Momentum coming out of risk assets

The bulls would be wishing that Oprah Winfrey had the capital to take sizeable stakes in stocks with heavier weightings than Weight Watchers on the S&P 500!

Source: Bloomberg

I’d also imagine there would be a few hedge funds keen to get her on the payroll given the stock market has effectively endorsed her as the world’s most powerful women.

Moves in US markets have provided Asia with little to work with today – both equities and fixed income were subdued. In fact, implied volatility in the equity market has really come off sharply with the VIX trading below 15% for the first time since 19 August. I would be watching these volatility metrics quite closely from here as we can’t rule out a sharp pick-up in volatility over the coming weeks.

One aspect of the market I have been looking at is positioning. Specifically, we have seen a 50% reduction of USD long holdings this year from speculative funds, largely as a result of tightening financial conditions turning the Federal Reserve more dovish and the market moving to push out its pricing for the first rate hike until May 2016. Does this present itself with a good longer-term entry point for USD exposure? I am still sceptical, and think we need to get the October Federal Open Market Committee (FOMC) meeting, Q3 US GDP (both on 29 October), and potentially even the next US payrolls (7 November) out of the way before we get more fundamental clarity.

The S&P 500 itself has rallied over 8% in the last 14 days and the gains have been broad-based. During the move from 1871 to 2034, the percentage of companies trading above their 50-day moving average has risen from 10% (a level I generally see as great contrarian buying) to currently stand at 65%. Short positions in S&P futures were reduced 12% last week by the fast money speculative accounts, so there has been a strong element of short covering in the market and as long as the USD finds sellers, then it seems risk assets can find buyers. As goes the USD, as goes risk appetite.

Earnings are rolling in, with 25% of the S&P 500 announcing this week. IBM has a 5.8% weight on the Dow, so the fact that it fell nearly 5% in the post market suggests the Dow should underperform the NASDAQ or S&P 500 today. Looking at IBM from a technical perspective, it’s interesting to see the 38.2% retracement of the July to August sell-off at $153.05 being so respected lately. This was the clear line to look at short positions. Today, however, we are more likely to see the 25 August low of $140.62 being tested, although the hourly chart is grossly oversold and I would expect traders look to try buy this low on open.

Traders will also be keen to watch out for modest improvement in US building permits and housing starts today, although neither should rock the risk barometer wildly. On the earnings front, I expect clients to be most active in Yahoo (who report after the close) given the huge volatility seen in prior quarterly reports. Analysts are expecting Q3 earnings per share (EPS) of 16c, on revenue of $1.02 billion. They do have a good pedigree of beating consensus EPS, so good numbers should add to the 75% of companies who have already reported earnings beats.

On a side note (and something I highlighted last week), there have been some sizeable moves in short-term US rates, specifically the US T-bill maturing, 12 November. Over the last few days, this issuance has traded between zero and 16 basis points – which is huge. This is worth watching, given this instrument seems to be the new proxy of systematic risk after US Treasury Secretary Jack Lew warned the debt ceiling deadline falls on 3 November and many feel cash balances would be exhausted by around the 10 November. There could be good selling (yields higher) of the short-term bills in the weeks ahead, and some fireworks here.

In Asia, US futures have seen net selling and are looking a little vulnerable with our European equity market calls looking modestly weaker. Asia has been generally mixed with small buying in Japan, while Hong Kong, China and Australia have seen a weaker tape. The ASX 200 seems a little lost at present and indecision is prevalent on the daily chart. A break of the 28 August high of 5305 is needed to get everyone excited that perhaps we can rally into the 200 day moving average (5568). On the other side of the coin, a move through the 14 October low of 5164 would suggest another tilt at the 5000 level.

My personal bias is neutral and I will turn more bullish on a break of 5305, or bearish on a break below 5164.

It’s worth pointing out that we have seen modest net buying of AUD/USD today and today’s Reserve Bank of Australia (RBA) minutes have largely helped – although 56% of all open positions are positioned for downwards move in the pair. Implied probability of a 3 November rate cut has fallen from 28% (from around 40% yesterday). Judging from today’s RBA minutes, this pricing seems fair. We have also seen net buying of Canadian dollars, although USD/CAD has popped on news of Justin Trudeau’s Liberal Party claiming victory in the Canadian election. I don’t see the victory as a major catalyst for the CAD and focus should now fall on tomorrow’s Canadian central bank meeting for real direction.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

Find articles by analysts

Een artikel zoeken

Form has failed to submit. Please contact IG directly.

  • Ik wens per e-mail informatie van IG Group bedrijven te ontvangen over handelsideeën en IG's producten en diensten.

Voor meer informatie over hoe wij uw gegevens mogelijk kunnen gebruiken, bekijkt u ons Privacy- en toegangsbeleid en onze privacy website.

CFD’s zijn complexe instrumenten en brengen vanwege het hefboomeffect een hoog risico mee van snel oplopende verliezen. 79% van de retailbeleggers lijdt verlies op de handel in CFD’s met deze aanbieder.
Het is belangrijk dat u goed begrijpt hoe CFD's werken en dat u nagaat of u zich het hoge risico op verlies kunt permitteren.
CFD’s zijn complexe instrumenten en brengen vanwege het hefboomeffect een hoog risico mee van snel oplopende verliezen.