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A Traders’ Weekly Playbook: After record levels comes chopOn the week we learnt that the UK and Japan are in a technical recession, although this meant little to markets and perhaps the bigger issue in Japan was the steady stream of pushback from key Japanese officials on recent JPY strength. US retail sales fell 0.80% in Jan, a sinister turn when both US CPI and PPI were far hotter than expected, putting us on notice that the US core PCE print (due on 29 Feb) could be above 0.4% MoM - which if seen a year ago would have been a trigger for the Fed to hike by 25bp. The Feb CPI print (due 12 March) will get huge attention, and while some way off is a key date for the diary. Among a barrage of ASX200 companies reporting, we also saw a poor Aussie employment report, which put great emphasis on the February employment report (due on 21 March) given economists (and the ABS) expect a solid snapback in hiring in this data series. The ASX200 eyes new ATHs, and key earnings from the likes of BHP, RIO, QAN and WOW this week could take us there. In markets, the USD gained for a sixth straight week, although a 0.2% week-on-week (Wow) gain was more of a stealth grind higher than an impulsive one-way tear. Assisting USD flows was a reduction in US swaps pricing, where we started the week with 113bp of cuts priced by December 2024, and finished with 91bp (or 3.6 cuts), which helped lift the US 2YR Treasury to 4.64% (+16bp on the week). If the market hadn’t already amassed a sizeable USD position, then one could argue the USD move would have been higher. The EURUSD weekly shows indecision to push the pair lower and a move above 1.0805 (last week's high) and should take the pair through 1.0828 (200-day MA) and onto 1.0865, which would be a level I’d be looking to fade longs on the week. While we saw the US500 0.4% lower on the week, we saw the prior week's low of 4918 (and the 5-week EMA) holding firm, with traders selling the VIX index above 15%. While US cash equity will be closed Monday for Presidents Day, I’m expecting choppy trade through to Thursday - so the intraday environment for day traders could get a little messy and it will pay to be nimble. The NAS100 was the underperformer last week but should attract good attention from clients this week with Nvidia’s number due out on Wednesday (after the cash close), and where the market eyes some punchy in reaction to the headlines, which could spill out into AI names more broadly. The Year of Dragon got off to a solid start for China equity outperformed, notably in the small-cap space (the CSI500 closed +10% WoW) and we see the CN50 index looking compelling for further upside, and I see 12,000 coming into play. While National Team flows and PBoC liquidity have supported China/HK equity, economics do matter, so put the China Prime rate decision and new home sales data on the radar to potentially influence this week. On the China proxy theme, Copper etched out a solid move on the week although we have seen selling interest into $3.80. Crude is also getting attention from traders, with price gaining 3.4% WoW and testing the 29 Jan pivot high. Moving in a bullish channel we see upper trend resistance into $80.50 – a level to put on the radar. Staying in the commodity theme, silver (XAGUSD) has found good buying interest off $22 and has closed above the double bottom neckline and the 200-day MA – upside into $24.00/50 looks possible. On the ag’s, cocoa and wheat come on the radar as short set-ups, while corn has seen a solid bear trend since October but indecision in Friday's price action, suggests traders are on notice for a small reversal this week. The marquee event risks for traders to navigate: Monday US cash equity and bonds are offline for Presidents Day – futures will be open but will close early. Tuesday China 1 & 5-year Prime Rate (12:20 AEDT) – The market sees the 5-year Prime rate lowered by 10bp to 4.1%, while the 1-yr rate is expected to remain at 3.45%. The Prime rate is the benchmark rate by which households can borrow from Commercial banks. We may see some disappointment in China's equity markets if the PBoC refrain from easing, which has been the trend of late. This time may be different, so conversely, a deeper-than-expected cut across both tenors may see traders adding to an early long position in the CN50 index. Wednesday Canada Jan CPI (00:30 AEDT) – The consensus is we see Canadian headline CPI coming in at 3.2% (from 3.4%) and core CPI unchanged at 3.6%. The CAD swaps market sees the first cut from the BoC occurring at either the June or July meeting. A core print above 3.6% should see good CAD inflows, while below 3.4% should interest CAD sellers. The GBPCAD (daily) setup is on the radar, where a closing break of 1.6950 would inspire short positions for 1.6800/1.6750. Australia Q4 Wage Price Index (11:30 AEDT) – the median estimate from economists is for Q4 wages to increase 0.9% QoQ & 4.1% YoY (from 4%). The AUD may see a small move on this data point, but it will naturally be dependent on the extent of the outcome vs expectations. A wage print above 4.3% would be a big surprise and get some attention from Aussie rates traders who see the first cut (from the RBA) at the August meeting. Nvidia Q424 earnings (after-market) – as noted in the Nvidia preview the options market prices a substantial -/+11% move on earnings. Naturally this sort of reaction – if it plays out - has the potential to cause big volatility in the NAS100 and US500 after the cash market close, so it is a clear event risk. Thursday FOMC meeting minutes (06:00 AEDT) – the January FOMC minutes should be a non-event given it predates last week’s stronger US CPI and PPI print. Any colour on an early end to QT may get some focus though. EU HCOB (flash) manufacturing & services PMI (20:00 AEDT) - the market looks for the EU manufacturing index to print at 47.0 (from 46.6) and services at 48.8 (from 48.4). If these median expectations prove to be correct, then we would see a slight improvement in the pace of decline, which is modestly EUR positive. Seems unlikely we see a sizeable reaction in the EUR unless we see services above 50.0. UK S&P (flash) global manufacturing & services PMI (20:30 AEDT) - the market looks for the UK manufacturing index to print at 47.5 (47.0) and services at 54.5 (from 54.3). So, a slight improvement is expected in both metrics. A service PMI print above 55 could see increased movement in the GBP and cement