Trader thoughts - The long and short of it

US equities have shrugged off reports that China have deployed 150,000 troops on the border with North Korea, although as a far as I can see this is coming from a Twitter source (@DEFCONWSALERTS).

Market Data
Source: Bloomberg

There is chatter that this was spurned out of an article from a Korean news article, either way, this in itself shows how technology is shaping first mover advantage, or what some will feel is actually a disadvantage.

If we look at moves in S&P sub-sectors by way of a guide for Asia, the lead really comes from energy, which won’t surprise when US crude has put on a further 1.4%. Real estate has performed fairly well, while financials and materials stocks have closed on a flat note. Volumes through the S&P 500 have been poor and some 22% below the 30-day average.

On the theme of crude strength, most have put this down to Libya temporarily shutting an export terminal, although there is already real momentum in the rate of change in price. A 12.6% rally in the barrel since 27 March suggests a certain caution around chasing the market here, as we are approaching a potential point of exhaustion and a pullback of sorts becoming a higher probability. Shorting oil seems a high risk strategy here though.

One other interesting issue to point out has been the moves behind the scenes in various European financial markets. If we look at the CAC index, a 0.5% sell-off is hardly concerning, neither is the moves in EUR/USD that is eyeing a move back into $1.0600. However, to be fair, it has come off 300 pips from late March, driven by the European Central Bank.

What we can see though is French two-year bonds trading on a yield premium of 51 basis points to that of German Bunds, with a punchy nine basis point increase of the session. This has taken it to the biggest differential since May 2012. This spread stood at one basis point in November. We can also see EUR/USD one-month implied volatility at 12.43%, the highest since June 2016 and traders will be watching for a break of June 2015 highs of 14.25%, where we start getting into levels not seen since the Greek debt drama – Grexit.

We can also see EUR/USD risk reversals trading at -3.225, which is now actually at the lowest levels since 2011 and this shows a huge demand from traders to hedge portfolios. There is also the skew of implied volatility in EUR/USD out-of-money puts far outweighing that of out-of-the money calls. There are strange things at play here, but one thing seems for sure, traders learnt some valuable lessons from the UK referendum and the US elections. While there doesn’t seem to be much stress in equities, traders are protecting themselves against a doomsday scenario, which of course means a showdown on 7 May between Marine Le Pen and Jean-Luc Melenchon. Things are getting very interesting indeed.

Aside from politics and geopolitics, we can see US Treasuries have been modestly bid, which in turn has taken some of the wind out of the USD sails. There has been small buying of S&P 500 futures on Janet Yellen’s optimistic comments during the late question and answer session, but there is little conviction here to push the risk on button.
AUD/USD has climbed back above the neckline of the February March double top at $0.7491 and unconvincingly reclaimed the 75 handle. Recall, a close below $0.7491 would have suggested a technical target of $0.7250. Short AUD/CAD was a trade I have suggesting of late and the moves in crude have clearly helped here and the pair now trades below parity. Keep in mind we get the Bank of Canada (BoC) meeting tomorrow night (12:00am AEST), so it could be worth looking at stops here, as the market may well require the BoC to turn modestly hawkish which seems unlikely.

Turning to the Asia open and there is new focus on Korea, where the Korean won and Kospi have found sellers easy to come by of late on concern that North Korea could be a future US target. The Nikkei 225 looks set for a touch of selling on open, with USD/JPY pulling back below ¥111. Our ASX 200 call sits at 5915, so the bulls are just getting the edge here. However, one should keep an eye on SPI futures (-2 points) that really needs to convincingly break the 5900 ceiling. The ASX 200 could be led by the futures market today, so that’s where I would be taking my inspiration.

Also keep an eye on BHP, which saw good buying in late trade yesterday, with its London listing gaining 2.2%. However, its American Depository Receipt (ADR) is suggestive that the stock could fall 1% this morning. One to watch, but ironically its oil exposure is likely to support the price today, with spot iron ore falling 1%, and iron ore and steel futures down very modestly.

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