can really knock it course. Not even fundamentals. And what do momentum trades usually end up doing? They reinforce BTD mentality, they recover quickly from any setback and that in turn builds on the momentum. Some say the USD momentum is only just getting started. That may be so, I’m not convinced there is a huge further leg to the US dollar collapse just yet – but the levels aren’t far away for me to change my tune. It has to break first though.

• At the end of momentum, however, especially when it lasts for a substantial time and accelerates as compound growth feeds on compound growth we often get BUBBLES. Which is what BAML strategist Micahel Hartnett says is happening for the FANGs. Via ZeroHedge, “BofA's Michael Hartnett writes, the ‘lowest interest rates in 5,000 years have guaranteed a melt-up trade in risk assets’, which Hartnett has called the Icarus Trade since late 2015, and points out that the latest, ‘e-Commerce’ bubble, which consists of Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX), Google (NASDAQ:GOOG), Twitter (NYSE:TWTR), eBay (NASDAQ:EBAY), Facebook (NASDAQ:FB), is up 617% since the financial crisis, making it the 3rd largest bubble of the past 40 years, and at this rate - assuming no major drop in the 6 constituent stocks - the e-Commerce bubble is set to become the largest bubble of all time over the next few months”. Or perhaps not. Perhaps the air is escaping from the balloon already.

• And on momentum I just want to highlight one thing which I believe is materially under-considered. The post-crisis environment has discouraged active investing and encouraged passive ETF and index investing. What’s important about that behaviourally I believe is that it puts a constant bid in the market on the way up as new money flows in. But on the way out we are likely to see the equivalent of someone shouting “fire” in a cinema – everyone will rush for the exits. I say that because folks might be loss averse but they’ll let their positions in these passive indexes and ETF’s run lower until at some point they don’t. Whether it is after a 20% drawdown, or perhaps something more I have no idea. But if prices do fall the 20% I expect (65% probability at present) we’ll also likely see a phase transition at some point as passive investors head for the exits.

• Ray Dalio has been thinking about the Thucydides trap as well. Writing in LinkedIn (NYSE:LNKD) the Founder of the world’s biggest hedge fund wondered where exactly President Trump is leading us and worried that the break down in the global order – multipolar as he calls it – means the Thucydides Trap is something to consider. I said I hoped to leave it on the shelf yesterday given the Chinese and Americans are seeming to be working things out. But it is worth noting that while Premier Li again said China is working with the US they aare also preparing for a trade war. Oh and have you seen the exercises the PLA is conducting in the South China Sea? Anyway, here’s Dalio’s piece.

• A quick data update. German import prices fell double the consensus in February down 0.6% which takes the yoy result to -0.6%. Take that EUR/USD bulls – oh you’re not listening, fingers in the ears. Sorry :S. EU economic and consumer sentiment was a little lower as well and comments from ECB officials were on balance dovish. Certainly, Ewald Nowotny reiterated an end to QE, ECB governing council member and Bank of Finland governor Erkki Liikanen said “a gradual tightening of monetary policy will rest on a more solid basis when indications of inflation rates to potentially temporarily exceed two percent become more prominent in inflation expectations”. A northern rival for Germany’s Jens Weidmann to succeed Draghi might have just emerged.

• In the US Case-Shiller house prices were up 6.4% yoy against expectations of a rise of 6.2% while Conference Board consumer confidence pulled back from last months highs with a print of 127.7 versus expectations of 131. On the Fed front both Bostic and Mester seemed to support further Fed hikes this year.

Australia

• It will not be a good day on the ASX today if the overnight moves in US markets are any indication. Yesterday 40 odd point rally is likely to be swiftly wiped away if SPI traders are correct in knocking 1%, 60 points, from yesterday afternoon’s close. What’s dangerous about that is it means the SPI is indicating a test to/of 5,770 which for me is the key to a deeper fall of maybe another 100 points or more on the ASX200 index.

• What’s particularly troubling though is that while Australia and other markets have already touched their February lows US markets have not. Certainly, the S&P pulled up last Friday at the 200 day moving average from where it bounced last month. But that’s not the low of 2,530 that the S&P is likely biased toward. That means further weakness is possible for the local market. And of course, behaviourally this dead cat bounce will scare a few of the buyers back into their box.

• Looking at the SPI chart then I see it is off its low but that ominously the low for the past 3 days has been in the 5,742/44 region. That’s critical now. If it breaks then 5,600/10 comes back into the frame with 5,700/10 and then 5,652 as support on the way down.

• The Aussie dollar is getting hit hard and it seems when you look at the lower highs that the sellers are back in control. It’s only a few points away from a big break lower, one that many believe will see it run back down toward 75 cents. For mine, the bias lower is dead on the money but the uptrend line from the 2016 lows comes in around 0.7590/0.7620 so let's see how it looks there first.

• There is no reason to buy the Aussie dollar right now unless the US dollar falls out of bed again. And on that front, it looks like the worm is turning a little – not conclusively but enough to have all the negatives stacked up against the Aussie given their full weight.

Forex

• Back to momentum for a sec, this time in Forex and the US dollar. As readers know I’m not on board the Euro train. Rather I’ve been saying its trading a range at the moment and while I’ll go with the break I do favour the downside at the moment. But other believe the Euro rally is only just getting started as Holger Zschaepitz tweeted yesterday. The fact that the US dollar can’t take a trick and sells of on almost anything is itself becoming a reason folks are citing as a reason to sell it and buy Euros – among other things. It’s not a bad strategy. But I need to see the line break in the US Dollar Index and euro to get on board.

Source: Twitter Screenshot

• For the moment that doesn’t appear to be happening and I always remember the McKenna Mantra by respecting trendlines and levels unless or until they break . Not only do the key bond spreads suggest US dollar strength not euro strength so to do the other indicators folks clung to justify euro strength. The EU 2 year forward 2 year continues to fall suggesting – if the correlation was anything ever more than fleeting and made up – that the EUR/USD should be down testing the bottom of the range at 1.2150. Lets see in the days ahead.

Commodities

• Oil has stalled at some very important technical levels. That’s despite the Saudi Crown Prince saying that the OPEC/non-OPEC/Russia deal could end up being a long-term agreement which effectively means an expansion of the cartel. We’ll see how the inventory data looks and whether these recent highs can be challenged again. For the moment it is looking like both WTI and Brent are stalling.

• Recently I’ve focussed on Brent and shown the chart most days. It’s pulled up under the recent range high so any talk of the $8-10 rally which might ensue needs to hold off for the moment. What was interesting this morning was an old weekly WTI chart I had sitting at the bottom of my screen anad hadn’t really looked at for a while. You'll understand the significance of the current levels just by looking at the chart. A break – and hold at week’s end – could get an $8-10 rally.

• Also I’ve been asked a lot about the new Shanghai oil futures contract. I’m going to concentrate on the Brent and WTI benchmarks while we see how this contract goes and how much traction it gets. Hopefully it gets a lot of traction and we end up with three established global benchmarks. That said the first couple of days have been volatile – up and then down more than 3%. If you want to read up on it I like this article from Bloomberg Gadfly.

Have a great day's trading.