expectations the BoE will look to cut rates from August. GBPUSD needs a catalyst as it tracks a tight sideways range, while I hold a preference for GBPNOK lower, with GBPCAD shorts a potential trade I’m looking at. Friday S&P Global US Manufacturing & Services PMI (01:45 AEDT) – the market looks for manufacturing index to print at 50.5 (from 50.7) and services at 52.1 (from 52.5). Any reading above 50 shows expansion from the prior month, so if the consensus proves to be correct then both metrics will show expansion but at a slower pace. Hard to see a pronounced move in the USD or US equity unless we see a sizeable beat/miss. China New Home Prices (12:30 AEDT) – China’s new home prices have fallen every month since May 2023, so further falls seem likely in the January series. China equity may find sellers if we see the pace of decline increases from the December outcome of -0.45%. Any improvement in the pace of decline could be taken well by the CN50 and HK50 Index which are already seeing tailwinds courtesy of National Team buying. ECB 1 & 3-year CPI expectations (20:00 AEDT) – there is no consensus by which to price risk for the EUR, but consider the last estimate was 3.2% and 2.5% respectively. Any impact on the EUR will come from the extent of the revisions. June remains the likely forum for the ECB to start a cutting cycle. Biased long of EURJPY given the bullish momentum for 163. US Politics – The South Carolina REP Primary is held on Saturday – will this be the stage for Nikki Haley to formally exit the REP Nominee race? Marquee corporate earnings reports • US corporate earnings – Home Depot (Before-market 20 Feb), Walmart (Before-market 20 Feb), Nvidia (After-market 21 Feb) • ASX200 Corp earnings – COH (19 Feb), BHP (20 Feb), WOW (21 Feb), RIO (21 Feb), QAN (22 Feb), FMG (22 Feb) • HK Corp earnings – HSBC (21 Feb)
PEPPERSTONE:NAS100
by Pepperstone
RBA meeting preview – transitioning away from a tightening bias Time: Tuesday at 14:30 AEDT With the Fed, ECB and BoE now having offered their guidance on policy and all largely pushing back on the pricing of imminent cuts, it’s the RBA who steps up as a risk event for traders on Tuesday. Like the aforementioned central banks, the timing and the extent of RBA rate cuts are the subject of much debate among local market participants - all with fairly strong and dispersed views on when the first cut plays out. What is more important to drive the reaction in the AUD or AUS200 are market expectations and what is being priced. The best way to measure these expectations is through the Aus 30-day interest rate futures, and these are the first derivative by which other markets (such as the AUD) will react to. As we from the table the central view from rates traders is there is very little chance of a 25bp cut at this meeting or the March meeting. The May RBA meeting is considered to be ‘live’ and while this pricing will move dynamically with supply and demand from market participants, there is currently a 56% probability of easing here, with June almost fully priced for a cut. I sit more in the June camp myself. By December ‘24 the market is torn between two or three 25bp cuts, with 64bp of easing priced. Another factor is the pricing of the trough in the cash rate, as this offers a sense of where the collective sees a neutral setting. Here we can look at the forward rates market and see this currently set between 3.50% and 3.25% in 2 years’ time. A 3.5% floor in the cash rate would be conditional on the economy avoiding a recession, where a recessionary environment would require a more accommodative stance and the cash rate likely pulled below 2%. The reaction in the AUD While the RBA won't cut the cash rate at this meeting, the reaction in markets will come from the tone of the RBA statement and any change in the wording that gives a sense of whether there is any appetite to ease from May or June. While cumulative pricing in Aussie rates is certainly nowhere near as aggressive as what we see in the tradable US or EUR interest rate markets, if the market sees no tangible evidence the bank is prepared to cut then May rate cut pricing will be pared back and the AUD should spike higher. Positioning, specifically from fast money leverage funds (e.g. hedge funds), will also play a critical role in the extent of the move to the tone of the statement, and flow reports from investment banks suggest these players running a sizeable AUD short position, albeit not at extreme levels. Given the trend in both headline and core inflation, along with subdued growth and stalling house price momentum, the RBA will almost certainly lose its hawkish bias in the meeting statement. However, they will likely be non-committal and adopt a clear wait-and-see bias. This should loosely put a cut on the table as early as May, but it will be highly conditional on the outcome of the following data points: Wage price index (21 Feb), monthly CPI reports (28 Feb, 27 March), Q1 CPI (24 April), employment reports (15 Feb, 21 March, 18 April) and Q4 GDP (6 March). Certainly, the Q1 CPI is the marquee data point that could decide a May cut, and the RBA would want to see inflation falling below 3.5%. The RBA would also require an unemployment rate above 4% (currently 3.9%) and trending higher to ease. A big day for the AUD It's worth considering that as well as the RBA statement we get the SoMP (Statement on Monetary policy) at the same time, and there will likely be changes to the bank's economic projections – that could put the market on notice. Also, an hour later (15:30 AEDT) RBA Governor Bullock will hold a press conference – this will be important for traders to react to. Gov Bullock will be probed on the broad appetite to cut and once again the reaction in the AUD and AUS200 will be driven by nuance and her urgency to normalize relative to the rates pricing. In theory, the meeting should be a low-volatility affair, with the bank moving to a more neutral setting and welcoming the moves lower in inflation but refraining from saying their work is done. It is still an obvious risk though for AUD exposures, so do consider position sizing over the event and consider where you see the skew in risk. As we move into the meeting AUDUSD is tracking a range of 0.6625 to 0.6550 – a break of this range could be quite powerful. Sentiment towards global risk assets is a contributing factor but as I say, around the meeting how the RBA are seeing things relative to market pricing will likely be the driving factor.
