With the US payrolls behind us, we hurtle into the new week with global growth weighing on our minds, with global interest rate markets already positioned for future central bank easing.
Rightly, or wrongly, the market has priced in a genuinely gloomy picture for 2019 and even more so 2020, and therefore the unfolding economic data takes on new meaning. Will the data justify the 19bp of cuts priced into US rates markets market for 2020, or the 40bp of cuts priced here in Australia? It’s the trend in the data flow that we are most keen to see, but it doesn’t take a genius to believe a better data flow is needed to justify current valuations in risk assets.
Global fixed income markets are the centre of my world this week. Importantly, the total US dollar value of negative yielding global bonds is threatening to push through the year’s highs of $9.148t, and at $9.141t needs a fresh bid to come through in developed market bonds and we will see this pool moving to the highest levels since late 2017. As suggested on Friday, this favours gold appreciation, which has been used as a hedge against economic fragility. Gold is not a hedge against inflation; in fact, it is quite the opposite.
(Yellow - spot gold, white - total value of negative yielding bonds)
Our flows over the past two days in the yellow metal have been quite mixed, although we have seen better buying in gold priced in AUD (XAU/AUD) and EUR (XAU/EUR). If we can buy gold in the weakest currency, we boost our returns, with any profits not be held back by the currency effect. This requires taking a view on the FX markets, and not just the gold price, and of course, that is no mean feat. The rewards can be favourable, but as always with your trading process, you need to understand how much risk you can take on and get out of exposures without emotion.
So, I am watching bond markets closely, and lower yields globally should push gold (USD terms) through $1303.70, on which development I will turn outright bullish again and look for a move into $1330, and even $1346/50.
In equity land, I have been keenly watching the S&P 500 as the centre of the equity universe here. Last week’s price action confirmed the bearish weekly reversal, with price tracking above the prior week’s high, only for the bears to come in, with price firmly closing below the previous weeks low. This indicates a potential change in market psychology, and after the bullish move through January to March, we are keen to see if the bears have regained the upper hand. We need follow-through selling today to confirm the reversal, and as I write I can see small selling in the S&P 500 futures, and this requires monitoring.
To provide context, we saw similar price action in October, and the US benchmark subsequently fell nearly 19% in the 12 weeks that followed. So, one to watch, but equities are mixed through Asia, while oil and copper are a touch higher. FX markets are not seeing much in the way of pronounced moves either, and that is partly a function that fixed income markets are calm, with the Aussie 10-year Treasury unchanged and eyeing the 2%-handle.
This serenity could change if we see a poor US retail sales report (tonight 23:30aedt), with expectations of a no change in the advanced read, while the control group (the basket of goods that feeds more directly into the Q1 GDP print), is expected to increase a sizeable 0.6%. Considering one Nowcast model has Q1 GDP at 0.5%, the outcome of the retail numbers could influence growth estimates. We also get February US CPI tomorrow, where economists expect core CPI to remain at 2.2%. A weak read here and we see UST10s through 2.61%/2.62% which feels quite significant for the USD.
The lack of any real move on open is largely a function that the weekend news has generally centred on trade, and although most of the information has been constructive, there is no new insight to cause a strong reaction. We have also heard from Fed governor Powell on the open of the S&P/ASX 200, and again there hasn’t been any new information for markets to digest. Mr Powell was quite upbeat on the US economy, which won’t surprise, although he offset this by saying “patience means Fed is in no hurry to change rates”. In a hawkish move, Mr Powell took a swipe at Trump, detailing he “didn’t stop rate hikes because of Trump pressure”, and that he plans to serve out his term and that Trump can fire him. You can almost feel Trump’s blood boiling with rage.
FX flow
In terms of FX flow, we continue to see good interest in EURUSD, with price pulling back below the 15 February low of 1.1234. Positioning, if I look specifically at leveraged FX funds, remains aggressively short, with the weekly Commitment of Trader report showing a net short position of 84,122 contracts. In the options markets, we can see 1-week risk reversals at -0.34x, which is actually quite neutral and showing no real skew in demand for put options over calls.
We’ve seen sellers in GBP/USD and GBP crosses on open, extending on from the recent trend from the 1.3350 highs, with price pulling below the 1.3000 figure. It’s another big week for the GBP, and we head into Wednesday’s (Tuesday night in the UK) second vote on Theresa May’s Brexit deal with expectations for a decent move in sterling set sky high. Implied volatility in these pairs is predictably high, with the implied move on the week in cable at a sizeable 245-points. This has to be a consideration for all FX traders, especially when we look at our risk and the assessment of position sizing.
The market is positioned for May’s deal to fail, with the vote on extending Article 50 (in the following day) fully expected to pass. The question of the duration of any extension is perhaps a key focal point, with the UK naturally preferring a short extension, while the EU, if they are to grant one, pushing for something far longer. I still cannot see the logic in any lengthy extension unless the EU feel the UK’s position changes radically.
USD/CNH has also been in focus, with a barrage of news on political wrangling, notably around how China manages its exchange rate, through to poor economic data. On the latter issue, through the weekend we saw PPI coming in at 0.1% and narrowly missing turning negative. One thing is certain if China has less ability to export its deflation, then it is going to hurt their economy in a big way, and Trump will try his best to achieve that. We also saw M2 money supply 40bp below consensus at 8%, with new yuan loans at RMB885b, which is a huge slowdown from the $3.23t in credit extended in January.