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Did the QE trade just pop?

The unwind of the QE trade last night was something to behold – all asset classes where smacked and all violently so.

US
Source: Bloomberg

Anything that has benefited from central bank money printing was shed. The most glaring example of the QE trade is: short euro, long Bunds, long DAX, CAC pretty much any European indices and long USD. Last night those trade reverse so solidly that Bill Gross’ call in German bunds looks to be bang on and one that is likely to carry on.

So does that mean last night the first sign the one-way QE trade is finally stalling and that the narrowing trade got so small it pop? One night doesn’t make a trend but it certainly makes things interesting – risk is lingering in the background.

It’s an interesting dilemma for the markets – macro data remains a concern.

The US just reported annualised growth of just 0.2% that’s slow enough to be described ‘grinding to a standstill’ consensus was for 1%. Interestingly, the FOMC and the investment world have already described the print as ‘nothing to see here’ and ‘retrospective’. Both believe Q2 and Q3 are more than likely to make up for the effects of a bad winter on the west side of the US.

However, the long term effects of the USD are (I believe) not fully factored into consensus expectations which currently stand at 3.1% annualised growth - that looks toppy considering the numbers coming out of China with regards to exports to the US and that confidence has taken a big hit in April.

Therefore, unwind maybe a more sustained move if US data remains subdued – caveat is that the Fed may not move at all 2015 if the data remain as is.

Risk has been building in the markets for weeks – the mass account openings in China, the rally in Europe as the ECB ploughs on with its €65 billion a month QE program. The Nikkei to 15 year highs as rumours build the Bank of Japan could be forced to increase its QE program on failing to meet its inflation deadline – which may come to ahead today when it releases its statement at approximately 1 pm AEST.

A pull back would be healthy for global markets - the heat has been constant due to monetary policy, at some point equities (which make up an index) will need to justify price. Yet, earnings currently are short of the mark. A possible reweighting therefore is building - it may not start day or tomorrow, but last night’s trade suggests investors are increasingly aware that the mass appreciation in global equities has limits and maybe we saw signs in overnight trade that we may be approaching those limits.

Ahead of Australian open

The limit looks to be here for the ASX – the shedding of the banks yesterday was a glaring reminder that earnings are looking strained even in the banks. Preview after preview from the investment banks are seeing earnings downgrades for the retail banks that are reporting next week. The collapse of the yield trade on falling expectations of a rate cut on Tuesday is just adding to slide in the fully valued banks.

We saw iron ore halting its meteoric rise falling 4.2% yesterday, the AUD is holding above 80 cents and futures market is suggesting the ASX will cross into the 5700 handle for the first time since March 16.

There was clear exhaustion from the bulls at 5990 - and the fact expectation for the banks is now to the downside, the push needed to break the resistance at 6000 looks lost for now. I can’t see the ASX legging higher in the next three weeks unless the RBA cuts rates, the Federal budget is more conducive of growth and the banks report earnings growth well above expectations – a tough ask to get all three.

There is nothing wrong with a healthy pull back and maybe I am being overly cynical but the signs are growing for the ASX to ease after rocketing up 7.8% year-to-date.

We are calling the ASX down 41 points this morning to 5797.

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