by Pepperstone
The RBA to join the rate cut party in May?Aus Q4 CPI came in at 4.1% yoy, with the trimmed mean measure at 4.2% yoy – both were nicely below the economist's median forecast, and importantly below the RBA’s own forecasts of 4.5% for both metrics. We also saw the more timely monthly (December) CPI print coming in at 3.4%; a 90bp improvement – and just 40bp away from the 2-3% target band. Next week’s RBA meeting looms large, and the tone of the statement should reflect a bank seeing inflation moving towards target, yet they will make it clear this is no time for victory laps and more needs to be done. The RBA will be enthused by the fact core inflation is below the RBA’s cash rate – subsequently, we have a positive real cash rate for the first time since 2016 - this is a small but welcomed victory for Bullock and co. With both core and headline CPI nicely below the November Statement on Monetary Policy forecasts, we question the possibility of tweaks to their projections for June and December 2024 CPI. These currently sit at 4% by June and 3.5% by December, so any revisions to these estimates could result in some solid movement in interest rate futures and by extension the AUD and AUS200. Aussie economic data has generally come in below market consensus expectations of late, so the pricing of expected RBA policy – through interest rate futures - has been part-validated in today’s CPI print. Looking at Aussie interest rate futures, the market prices no chance of a 25bp cut in either the February or March RBA meeting, and if anything, the RBA statements at these meetings need to lay the groundwork for cuts – although the tone of the guidance will be data-dependent. While much of the disinflation has been driven by tradables, a 25bp cut in May is a real possibility and the market prices this at 50% - so essentially a coin toss. We see two 25bp cuts priced by year-end. Eyes on Gov Bullock Gov Bullock speaks next Friday (09:30 AEDT) and while she speaks after the RBA meeting statement and SoMP (both on Tuesday 14:30 AEDT) her testimony will be scrutinized and will move interest rate pricing, and by extension the AUD. I think we’ll have a fair idea of the timeline for potential policy easing from here. Gov Bullock has a straightforward job – time rate cuts perfectly. Obviously, that’s easy to say but tough to do in principle but if we focus on the capital markets, we see little risk of an implied policy mistake and we see the ASX200 at all-time highs, with bank equity and consumer-sensitive stocks in rude health. AUD 1-month implied volatility resides at 12-month lows, while the Aussie housing market shows few concerns. I guess this is an issue with setting policy on quarterly core inflation -it is a slow-moving beast and clearly a lagging indicator the fact it is still 120bp from target feels like a hawkish Bullock may keep the peddle to the metal for now. The market will put more weight on the monthly CPI reads. I also consider the frequency of central bank speeches, and this is where the RBA, the ECB and the Fed differ in a big way – In Australia, we simply don’t have the plethora of central bankers that speak almost every day, and it's often a long time between drinks for the RBA speeches. This is quite refreshing, but in times like this it can be useful to know how each member stands, giving almost real-time commentary on policy. Anyhow, the markets speak out – the door is ajar for a cut in May but easing will be gradual relative to the Fed, ECB, and other G10 CBs. We also see the floor in the RBA cash rate priced at 3.5%, so loosely four 25bp cuts are priced to a ‘terminal’ level. The RBA won't try and keep pace with the Fed, they will work on their own merit and focus on their set of economics – either way, the trajectory for CPI suggests we will join the rate cut party and a ‘soft landing’ seems to be the more probable outcome, at least judging by the message from the markets.
PEPPERSTONE:AUS200Long
by Pepperstone
AUS200 – 7632.8 in our sightsWhile the AUS200 revisits the all-time highs set in Aug 2021, the index absorbs a positive mix of sentiment towards global risk, as well as local factors, and many question if this time around we see the illustrious bullish break the bulls are positioned for. While global macro issues remain paramount, one catalyst to look towards is ASX200 1H24 earnings, with Amcor kicking the season into gear (6 Feb) and JBH (due 12 Feb) one that CFD traders will be keen to focus on. CSL (13 Feb) and CBA (14 Feb) report shortly after and both could influence sentiment with their outlooks. The Aussie banks are driving the market from an index points perspective, with materials also finding form. Importantly, we see the ASX200 bank index is flying high at present and until we see the bullish tape in the banks give way, index volatility will remain subdued, and traders will be skewed to buy weakness in the Aussie equity index.
