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Trader thoughts - the long and short of it

With one more trading session left, it looks like we are on the path to close out a week of much-needed moderation. Using the US Dow 30 as our proxy, we have registered an extreme and volatile past two weeks.

Source: Bloomberg

This benchmark index posted a weekly range two weeks ago of nearly 2,200 points with the subsequent period – though a rebound – of over 1,200 points. Volatility is the life blood for short-term, market opportunists (more charitably referred to as ‘traders’), but it stands as an overt threat to investors who are looking to hold positions for longer durations and abhor the uncertainty that comes with charged activity. Many traders actually seek out volatility as they think it will hasten their profits – in other words, they are certain of their views and position on the market. Yet, accuracy on trade calls is the constant battle. Faster markets equate to faster losses as surely as gains according to the market participant’s win/loss ratio. And, for most, the emotional impact of losses can contribute to a quick falter in strategy and lead to a crash and burn. Account for and strategize around volatility, do not pine after it. 

Wall Street: The benchmark US equity indices were a mixed bag Thursday. On the open, bulls seized control with bullish gaps with the opening trade for the S&P 500, Dow 30 and Nasdaq. However, the opening salvo inspired little follow through as market conditions filled out through the day. As we look to close out the week, the loss of momentum to the strong rebound between February 9th and the 16th is quite prominent. This is both expected as the volatility of the tumble earlier in the week wears off and disappointing for bulls that had the opportunity to take advantage of the speculative wave to return to record highs without a robust fundamental wind to their backs.

Volume’s softening is similarly discouraging for those with hopes that the complacent advance of the past year would simply reinstate itself. It is interesting how many more stories there are about the rich valuations of benchmark equities through traditional measures after the nasty spill we suffered earlier in the month.

ECB Minutes Show Concerns: Speculation surrounding ECB monetary policy has held consistently hawkish over the past year even though the policy authority has refused to budge from its exceptionally dovish stance. Last month, the central bank refused to give any signal that it was planning to normalize its policy in the foreseeable future – further undermining Euro bulls’ hopes that a more robust fundamental argument would be levied to justify the currency’s remarkable run to this point. Its monetary policy statement offered an opportunity to deliver a more nuanced and thereby staid signal for a very hearly hawkish turn, but there too the ECB refused.

What was far more interesting in the ECB’s transcript from its last meeting is the wide concern that US officials are pursuing policies that artificially deflates the Dollar – and thereby boosts the Euro. This is not an unreasonable concern, but it is richly ironic. Back in 2014, the ECB explicitly voiced concern about EUR/USD pressuring 1.4000 at the time saying it bolstered the threat of deflation. They in turn threatened outright monetary policy if the exchange rate did not deflate naturally. It does not get more explicit than that.

Federal Reserve Semi-Annual Update: The market’s speculative interest in the Fed’s policy bearings have cooled significantly recently despite the central bank’s notable contrast to virtually all of its peers with a decidedly hawkish lean. It seems their effort at making their intentions transparent through forward guidance is working. That said, there is stillroom for uncertainty as conditions change – and with it, the policies that are meant to navigate them. Between the FOMC minutes, individual Fed speak and data recently; the outlook has grown somewhat foggy. If there is going to be a change in policy, one of the best places to register it will be in Friday’s semi-annual monetary policy update to Congress. The assessment will be released ahead of new Chair Jerome Powell’s first appearance before legislators next week as the head of the central bank.

Japanese Yen Makes Technical Breaks: While volatility has returned closer to normal levels after the month opened with a ‘heart-attack’ of sorts, concern remains when looking to the market’s favorite proxy for risk-off, the Japanese Yen. The EUR/JPY cross is looking to close below the 200-DMA, something not seen since April while the USD/JPY fell 1%, and options traders are paying a higher premium to protect against further outsized JPY gains.

ASX200: A quiet rise in the ASX brought about the third straight advance as AU yields held steady after a persistent drop and the AUD works to limit monthly losses. The ASX 200 rise brought the index to 5,950.8 and helped the index move to the highest level since February 5. The index remains down for the year by 1.9% but remains 5.7% above the trailing-twelve-month low.

BHP implied open shows an attempt to fill the gap down created from the 3% miss to EBITDA estimates. The market implied open sits at 30.44, which is good for a 0.7% gain. BHP is looking to a brighter 2Q after estimate misses were blamed on China winter supply curbs that are expected to lapse in a staggered fashion. BHP remains positive on their higher-quality iron ore, which China has favored to reduce pollution and overcapacity.

Commodities:  While most commodities remain well below the month’s open, traders are bidding up energy, metals, and agricultural commodities on Friday morning. WTI Crude Oil saw a boost of 1.6% after the EIA Crude Oil Inventory Report showed surging US crude oil exports as imports slow. This data point helped to dampen concerns of US overproduction. Both WTI and the global benchmark, Brent crude remain down roughly 4% on the month.

Profits have returned to miners as Anglo earnings showed the best profit since 2011 on the jump in commodities pricing. Miners appear to be taking a page from Oil strategy book to cut debt and grow as the market demands. While the shares slid in London trading after the report, the stock is up by more than 30% in the last twelve months thanks to growth prospects expecting to be realized in future projects.  

Australian Dollar: After sliding for three consecutive days, and aggressively after the FOMC release encouraged short-term buying of the US Dollar, the AU dollar received a boost Friday morning thanks to wage data. The Aussie has been sliding against the US Dollar as AU yields have recently traded at a decisive discount at the ten year tenor to US Yields.

AUD gains against weaker currencies on Friday morning were attributed to the second consecutive month higher wages in 4Q, but doubt remains that the RBA is any closer to hiking rates off the record low 1.5% cash rate floor. On a negative note for the Aussie, the AUD/NZD rate has continued to slide as agricultural commodities trade at a premium to industrial metals, which has helped the pair trade down to 1.0660, which is the lowest level since August.

Market Update:

SPI futures moved 7.16 or 0.12% to 5950.88.

AUD/USD moved 0.0035 or 0.448% to 0.7852 - Session High: 0.786 Session Low: 0.7812

On Wall Street: Dow Jones 1.22%, S&P 500 0.97%, Nasdaq 0.63%.

In New York: BHP 3.42%, Rio 1.58%.

In Europe: Stoxx 50 0.05%, FTSE 100 -0.4%, CAC 40 0.13%, DAX 30 -0.07%.

Spot Gold moved 0.58% to US$1331.39 an ounce.

Brent Crude moved 1.25% to US$66.24 a barrel.

US Crude Oil moved 1.67% to US$62.71 a barrel.

Dalian Iron Ore moved 0.65% to CNY541 a tonne.

LME Aluminum moved 0.73% to US$2201 a tonne.

LME Copper moved 0.41% to US$7119 a tonne.

10-Year Bond Yield: US 2.92%, Germany 0.71%, Australia 2.87%.


Written by: John Kicklighter, Chief Strategist, DailyFX

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