Trading opportunities abundant

A sense of calm seems to have moved over financial markets and we could rationalise this by the 6% decline in the US volatility index (VIX).

Source: Bloomberg

I was looking yesterday for the potential for ‘turnaround Tuesday’ and while we haven’t seen a snap back rally, the flat moves in US and European markets means we can stop to catch our breath.

It’s noteworthy that there are still some interesting dynamics for traders to key off.

In terms the ASX 200, we are expecting an open at 5205, so the index looks set for a modestly positive open and the investment community will naturally welcome the sense of calm. Day traders? Not so much. The Aussie banks will key off the falling VIX and find some buying interest, with energy likely to face another headwind due to the fact that oil is 3% lower from yesterday’s ASX 200 cash close. I would temper that by saying the S&P 500 energy sector is actually modestly up.

As an indication of today’s open, BHP’s American Depositary Receipt (ADR) is up 0.3%, while WPL’s is down 0.4%.

I think it’s fair to say that trading the ASX 200 and SPI futures were one of the harder markets to trade in 2015 due to the choppy nature of price action. I suspect we are in for another year where the local market tests us all. We could say the same thing about US stocks too, the top 10 US stocks gained on average 13.9%, while the other 490 stocks (within the S&P 500) fell nearly 6%. This is the widest divergence since the late 1990’s (source: Morgan Stanley research), so for those who like to incorporate market breadth into trading views, this could be seen as a red flag.

In terms of other markets immediately on the radar today, I am looking specifically at the JPY, oil and petro-currencies (CAD, NOK, SEK and EUB), Chinese markets and EUR/USD.

  • Watch Chinese equites again today as price action has been wild and despite talk last year that the so-called ‘National Team’ were not going to directly intervene in the stock market, this idea seems to have reversed. The various Chinese ETF’s (FXI and ASHR) are hardly suggestive of strong gains in Chinese stocks today, but you can never tell with China and these measures can’t be seen as a positive. As of last week, Chinese futures markets open at the same time as the cash market at 12:30 AEDT.
  • Technically the CSI 300 looks like it could be headed for lower levels over the medium-term and the break of the multi-month channel has been noted. Trading the Chinese markets from a technical perspective can be tough when they are manipulated as they are, but  it’s interesting to look at the charts as a road map for supply and demand. Watch for a move back to the former channel 3450, where traders may look to sell into.
  • Chinese authorities are said to be directly intervening in the FX markets too. I would be looking closely at how the speculators trade offshore yuan (CNH) today, as the spread between onshore and offshore has blown out. I suspect we will see traders selling USD/CNH.
  • In the FX space USD/CAD is a thing of beauty for the trend followers. A simple look at the daily chart shows a continuation pattern, and a convincing break of $1.4000 would be super bullish. If you believe following money flow is part of the trading strategy, then USD/CAD should be on the radar.
  • I’ve made mention that the JPY will be a must-watch currency for 2016. While the consensus is that we see the JPY lower and following in appreciation of the Bank of Japan’s expansion of the monetary base, the JPY is actually looking quite bullish. If we are going to see bouts of volatility through 2016, as is my base case, then having exposure to one of the best safe haven assets is certainly warranted.
  • USD/JPY is trending lower, but the event risk ramps up tonight with December ADP employment data (00:15 AEDT – 198,000 consensus), November trade data (00:30 AEDT - -$44 billion), December services ISM (02:00 AEDT – 56.0), factory orders (02:00 AEDT - -0.2%) and November durable goods orders (02:00 AEDT – no consensus).
  • One of my favourite trades for 2016 is short CHF/JPY and this is already working nicely.
  • EUR/USD seems to be holding below the five-day average, showing the trend lower is quite compelling. The pair has broken below the bottom of the December range at $1.0802, but has found good bids into the 61.8% retracement of the ECB inspired rally ($1.0525 to $1.1059) at $1.0729. It‘s interesting that the pair is moving hand-in-hand with the US treasury/ German bund yield spread and last night’s below consensus Euro CPI print clearly aided EUR/USD selling.

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