PEPPERSTONE:AUS200Long
by Pepperstone
Is the ASX 200 about to roll over?Looking at the weekly chart, bulls may have something to worry about. The market is yet to even test 7500 let alone break above it, and each time it has tried (and failed) to do so, the ASX has fallen by double digits in percentage terms. A bearish engulfing candle formed in the first week of the year after once again faltering at those cycle highs. And if we're to see even just a 10% drop from the 2024 high it could, the index will find itself back beneath 7000. But if bears really get their way for another -16% drop, the ASX will be back around 6400. What could make that happen? Well, markets have been aggressively pricing in 5 - 7 Fed cuts this year which may not arrive. And if the wheels fall off the global economy to justify said cuts, that could also be bad for the stock market. So bulls may want to ask themselves if they want to be along at these levels, where the market is yet to every trade above it. As we could be in for a deeper pullback at the very least.
CITYINDEX:AUSTRALIA200CFDShort
by CityIndex
A Traders’ Weekly Playbook; Buying risk when its darkestA Traders’ Playbook; Buying risk when its darkest Equities continue to find few friends and reviewing so many of the daily and weekly set-ups in our core equity indices, standing in front of the move and countering seems a low probability outcome at this juncture. The China CN50 and AUS200 look particularly weak, while EU equity markets are in steep decline, with price breaking level after level. In the US, the NAS100 sits on a huge support zone seen between 14,560 and 14,430, with the US500 eyeing the 4 Oct swing low at 4200 – if these levels are broken this week and SPX 20-day realised volatility rises further, then market chatter will centre on the S&P500 pushing towards 4000. The contrarians have started to look at sentiment and throw out a range of charts, including deteriorating market breadth and the number of stocks (in an index) below the 20-, 50- or 200-day moving average, that have an RSI below 30, or resides at 4-week lows. On current standings we’re not yet near a point of maximum bearishness. The CNN Fear and Greed can do a good job capturing the mood across markets and this says a similar message. The time for contrarianism is approaching – and who doesn’t love a tradeable V-bottom – but it isn’t now. Maybe corporate earnings can have a more positive effect and stabilise sentiment. With 47% of the S&P 500 market cap reporting this week, this is the week it could happen, and guidance and outlooks from CEOs can play a more important role. The macro matters though, and we continue to focus on geopolitical headlines, moves in the US 10- and 30-year Treasury, volatility, and energy markets. With bonds offering no defence in the portfolio, traders continue to manage drawdown risk through volatility, gold, and the CHF as the preeminent hedges. The USD hasn’t performed as well as some had hoped through this period of equity drawdown and rise in long-end bond yields. One factor is that we’re seeing a rise in EU and Chinese growth momentum, so the rest of the world is looking less bad. We also regress and understand that the CHF acts more like gold in times of geopolitical tensions, and after a 7.8% rally between July and October (in the DXY), consolidation in the USD index was always a possibility. Keep an eye on USDCNH and USDJPY as a guide, and the fact we see both pairs in a sideways consolidation is keeping broad G10 FX volatility subdued and a factor keeping the USD from moving freely on a broad FX basis. As many try and pick a turn in equity markets, a bounce in risk this week can't be ruled out, and we need to be open-minded to all possibilities – its fighting an evolving momentum though and many will prefer to initiative (or add) shorts into any rallies, rather than fight it. Buying risk when it's darkest and sentiment is rock bottom is a well-adopted market philosophy but I’m not sure we’re there just yet. Marquee data points for next week: • EU manufacturing/services PMI (24 Oct 19:00) – the market consensus is we see the diffusion index print 43.6 (from 43.4 in September) and the services index at 48.6 (from 48.7) • UK manufacturing/services PMI (24 Oct 19:30) -– the market consensus is we see the diffusion index print 44.6 (from 44.3 in September) and services at 49.3 (unchanged 49.3). A better services print could see a big reaction in GBP given how short the market has got. • Australia Q3 CPI (25 Oct 11:30 AEDT) – the consensus sees headline CPI at 5.3% yoy (from 6%) / core CPI at 5.0% yoy (5.9%). The Aussie interest rates markets price a hike on 7 Nov at 34% - so, if we get a CPI print above 5.4%, we could see the market pricing a hike at the November RBA meeting at or above 50%. AUDNZD has been the best expression for AUD bulls but is coming into a supply zone around 1.0850. • US S&P manufacturing/services PMI (25 Oct 00:45 AEDT) – a data point the market could completely ignore or could be the trigger for a sizeable reaction – the consensus is we see manufacturing at 49.9 (from 49.8) and services at 49.9 (50.1). • BoC meeting Canada (26 Oct 01:00 AEDT) – the swaps market ascribes very little chance of a hike at this meeting, and only 6bp of hikes through to March 2024 – if the tone of the statement suggests a greater risk of hikes in the future, then the CAD should rally. • ECB meeting (26 Oct 23:15 AEDT) – the ECB won’t hike at this meeting, so the focus falls on their guidance on the economic outlook and hurdle for hikes in the future. There will also be a focus on the bank’s plans to increase QT, and even look at the timeline on sales from APP and PEPP bond purchase program – if this is brought forward from Jan 2025 the market would see this EUR positive. • US Core PCE inflation (27 Oct 23:30 AEDT) – US headline PCE inflation is eyed at 3.4% (from 3.5%) and core 3.7% (3.9%) – it would have to be a big number to put a hike at the Dec FOMC meeting on the table – a November hike is not up for debate and the market sees a hold as a full-gone conclusion. • Chile central bank meeting (27 Oct 08:00 AEDT) – The market looks for a 50bp rate cut, but there are risks for 75bp – can USDCLP print new cycle highs? Central bank speakers: Fed speakers – Powell (26 Oct 07:35 AEDT – unlikely to offer any new market intel). Waller (27 Oct 00:00 AEDT) and Barr BoE speakers – Cuncliffe (27 Oct 03:45) RBA speakers – Gov Bullock (24 Oct 19:00 AEDT) & Bullock and Kent both appearing at the Senate testimony (26 Oct 09:00 AEDT) Marquee US earnings and the implied move on the day of earnings (derived from options pricing) – on the week we see 43% of the S&P500 market cap reporting. Marquee names include - Alphabet (4.8%), Microsoft (4.1%), IBM (2.7%), Meta (8.6%), Amazon (6.4%), Intel (6.6%), Exxon (2.4%)
