Weekly Fundamental Update (Mon Jan 27, 2020)

Weekly Fundamental Update

This last week ended with a noteworthy sell off seen towards the end of the week and it was a broad sell-off not specific, which is more accurate of risk-based movement a cross the financial markets rather than a specific impact from the target region (Asia) or asset class. Consideration of risk these days is important. The backing of value in its classical form has given way to an extreme amount of complacency; fueled by the bulls (buy-high, sell-higher). Being flexible to trade the markets bias and not the news is critical towards spotting opportunities in not only multiple timeframes but also across different asset classes. Your risk- tolerance should be in the front of your mind going into this next week. The most noteworthy topic last week was growth.

Even though the GDP proxies that many people point to PMI’s have their flaws, they remain the leading key forward-looking indicator without any better solution. Generally speaking, they reflect the same figures as what the government published. In particular, this week’s Eurozone government-based GDP readings will be updated. This will be interesting considering the GDP from South Korea (worst since 2008) and China (worst in 29 years).

Looking at the 10’s minus the 3-mo’s U.S. bonds you would assume that growth as far as a catalyst ended up with a weak footed bias. However, when you look at the PMI’s themselves, here’s how they stood.


  • - JPY: +0.9 to 49.3
    - NZD: -0.1%
    - EUR: +1.2
    - Australia’s figures softened however the Japanese numbers improved. The number is still below 50 (indicative of a retraction), however its improvement was above 50 (an expansion).
    - Germany: A bigger than expected uptick, however still not above 50
    - U.K.: A significant boost, manufacturing and services improving and shared burden 47.t to 49.8
    - U.S.: Manufacturing ticked lower from52.4 to 51.7 (still above 50)


Overall this data would be an improvement in growth. This didn’t reflect in the yield spread last week and risk-aversion was obvious. Now, what’s motivating this? If it’s something that we can identify than it’s something that most traders who consider fundamentals are all watching. I would define the complacency in the channel in the DOW, NASDAQ, or the SPX. These are the best performing asset classes in general, and especially in the last 12 months (U.S. equities vs rest of world equities (VEU)).

The pullback yesterday almost hit the -1% mark, but the SPX was down 0.9%. This was a decline that was the biggest since October, but it’s also been 72 trading days without a 1% drop or advance. This is something that is considerable and can be directly reflected in the subdued volatility of the VIX. The next 1% move I think will be down, not up considering the current over extension of the longer-term bull run for the U.S. equity market.

The top event risk this week depends on how we are surprised with scheduled events this week. The risk perspective will be a principle driver and I will be watching tomorrow during the N.Y. session to see how the current levels (which are at channel floors established since October 19)

Event risk:

The official GDP figures this week: Mexico and the U.S. on Thurs and the Eurozone on Friday. This will affect the EUR/USD and other U.S. dollar pairs. Given how quiet things have been on the Euro, I think it will reflect volatility seen in other cross pairs.

Earnings: Tech, manufactures, goods etc.

Consumer confidence sentiment: worth highlighting, because of the impact is has the U.S. elections (second tax cut, and trade war resolutions)

Monetary Policy:

The Fed decision is the top priority this week for event risk. Higher levels of inflation is expected from Australia. There is also rumors based on the REPO/ swap market that the BOE will cut interest rates.

The fed will release its forecast for 2020 and their “review” of their effectiveness of monetary policy (targeting 2% inflation vs QE as a standard tool vs. risk of high-leverage exposure to future crises) could raise questions of the ineffectiveness of monetary policy and its low rates and benchmark yields regarding solvency. This probability is low and it’s seen in the Fed Funds Futures contracts. You can’t write off the risk though, because if it comes to fruition it can overwhelm other fundamental themes.

03:11:43 (UTC)
Mon Jan 27, 2020


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