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If sizeable outperformance on the football field wasn’t enough, you could also look at Germany’s financial markets relative to that of Brazil.
Since 2010, the ratio of the Brazilian bovespa to that of the DAX has fallen from 12 times to now stand at 5.4 times. EUR/BRL has come off a touch of late, but is still up 40% from the 2010 low, while there has been massive outperformance from bunds.
Looking at USD/BRL in the last hour of US trade echoed this sentiment, with very limited spot transactions going through the market.
In the equity and futures market there was a very modest afternoon surge in the S&P 500, with S&P futures currently up 0.3% from the European cash close (and giving backbone to our opening calls). Asian equities have reacted to the US lead, but after pricing in the falls, have done very little. US data was mixed, although the fall in consumer credit has been noted, with the US ten-year treasury falling six basis points. This falls in line with my view that the yield should trade in a range of 2.5% to 2.70% over the coming month.
Renewed calls for a correction from a couple of respected US-based strategists were also cited, and to me the fact that developed markets have pulled back as a result highlights the psychology of the current bull market.
Traders and investors seem nervous; perhaps this is why we have seen better buying of volatility over the last couple of days, with traders also happy to buy protection given how cheap put options are right now. The VIX (US volatility index) has rallied around 16% over the last couple of days, however it’s still worth pointing that the VIX averaged 11.54% in June, which is the lowest calendar month since February 2007. Some have even bought gold of late, with net long holding (by futures traders) increasing 146% since the start of June and now elevated to the highest level since January 2013.
The S&P 500 the barometer for risk sentiment
The S&P 500 is the key market for me now, and while fixed income (and credit) is usually the best central guide, I feel the technicals on this index still suggest favouring a long bias in risk assets. The index is still tracking above the 2011 former uptrend, while the short-term uptrend drawn from the April low is still intact. A close below 1947 would mitigate this. It’s certainly an issue that momentum and high growth names have started to roll over, however the bulk of traders are happy to stay long for now. Many in the market are dancing very close to the exit sign in case of a fire and we run the risk of the market talking itself into a deeper pullback, with no one wanting to be the last man out.
The ASX 200 has been the regional loser today; probably not helped by the further flows into the AUD. Chinese mainland equities have also joined the sell-off, although the Hang Seng is fairing worse; down over 1%.
Chinese inflation once again showed that it is food prices which are buoying inflation, with non-food inflation gaining a mere 1.7%. Certainly when you see headline inflation at 2.3% - firmly below target, you would think the PBOC could have fixed the RMB lower today. However we actually saw the PBOC fix the RMB 61 pips higher, which given todays US-China Strategic Economic Dialogue suggests this was a purely political move designed to appease Jack Lew et al.
It’s also interesting to see the developing trend lower in USD/CNY again, with the five-, ten- and 21-day moving averages headed firmly lower and in alignment. This should be well received by China’s exporting peers and suggests that officials seem comfortable with how the economy is reacting to the recent mini-stimulus. Lower levels seem likely in this pair over the medium-term.
Traders to focus on Draghi and the Fed minutes
European markets should find modest support on open and it will be interesting to see how traders act after the unwind. Our clients have been better sellers of European out-of-hours markets, but much will hinge on US trade given the event risk seen in the latter stages of US trade, although ECB members Coeure and Praet speak. Mario Draghi presents in London, although the ECB president speaks at an International Financial Reporting Standards conference, so may shy away from talking down the EUR and telling traders the ECB are ready to do more.
The FOMC minutes will be the clear focal point, being released 30 minutes prior to Draghi’s speech. Recall the minutes take into consideration the views of regional presidents and the non-voting members, many of whom are largely hawkish, with Philadelphia president Charles Plosser recently detailing he would want to see the Fed raise the funds rate in Q3.
One can imagine where assets would be if Mr Plosser had Janet Yellen’s job. Still, while we may see some additional information, we are unlikely to be told anything new that could really see a pick-up in volatility. In fact you have to really go back to March Fed minutes when we last got a real stir in markets.