PEPPERSTONE:NAS100Short
by Pepperstone
Most difficult trading environment since 2011I've been trading since 2003. And if you're a position (swing trader , medium term) trader, you'll know there comes a time where the markets flow in a difficult range... There are two types of markets when it comes to strategies. Favourable and Unfavourable. Right now, I don't mean to speak for everyone else, but I believe the markets are in an unfavourable territory for medium term traders. Initially, I was blaming the JSE ALSI 40 (South African) index. I blamed the Load Shedding (cutting of electricity) Incompetency of the government providing sufficient water and services I blamed us being downgraded to grey (which has pushed out Foreign direct investments). I blamed the low liquidity and volume and the blame game kept going on... But then I realised something even more problematic. This horrible market environment has not only been for the JSE ALSI 40... It's been for the ASX (Australia), CAC40 (France), DAX (Germany) and even UK 100 (FTSE 100)... And I'm sure there are a lot more stock markets that have had this tight and ongoing range... So, what market environment are we in at the moment. It's not going up so it's not the Mark-up phase It's not going down so it's not the Mark-down phase We can either call it Accumulation or Distribution, but it's been moving in a sideways range for obver a year. So clearly we are in a larger market environment, which is known as the capitulation stage. The volumes are low worldwide, the prices are erratic and volatile. Many traders and investors are holding tight onto their money and not even dabbling into these markets at the moment. How long will this last? Well in 2011, it lasted two years. And right now, we are not seeing any strong signs of change yet... So what do we do? Well I don't have the holy grail nor some incredible points. But I can share what I'm doing during these timultuous times... 1. I've reduced my risk to 0.5% to 1% per trade (Instead of 2%). 2. I'm always hedging with Longs and Shorts 3. I'm trading other markets (Forex, Indices and intraday trades). 4. The drawdown isn't bad so I haven't halted trading 5. I've come to terms that this is the new normal for the next year or too. Expect disppointment and you'll never be disappointed. You learn a thing from Marvel Movies now and then... What are you doing and can you relate to these difficult trading conditions right now? What are your thoughts on the matter?
JSE:J200Long
by Timonrosso
A traders’ weekly playbook – no rest for the wicked Last week was some ride and I feel like I’ve aged 10 years, but what have we learnt? The Fed and the ECB are almost done tightening and market pricing shows this front and centre. In the case of the US, core PCE and the Employment Cost Index (ECI) showed us that price pressures and wages are abating. However, the US Q2 GDP print grew at an above-trend pace (at 2.4%), so we are staring at a resilient economy at a time when the Fed is done, and inflation grinds lower. Add in a 4.5% rally in Chinese equity on the week and the word ‘Goldilocks’ comes up liberally in conversation. It’s no wonder the chase is on and those underweight equity are feeling the heat. This positive growth factor is certainly not true in Europe and China, where growth has been consistently missing the mark – the US exceptionalism story is therefore firmly in play and keeps me constructive on the USD, even if the technicals/price action are not showing any strong bias to own USDs over other G10 FX. We see that the bullish trend in DM equity markets is mature and, in some cases, owned/loved – however, new highs seem more likely than not - Apple will need to impress in earnings this week. In Asia, it feels hard to trust the late week rally in HK50 or CHINAH, but I’m skewed long for another 3-5% upside. Huge inflows into mainland Chinese equities last week suggest more is to come. The BoJ threw a curve ball into the market on Friday with its cosmetic change to YCC – in essence, it was a brilliant move by the central bank, and they’ve managed to bridge the volatility that would come with a straight change to 1% in the YCC band, but have given themselves all the flexibility should they wish to tighten policy without causing ripples in the Japanese or global bond markets. After the fourth biggest trading range of 2023 on Friday in USDJPY, we should the ranges settle in the days ahead – Again, I don’t trust the last session sell-off in the JPY, notably vs the ZAR, MXN, and GBP, and we watch to see if the JP 10yr JGB grinds towards 75bp and above. We look forward to another big week of event risk – the BoE should hike by 25bp, while the RBA meeting is perhaps underpriced but line ball, and we know once we get the policy call the AUDUSD should revert to following USDCNH. US NFP should again highlight the US labour market is fine health, and EU inflation should offer a view that the ECB can’t be complacent but are close to the end. It's another week in paradise and managing risk and achieving correct position sizing will help you stay solvent. The marquee event risks for the week ahead: US Q2 earnings – while the bulk of the S&P500 market cap has reported Q2 earnings, in the week ahead we get around 15% of the market cap reporting. Numbers from the Apple and Amazon (both on 3 August) and QUALCOMM get the attention. Can we continue to grind to new highs in the US500 and NAS100? RBA meeting (1 Aug at 14:30) – Given the recent domestic economic data flow it will be a close call whether the RBA leave the cash rate at 4.1% or hike by 25bp. Interest rate futures price a 21% chance that the RBA leave rates on hold. I personally lean to a hold from the RBA – however, given the strength in the labour market data, increasing unit labour costs and house price data, one could argue this is under-pricing the risk of a hike. Bank of England (BoE) meeting (3 August at 21:00 AEST) - the BoE will choose between another pro-active 50bp hike or a more data-reactive 25bp hike. The market and economists see a higher probability of a 25bp hike, with the peak Bank rate