Trader thoughts - The long and short of it

Different markets are telling us different messages, with equities and credit finding only very modest selling, while we have seen strong bids in safe havens such as the JPY, gold and US Treasuries.

Market Data
Source: Bloomberg

Geopolitics is certainly the talk of the town, with the white house posing a fairly unsubtle question on whether it was ‘worth asking the Russians what [they] knew about the Syrian chemical attack, because the Russian military has worked closely with Syrian government forces’ and that ‘Russia has shown a clear pattern of trying to shift blame for chemical weapon attacks away from Syria's Assad’. Reports that the G7 are calling on the United Nations to investigate the chemical attacks is in focus, amid views from Putin that the gas attacks were actually ‘fake’ and that more US led military strike are coming. Iran has thrown their backing to the Russians.

One can also be concerned with Donald Trump’s tweet about North Korea in which he detailed ‘if China decides to help, that would be great. If not, we will solve the problem without them!’

As mentioned the JPY has been the place to be in FX land, and notably selling higher beta currencies such as the NZD and AUD (against the JPY) have worked well. USD/JPY has broken through the recent lows of ¥110.11 and through the figure and that would have taken some selling given the sheer level of reported buy orders here.

AUD/USD is flat on the day and is once again oscillating around the key $0.7491 level (the 9 March low) and this level is on so many radars’ right now, although selling AUD/JPY or even AUD/CAD have been the better trade. Shorts positions on EUR/JPY have been working well here too and this trade still has some downside, given we are in the real eye of the storm with the French elections. However, EUR/JPY has closed lower on the session for a record 11 consecutive trading sessions, so one suspects selling rallies here is the way to go now.

Fixed income traders are once again transfixed to the underperformance of French debt, relative to German bunds, with the French/German two-year spread increasing a further three basis points. Traders are also eyeing the longer-end of the US curve and whether the US ten-year Treasury could close through 2.30% and the bottom of the multi-month trading range. This concern has materialised with the close at 2.29%, so it promises to be an interesting session ahead, where one suspects a more convincing break here takes the yield down to 2%. We can trade this through Exchange-Traded Funds (ETF) through the TNX or TLT ETF. Any move lower here in yield (higher in price) should also keep the USD from rallying too greatly and keep USD/JPY below ¥110.00.

There has been buying of volatility structures and some increased demand for portfolio protection, with the US volatility index (or the VIX as it is more commonly known) increasing 7.3% to 15.07. The index was higher at earlier stages of US trade, but US traders love selling volatility and it’s interesting that it has maintained at 15 handle. Implied volatility is moving up though and it needs to be on every trader’s radar as it affects not just the close of markets to trade, but is key in one’s risk management. It is a key consideration in position sizing and distance to the stop loss.

It has certainly made sense buying protection and as I have mentioned in previous reports, one should buy protection when it’s cheap, rather than be forced into doing so by market forces. We’re not at the stage where anyone is genuinely panicking, but when you see gold breaking out and closing firmly above the key $1264, you know there is a defensive stance being displayed by market participants.

The fact the Eurostoxx 50 and S&P 500 indices fell 0.3% and 0.1% is pretty impressive and it shows that traders are happy to hold core portfolio positions and either trade around these, while also using options to protect against any downside. The lack of move here have provided the ASX 200 with a reasonable platform, with SPI futures gaining 16 points and thus our opening call sits at 5950. 6000 is in the market's sights, but the bid in safe haven assets gives this call a real headwind – it would not be a surprise if sellers hit the market after the full unwind.

Oil has seen further upside again, with the Saudi’s making the right noises, which they too will take part in rolling over the previously agreed output cuts at the 25 May OPEC (Organisation of the Petroleum Exporting Counties) meeting. We have also seen the API inventory report (out after the S&P 500 close), showing a 1.3 million and 3.7 million barrel draw in US crude and gasoline inventories and that bodes well for tonight’s official report. Consensus, as it stands, is for a draw of 772,000 barrels of crude and 1.27 million in gasoline inventories.

We can see iron ore has pulled back 0.4%, but iron ore futures have dropped 2.1%, with steel futures also falling close to 3%. Incredible BHP’s American Depository Receipt (has closed up 0.7%). Banks look set for a flat open, with gold stocks the place to be here.

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