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Trader thoughts - The long and short of it

We have seen a handful of geopolitical and economic events show their hand last week and this has pushed a number of markets into some very interesting technical set-ups.

Source: Bloomberg

I haven’t had so many markets pop up on the radar for a while and there are some very interesting arguments that are being had that need resolution.

One that I will be following closely is that of the US fixed income market, where on Friday we saw some dramatic and fairly punchy moves. For those who like volatility, the fixed income market probably is seeing it better than most asset classes of late. Friday’s payrolls report was weak at a headline level, with 98,000 jobs created, and although far worse than forecast, traders largely put this down to one-off factors (such as weather). On a more positive footing, we saw a rather strong 472,000 increase in the household survey. With this, the actual labour force increased by 145,000, in turn pushing up the participation rate, with the unemployment rate ticking down to 4.5%.

One can then add comments from New York fed president Bill Dudley providing clarity from his perceived dovish comments made earlier in the prior week, when he suggested that the Federal Reserve had scope to have a “little pause” with hiking rates when they allowed the balance sheet to normalise. Accordingly, his new comments on Friday suggested this “little pause” really is actually going to be a very short period. Keep an eye on Janet Yellen who will be answering questions at the University of Michigan at 6 am AEST tomorrow.

The moves then in fixed income were sizeable, with the US ten-year Treasury initially breaking down through the year’s low trading range of 2.30% (hitting 2.26%) before rebounding sharply and closing at 2.38%. The short-tend sold off sharply too and despite a weak headline jobs report there was enough goodwill in the numbers to see the probability of a June hike from the Federal Reserve remain above 60%. The reversal and subsequent selling in bonds caused a strong move higher in the USD, with USD/JPY reclaiming the ¥111 level and this should promote Nikkei buying on open.

AUD/USD is trading through $0.7500 this morning, which on the daily chart looks like a key level and a close through the 9 March spike low of $0.7491 would open up a move into $0.7250. EUR/USD is threatening to break the January uptrend, but the key will be whether the pair can break strong bids seen into $1.0520 (the series of lows through February and March), where a break here opens up the December lows of $1.0340. In the crosses (and outside of the USD), being short AUD/CAD is a trade on many traders radars here, with this being a play on short iron ore, long US crude, with the technical set-up is clearly reflecting this and whether you look at this from a daily or weekly perspective the pair seems to be going lower in my opinion.

Of course, all eyes this week on Thursday’s Aussie employment data (consensus 20,000 net jobs created, unemployment rate at unchanged at 5.9%). Keep in mind iron ore futures fell a further 1.5% on Friday and have fallen into a technical bear market since the 16 March.

Gold looks interesting, and I had this firmly on the radar on Friday and was looking to recommend buying the yellow metal on a close through the 27 February high of $1264. On Friday price broke through $1264 and spiked to $1271, but when we saw the heavy selling in US fixed income and move higher in the USD gold came off hard to close at $1254. There is a battle underway in gold and if you read social media, one could believe that we are seeing the start of a new Cold War and this in itself should support gold, but again I want to see the bulls getting the upper hand and that means waiting for the close through $1264. On the other hand, one must respect price and I am a seller of gold through $1239 (the 31 March low and double top neckline) for a move into $1200.

US equities look firm and while traders will be keeping an eye on the relations between Russia, the US and any subsequent moves from Bashar al-Assad, Q1 earnings will play a larger role for traders too. JP Morgan and a number of other financial companies kick-off proceedings on Wednesday at 20:45 AEST and we subsequently get 4% of the S&P 500 market capitalisation reporting this week. This then proceeds with 57% of the S&P’s market cap reporting in the two weeks ahead. Interestingly, the consensus from strategists is that we see 9.1% earnings growth in the quarter, which would be the fastest pace since Q3 2011. I am a buyer of the S&P 500 on moves through 2377, which represents both the February downtrend and last week’s spike high. The Russell 2000 is also looking very interesting.

There are many opportunities in Asian equities here too and specifically this week the ASX 200 needs to resolve its own battle. SPI futures closed up 14 points, with BHP’s American Depository Receipt (ADR) closing up 0.1% and CBA’s ADR up 0.4%, so we start the week slightly on the front foot. If we look at the daily chart of the ASX 200 we can see the bulls are happy to support and defend the index at the former top of the trading range at 5830, but we really need to see a move above 5913, where on this development we will be talking about 6000. A close through 5830 would be encouraging for the bears. This chart has to be on everyone’s radars here and if I have to make a choice I would be calling a break to the upside. Still, there is plenty that can go wrong here.

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