expected to hit 5.83% by February 2024. We may also hear of an increased pace of quantitative tightening (QT) from October, although the BoE may wait until the September BoE meeting to update the market. US nonfarm payrolls (NFP - 4 August at 22:30 AEST) – the US labour market remains in rude health, and there are no clear signs of a cooling in the July employment data. In the lead-up to NFP we get ADP private payrolls and the JOLTS job openings report, so both could shape expectations for NFP. The consensus for NFP from economists is for 200,000 jobs to have been created, with the unemployment rate expected at 3.6%. Average Hourly Earnings (AHE) will be closely watched, as wages are a key consideration if the Fed are to go on an extended pause. The consensus is we see AHE +0.3% MoM / 4.2% YoY (from 4.4%). US ISM manufacturing (2 Aug 00:00 AEST) – The market looks for the index to come in at 46.9 (from 46.0), so a slight improvement from the June print. The ISM services print (due on 4 August) is also due this week and may be more influential on the USD. The market expects a slower pace of growth in the service sector with the index expected to print 53.0 (from 53.9 in June). A read below 50 in services ISM would likely see broad-market volatility pick up. Fed Senior Loan Officer Opinion Survey (1 Aug 04:00 AEST) – the SLOOS report on bank lending standards was referred to on several occasions at last week’s FOMC meeting – we expect a slowdown in credit and tighter lending, but whether this proves to be a volatility risk for markets seems unlikely. Watch the US banks close- the XLF and KBE ETFs offer good context here. China Manufacturing and Services PMI (31 July 11:30 AEST) – after last week’s Politburo meeting, there may be a limited reaction to this PMI report, as stimulus takes time to feed through to the real economy. For now, the market looks for the manufacturing index to come in at 48.9 (from 49.0) and services PMI at 53.0 (53.2) – a read below 50 shows contraction from the prior month, and above 50 signals expansion. EU CPI inflation (31 July 19:00 AEST) – the market expects the EU CPI estimate to come in at 5.3% (from 5.5%), with core CPI eyed at 5.4% (from 5.5%). The market currently prices 10bp of hikes for the next ECB meeting on 14 September – a 40% chance of a hike. An inflation print below 5.1% would be a surprise and should attract decent EUR sellers. EU manufacturing and services PMI (3 August 18:00 AEST) – this data point is a revision of the numbers announced on 24 July, so unless we get a marked revision to the preliminary print the data shouldn’t move the dial too intently. The market will be watching revisions to the service data more closely.
PEPPERSTONE:US500Long
by Pepperstone
RBA surprise and China uplift; The AUD nirvana backdropThe RBA has now ‘surprised’ the market with 2 back-to-back rate hikes, which were both priced at a 30% probability or below. Essentially, the RBA has injected a level of policy uncertainty greater than any other G10 central bank. We also see its hawkish forward guidance maintained with “some further tightening of monetary policy may be required”. So, the question is how much pain the Aussie economy must endure before demand is sufficiently impacted to put inflation firmly on the path to target. AUD supported by a confluence of factors One of the beneficiaries of the RBAs hawkish guidance is the AUD, and it’s been on a roll – where the fundamentals have offered an almost perfect storm for AUD appreciation. We’ve seen iron ore futures +17% since the 26 May lows and copper has lifted from $3.54p/lb. to $3.77 p/lb. The HK50 index was in a bear market but has now rallied 7% off the lows. A reversal and a stronger yuan would have been helpful (for AUD longs) but we’ve seen USDCNH pushing higher and looking for a break of 7.1500. On the rates front we see interest rate differentials also a factor in AUD appreciation, and while we can see some uplift in market expectations for the immediate months ahead, it’s the aggression by which the market has repriced cuts over the next two years that have really hit home. Looking at the pricing of 2-year forward rates we see that while expectations of near-term hikes have increased, it’s the level of expected rate cuts has been more aggressively priced out of the Aussie rates market that have been at play. For example, on 26 April the central case of the market was that the RBAs cash rate would be 128bp (5 cuts) lower this time in 2 years. The re-pricing has taken the level of expected cuts over the next 2 years to just 34bp. Rate cuts have also been walked back in other G10 countries, as we see below. However, when we contrast Aus 2yr forward rates to that of USD, EUR, NZD, and GBP (see below - in order), we see just how aggressive this move has been on a relative basis. This has proven to be a real tailwind for the AUD. Moves in ASX200 equity; shorting banks has worked well If the move-in rates are a tailwind for the AUD, it has been problematic and a sizeable headwind for the interest rate-sensitive parts of the Australian equity market. Shorting Aussie banks has worked well really since early February, where competition has had to intensify to attract deposits, while higher funding costs have promoted a war on mortgage pricing. Net interest margins are to decline consequently, and Westpac has already stated they have seen a rise in 30-day delinquencies. While would-be buyers step away, the speculative fraction of market participants senses this and gets more traction shorting equities that are bear trending. Traders can operate banks tactically, either as part of a long/short approach or as an outright directional trade against lower net interest margins and earnings. What comes next? Are rates still too low? With the market now having discounted much of the expected future RBA policy setting, the question is what happens next for RBA policy. Can we get to a point where the market fully prices out cuts for the coming 2 years altogether? Shorter-term, with 8bp of hikes priced for the July RBA meeting (a 32% chance of a hike), is this again priced too low? We see the peak RBA cash rate expectations of 4.34% by September, should this be priced closer to 4.6% maybe even 5%? To answer this we will watch a combination of broad financial conditions, global economic trends, domestic auction clearance rates and anecdotes on credit demand. However, of the known data points, we look for: • 13 June Westpac consumer confidence / NAB business confidence. • 15 June - May employment report • 28 June – May CPI report • 29 June – Retail sales • 3 July CoreLogic House price index • 4 July – RBA meeting • 26 July – Q2 CPI • 15 August – Wage Price Index For now, especially on the higher timeframes, the wind is to the AUD's back, and we see key technical breakouts vs GBP, EUR, and JPY, with AUDNZD having been on a one-way rampage. AUDCHF is eyeing a break of its range higher, having rallied from 0.5867, where a daily close could set the pair on for the double-bottom target of 0.6230. The time for shorting the AUD (on the higher timeframes) will come soon enough, but until China turns lower and rates look fully priced the skew in risk that for more upside in the AUD.
