Trader thoughts - the long and short of it

Korean assets, such as the KRW and Kospi are also in focus, but it’s hard to see buyers here. However, If we do, it could be somewhat of a leading indicator and it could provide stability for other markets – a big ‘if’ under the circumstances.

China should also join the negative in with a close to the trading week, and once again, we should find the H-shares and Hang Seng in Hong Kong underperforming. It’s amazing to think that mainland China has been labelled a ‘safe-haven’, with strategists pointing to strong relative currency, stable economy and elevated ‘real’ bond yields. A focus will also be on the CNY fixing this morning, where we see another stronger day for the CNY.

SPI futures were trading close to 5700 when the ASX 200 officially closed, so if we use this as our guide, we can see the Aussie futures index trading some 67 points or 1.2% lower. It’s not a great day if you are reporting earnings numbers, such as REA or providing a trading update such as NAB, as its times like this when macro absolutely dominates bottom-up issues.

Although that said, NAB’s update will obviously certainly garner attention from shareholders and investors. As I write, futures are trading close to the lows of the session (5629), which is never a great sign and suggests that the bid in the ASX 200 could be somewhat on the light side. With such uncertainty, why buy today, when there is still weekend news and a heightened risk of a gap lower in SPI and S&P futures on Monday?

If we look at the period between 2:40am AEST and 4:30am AEST some stability was seen and even brave buyers stepped in. However, as soon as Donald Trump came out speaking in New Jersey, insisting that his ‘fire and fury’ statement, ‘maybe wasn’t tough enough’, then risk becomes lower again. There is a rhetorical war between the two nations and traders (as are most human beings) are nervous. So why buy risk asset as (such as equities or credit) when the thematic at hand isn’t going to resolve itself in the immediate short-term?

If we look around the markets, we can see US small caps have unperformed (the Russell closed -1.8%) and credit spreads have widened. The US ten-year treasury is sitting at 2.20% and below what has been a strong support level at 2.21%. US ‘Real’ yields have continued to move lower across the curve and of course, this means a good bid in gold and the 6 June highs of $1295 are in the bull’s sights here, where a closing break would be unassailably bullish.

Gold is eyeing a bullish weekly reversal (i.e. price traded below last week’s low and looks destined to close above the high), and the weekly chart, as always, provides great perspective. We can also see strong demand and short covering of the ‘funding’ currencies, with JPY the star of the show. NZD/JPY, CAD/JPY, EUR/JPY, GBP/JPY and AUD/JPY all look vulnerable here as the buyers are standing aside and this is arguably the best time to be short, so pick the weakest currency, which I would say is the CAD or NZD and keep selling here.

USD/JPY has been well traded, with the exchange rate just not finding any buyers and eyeing a move into ¥109 and then ¥108.82 (the June low). This pair has to be on the radar over the next 24 hours, notably with US core CPI due at 10:30pm AEST and recall this data point has missed expectations in each of the last four reads. US producer price inflation (PPI) came in at -0.1% month-on-month, with the annualised rate at 1.8%. Both were well below consensus and give us no hope that consumer price inflation (CPI) is going to materially beat expectations, despite obviously looking at different inputs.

A number below 1.7% on core inflation and the market will likely lower the probability of a hike from the Fed this year down to 20-30% and will be a clear USD negative. That being said, a core CPI print above 1.9% could be very interesting indeed, but the trade here would to be short EUR/USD, NZD/USD or GBP/USD, as clearly being long CHF or JPY is tough in this geopolitical backdrop.

Of course, there has been an intent focus on both US crude and the US volatility index (‘VIX’). US crude has printed a bearish outside day reversal, with price briefly trading above $50 and closing at $48.55 (-2%), naturally weighing the S&P 500 energy sector down.

If your preference is ETF’s (Exchange-Traded Funds), put the XLE ETF on the radar as this looks ripe for a test of the July low of $63.30. Follow through selling in today’s session and oil could be headed into the lower levels of $40. Certainly, moves in S&P 500 implied volatility have been the talk on the floors, with the VIX trading up a lazy 43% to 15.94%.

As many have understood, global trend following systematic funds (called Commodity Trading Advisors or CTA’s) and risk parity funds have been max. short volatility structures. We’ve seen speculative funds holding the largest ever net short position (-158,000 contracts as of last Tuesday) in VIX futures and that level of positioning has obviously been at play here. Either way, it feels like market measures of volatility can push higher here and this is just so important, not just for tactical asset allocation, but for position sizing and managing the risk in the portfolio.

Iron ore futures have held in fairly well, so this may lend some support to the iron ore plays today, but it seems logical that equity will likely be shunned all around, unless in a really defensive name or gold stock. AUD sensitive stocks will find some relief that the AUD/USD rate hasn’t found any bids in this market and maintain a sub-79 level, although they will be open lower. Volatility has kicked in again, which is nice to see the market with a pulse, even if the backdrop is a very concerning one.