Bulls take a breather

We have seen some shaky price action in Europe yesterday with the DAX at the centre of this, although our opening calls suggest a more positive open today.

Source: Bloomberg

Worryingly, the German market printed a bearish outside day reversal at the trend high and this could be the start of something more pronounced, especially with the January uptrend being tested. A move higher in European peripheral bond yields (by way of example, the Italian ten-year bond pushed six basis points higher) has given traders reason to take profit in these markets it seems. On a bullish note, better European data continues to roll in, adding to the growing call that we could be seeing the start of an EPS upgrade cycle in Europe.

Since 13 January, the 20-day moving average on the DAX (now at 11,104) has been the markets preferred area to buy and given this is pointing higher I feel the ‘value’ trade is to buy closer to the average.

US markets have also seen the bulls take a breather. Volumes are terrible right now and it feels like we could just go through the motions for a while waiting for the next bout of volatility as a  major catalyst. Again, the 20-day average (2,100) is providing good buying support. However, a number of the momentum and trend indicators are starting to roll over and head lower. Nothing alarming, but certainly some of the bullish momentum seems to be waning.

In Asia, the same is true. The Nikkei is looking vulnerable and a move to 18,393 could be on the cards, especially as the MACD is crossing the signal line, suggesting a change in short-term momentum. There are still bullish undertones in Japan but increased talk from officials that USD/JPY is unlikely to push higher won’t do the index any favours. We have heard very upbeat commentary from BoJ policy board member Ryuzo Miyao today, suggesting the central bank were ‘very likely to achieve the 2% price target’ and that the precise timing of reaching 2% may be sooner than intended. 

These comments are bullish JPY and its no surprise to see the the currency bid today. GBP/JPY has seen the biggest percentage move and it’s interesting to see the strong correlation between GBP/JPY and the S&P 500. If the S&P 500 pulls back, it seems logical that traders will take profits in GBP/JPY.

To me though, a weaker JPY is still needed, although this is going to be heavily influenced by the US/Japan bond spread. The US two and five year treasury hold many answers for 2015 in the future direction of many currencies - both in developed and emerging markets.

In Australia, traders have been net sellers of stocks with the Q4 GDP print (0.5% quarter on quarter) the key focal point. Many saw this data point as a key component in influencing the Reserve Bank’s view on whether rates will come down in April or May. The initial pop in the AUD and six basis point move higher in the Australian 10-year treasury suggests the in-line GDP print actually subtracted from the near-term need to bring the cash rate to 2%. I would put the rally in AUD/USD to $0.7834 to nothing more than positioning, although the interbank market has moved from a 51% probability of an April cut to 44%.

Looking through the finer details, domestic growth has averaged 1.9% (annualised) over the last three quarters, which is certainly below trend and while residential investment and private consumption was firm, business investment is still far too soft at present. Interest rates seem likely to come down and May seems the likely date. With the clear easing bias in play, selling rallies in AUD/USD to the top Bollinger Band at $0.7873 look compelling, placing stops above the September 2014 downtrend at $0.7910. Given the current sideway trend, I would look at taking profits at $0.7723 (the lower Bollinger band).

For what it’s worth, consensus estimates suggest we should see Australian growth (annualised) tick down 30 basis points in Q1 to 2.2%, before rebounding to 2.4% in Q2. The Q2 consensus sits just above the RBA’s own forecasts of 2.25%.

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