Long
by Pepperstone
It could be now or never for ASX 200 bullsI suspect it could be a case of now or never for ASX bulls. Whilst it suffered its worst day in 9-weeks on Thursday, this could be part of an ABC correction and the 200-day MA is nearby as a probably support level, even if it breaks lower today. Futures markets shows heavy volume occurred around yesterday's lows (bears piled in around the lows) yet sentiment could rise if a debt ceiling deal is reached as reported, forcing a short-covering rally. Yesterday’s low sits around a 50% retracement and 61.8% projection level, and there is a volume cluster around 7122 during the strong rally which could provide support. Furthermore, RSI (2) is oversold. The bias is bullish above 7090 (below the 200-day MA) and for its next leg higher to begin.
ASX:XJOLong
by CityIndex
1
ASX 200 bulls eye another crack at 7300 (Australia 200 CFD)The possible 'sympathy bounce' towards 7300 highlighted last week played out nicely. Whilst we're on guard for bearish momentum to return as part of the seasonal 'sell in May and go away', we retain a bullish bias over the near-term. Prices have since pulled back from those highs and price action on the intraday chart appears to be corrective, in the form of a falling wedge (a bullish continuation pattern). It's forming a base around the 38.2% Fibonacci level and above the 50% retracement line, whilst RSI (14) is forming a bullish divergence. - From here, bulls could consider bullish setups above 7226 in anticipation of a move higher - The bias remains bullish above 7220 - The wedge pattern suggests an upside target near the base of 7300
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CITYINDEX:AUSTRALIA200CFDLong
by CityIndex
3
Sympathy bounce for the ASX 200?Whilst prices are expected to open lower, we’re on guard for a small countertrend bounce. A bullish hammer formed on the daily chart at the lower Bollinger band which found support at the 50% retracement level and 200-day EMA. A bullish divergence has formed on the RSI (2) within the overbought zone. A break above yesterday’s high could potentially see it retest the 7275 low, or the monthly pivot point around 7300. If we managed to bounce that far, we'd then look for signs of weakness for a potential swing trade short, given weak sentiment for global stocks and the tendency for stocks to underperform around this year due to "sell in May and go away" seasonality. A break of yesterday’s low assumes bearish continuation.
ASX:XJOLong
by CityIndex
RBA meeting preview – a traders perspective Traders are looking ahead at the RBA meeting (2 May 14:30 AEST) and reviewing where the balance of risk sits, as well as the propensity for volatility. As always, the need to manage the risks when holding exposures over news is of clear importance. From a volatility perspective, AUDUSD 1-week (options) implied volatility sits at 11.2% - the 20th percentile of the 12-month range – in essence, the market is not expecting an outsized move through the week, and that makes sense – however, there are still reasons to believe we could see big movement in the AUD, AUS200 and Aussie bank/consumer plays. Having just seen the Aus Q1 CPI print – with the trimmed mean CPI measure coming in below expectations at 6.6% - interest rate futures are pricing just 3bp – or a 12% chance - of a hike at the May RBA meeting. Rates traders hold a high conviction that the cash rate will remain at 3.6%. So naturally if we were to see the RBA hike by 25bp it would be a shock, and the AUD would likely spike 50-70 pips off the bat. It's rare that the market has such a strong view, and the RBA doesn’t ultimately meet the market. If we look further out the interest rate futures ‘curve’ at forward expectations, we see 13bp of hikes priced by September to reach a peak rate of 3.7%. This feels fair, with the market essentially pricing a premium that if we get a hotter Q1 wage price index (17 May), employment report (18 May) and monthly CPI print (31 May) that the RBA may look at massaging the cash rate higher sometime in Q3. There’s obviously a lot that can happen between that time. Given this forward rate pricing, if we do see the RBA leave rates at 3.6% at the May meeting, the market will reconcile the tone of the statement to this forward pricing. It seems likely the statement will be largely unchanged, with the RBA offering the flexibility to hike in the future, again making it clear that they are data dependent. Economists view on the RBA meeting The economist community are more upbeat on the prospect of a hike, and while the consensus of economists polled by Bloomberg sees the cash rate on hold, we still see 7/24 (including CBA) calling for a 25bp. This position is in some way at odds with market pricing. As always when looking at risk we consider positioning – the TFF futures report shows AUD net position held by leveraged traders is modestly short, to the tune of 4092 contracts. Other flow reports from investment banks suggest leveraged funds are long of AUD, while real money funds are holding a sizeable short position. Pepperstone's client positioning is more reflective of sentiment and trend, and we see the net position is skewed long, with 69% of open positions held to capture a move higher. So considering positioning, rate expectations and flows, traders need to weigh up where they see the balance of risk and the probability for a big move in price. I think the RBA pause on rates and offer little new intel in the statement – subsequently, I favour selling rallies on the day in AUD, given any outsized move will be driven by positioning and it should not last long before the AUD takes its variance from USDCNH, the CN50 index and even copper.
Short
by Pepperstone
RBA meeting preview – a defining moment in the cycle Time – 4 April @ 14:30 AEDT In the March RBA meeting minutes, the RBA noted policy was now in restrictive territory and they would “reconsider” the case for a pause in the April meeting. Is there enough new information to compel this pause? Market expectations - hike or a pause? The market prices just 4bp of hikes for this meeting, equating to a 16% chance of a 25bp hike. We see just 10bp of hikes priced for both the April and May meeting, with the market seeing the effective cash rate at 3.52% by September. Economists’ expectations are more divided than the pricing implied in the interest rate futures – of 26 economists polled by Bloomberg 16 are calling for a pause and 10 for a 25bp hike. AUD positioning – essential when assessing risk around any major announcement. Looking at AUD futures positioning, or spot FX positioning reported by banks, there is no extreme bias - so positioning, in isolation, shouldn’t result in any exacerbated moves in the AUD. In the weekly CoT report, we see non-commercial accounts (trading FX futures) hold a net position of -38,459 contracts - that is the 49th percentile of the 5-year range. In the more defined TFF report leveraged funds (again trading FX futures) are small net long at 6290 contracts, the 67th percentile of the 5-year range. (CFTC/CoT report – non-commercial AUD futures positions) Investment bank flow reports portray leveraged funds running a small net short AUD position, while real money accounts are long but not neither are at extremes. Pepperstone’s clients hold a net long AUD position, and this could be representative of broad retail trader positioning and sentiment. Digging into this we see a split on the near-term direction of AUDUSD, with 52% of open positions held short (48% long). There is a more concentrated long bias in the AUD crosses with 77% of open positions in AUDNZD held long and 74% short EURAUD and 79% short GBPAUD. This is likely a reflection of the set-up in the pairs and not on the RBA meeting per se. Trading the RBA meeting Initial thoughts I think the RBA holds rates unchanged, but I also think 4bp of hikes that are priced is too low and the probability of a hike should be closer to 40% than the implied 16%. The downside in AUD on a pause seems limited, given the RBA will likely make it clear in the statement they will retain the flexibility to hike rates in May. My preferred tactical approach is to fade any extreme initial moves – using limit orders to sell rallies or buy weakness, as I see a high probability the RBA statement may counter any initial move driven by their actions with the cash rate. Need to know Market pricing portrays a high degree of conviction that the RBA are on hold - so a 25bp hike could cause the AUD to see a solid spike off the bat. The extent by which price could extend would be driven by the RBAs statement and whether the market felt the wording suggested the May meeting was also priced too low. With 10bp of hikes priced for both this meeting and May, the market is essentially saying that if they don’t hike at this meeting then it's unlikely the RBA will hike in May – this seems fair, as they are more likely to hike now and pause in May. With subdued levels of AUD implied volatility, the market is not expecting to be shocked – for a genuine surprise I suspect we’d need to see a ‘dovish hold’ – where the RBA keep rates on hold and offers a clear view they will pause for an extended period as they assess the lag effect of tightening into the real economy. This seems unlikely given inflation is still far too high. Conversely, a ‘hawkish hike’ – where we get a 25bp hike, and the statement signals another could come in May – this would get the AUD firing. Again, this seems unlikely, as it would cause a strong tightening of financial conditions at a time when growth is delicately poised. The case for a hike - Those calling for a hike of 25bp see a tight labour market, strong business confidence, and high-capacity utilization. Digging into the Feb monthly CPI indicators we saw broad-based month-on-month rising price pressures – it was only holiday, travel and accommodation and recreation that created the disinflation impulse. The case to pause - Those calling for the RBA to hold rates at 3.6% acknowledge that headline inflation is moderating quicker than expected, suggesting a big downside risk in the Q1 CPI print (released 26 April). There is clear evidence that inflation has peaked and fallen to the RBA’s estimate of 6.7% by June. Wage growth is not problematic and there are lag effects from 360bp of hikes that still need to filter through to the real economy – there is also a significant number of fixed-rate mortgages rolling off in Q223. I think the RBA hold but I also see the implied probability too low – how do you see the risks?
by Pepperstone