Forex Market Commentary
This has been a seismic week! But were not going to talk about the slowing US economy now at 0.5% growth. We're not going to focus on the languid Euro zone because we already knew that at some point the US economy had to slow down and take a breather. Indeed, we are going to talk about a far more dangerous event that's looming dangerously right ahead in the shape of China. Moreover, the worse thing is that if the event horizon ever does reach the tipping point, probably very few smart traders will be prepared for it.
Yes, the Googles of the world, the Microsofts and the Apples and a whole host of US brand names largely failed to impress fund managers and investors with their meager earnings reporting this week. But in any case we were expecting this earnings debacle anyway particularly since half the SP 500 companies have exposure to earnings in foreign markets where the brunt of the global slow down is occurring. Moreover a slow down in the Dow and SP 500 is not a bad thing after all as the USD slows down it's rapid pace of appreciation against the other world currencies. The opportunity cost for institutional money going back into negative bond yields in Europe or Japan, or unconvincing Euro equities, isn't really an alternative prospect for fund managers to take money out of ETFs or US bonds and the USD. So the USD is not going to tank and neither is the SP 500 even if it goes through a mild correction. The FOMC release on Wednesday was key for a hawkish undertone that seems to point that whilst the threat of global risks to the US economy seems mitigated, and whilst US inflation seems under control, still there are all the possibilities for a 25 basis point rate hike in June 2016. Even with a slow-down to an annual rate pf 0.5% GDP growth still the fundamentals for the US economy are sound. Therefore, the USD is not going to tank immediately even if there is a gentle correction and side-ways trading in US equities in the weeks ahead. An equities correction was overdue and the USD needed a breather before it resumes its next wave up with a long march.
Yes, the Googles of the world, the Microsofts and the Apples and a whole host of US brand names largely failed to impress fund managers and investors with their meager earnings reporting this week. But in any case we were expecting this earnings debacle anyway particularly since half the SP 500 companies have exposure to earnings in foreign markets where the brunt of the global slow down is occurring. Moreover a slow down in the Dow and SP 500 is not a bad thing after all as the USD slows down it's rapid pace of appreciation against the other world currencies. The opportunity cost for institutional money going back into negative bond yields in Europe or Japan, or unconvincing Euro equities, isn't really an alternative prospect for fund managers to take money out of ETFs or US bonds and the USD. So the USD is not going to tank and neither is the SP 500 even if it goes through a mild correction. The FOMC release on Wednesday was key for a hawkish undertone that seems to point that whilst the threat of global risks to the US economy seems mitigated, and whilst US inflation seems under control, still there are all the possibilities for a 25 basis point rate hike in June 2016. Even with a slow-down to an annual rate pf 0.5% GDP growth still the fundamentals for the US economy are sound. Therefore, the USD is not going to tank immediately even if there is a gentle correction and side-ways trading in US equities in the weeks ahead. An equities correction was overdue and the USD needed a breather before it resumes its next wave up with a long march.
Now, coming to the new area of concern that raised itself this week and its nothing to do with Apple stocks falling suddenly and a looming correction in US equities. China once again has got traders nervous. Just when we thought
that China would manage to grapple with it's huge
problems of corporate debt then along came a spider and showed us a lot more information that has the potential to hit global markets once again. It's that ugly! Currently Chinese debt levels have ballooned to and incredible 237% of GDP. Now putting that into perspective, that is double the debt level at the time of the Lehman's crash in 2008. We already saw what a sneeze China caused in global equities markets last year 2015 and now add this to the Brexit problem and we certainly have two large areas of global risk over the next coming months in case we see a stampede of investors heading out of the UK and Chinese economies. Such developments would be unwelcome as it would lead global money to bid the Dollar and flood into US bonds which will then drive yields lower. The last thing we want to hear about is a US specter of deflation. We only need to look at Japan in the last 30 years to understand the risks of deflation that can appear when bond yields slip into negative territory. What would it take to spark off the China stampede? Very little indeed. China is attempting structural reforms in the banking market but will it be too late because investors are fickle? The whispers going round the trading floors right now are making large bond traders take a closer look at China once again in making the very first short positions. Once initiated, a large trader tends to develop the idea by watching other large traders, and a few shorts could lead to more whispers and even more shorts rapidly building up until the next IMF warning literally brings the whole house down and with it; even the US equities markets as demonstrated last summer 2015. It's that bad. Forget the Apple story this week; there's another story over the horizon looming ahead.
Altogether this week the USD took a beating and so far this year has depreciated about 4% against a basket of major currencies unlike last year where it appreciated by about 20%. Moroever, the COT figures show that some speculators are trying to short the USD now. Such short positions may be a short term move to capitalize on the traditional weakness of USD in Q1. Traditionally May is always a good year for the USD and as soon as the equities markets adjust and ease off the selling pressure we should see the USD coming back to the fore byt the end of May 16.
A completely new global macro trading scenario may unfold as follows:
Short Chinese/ Emerging Market equities and debt + long US equities and debt
= collapse of Chinese markets
= global contagion whereby global equities tank and flight to safety in US Treasury occurs and bids up USD in the process
= Dow comes under pressure and plunges 2000-3000 points before consolidation in a month
= US debt markets become saturated on the long end 10-30 year.
= Investors begin to move out of Treasuries and swoop to grab bargain US equities.
= US strengthens once again in the entire process.
The traditional havens for flight to safety like the CHF and Gold are fast losing relevance in the modern world and in the event of any crisis triggered by Brexit, or on a larger scale, China would lead to international investors piling into the only security worth holding - US treasuries because of the sheer scale of currency movement that may occur and would dwarf nominal value of bullion and CHF trades.
The result would be the next deflationary demise whereby China becomes the may-have been story of the new century. China is fast sinking into a copy cat scenario along the manner of Japan in the 90's and still Japan cannot emerge out of the asset deflationary spiral.
In my global macro analysis the major barometers I am look at for 2016 are as follows:
US Dollar - 93.054 -0.710 -0.91% - the global base currency (hedge funds are neutral at the moment waiting fresh signals from the US Fed on 1-2 25 bp rate hikes later this year. USD needed to pause as GDP slowed down for Q1 16 but Q3 should see GDP expansion and thereby push forwards the USD again. If the China crisis part 2 emerges this year there will be a stampede for US products)
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that China would manage to grapple with it's huge
problems of corporate debt then along came a spider and showed us a lot more information that has the potential to hit global markets once again. It's that ugly! Currently Chinese debt levels have ballooned to and incredible 237% of GDP. Now putting that into perspective, that is double the debt level at the time of the Lehman's crash in 2008. We already saw what a sneeze China caused in global equities markets last year 2015 and now add this to the Brexit problem and we certainly have two large areas of global risk over the next coming months in case we see a stampede of investors heading out of the UK and Chinese economies. Such developments would be unwelcome as it would lead global money to bid the Dollar and flood into US bonds which will then drive yields lower. The last thing we want to hear about is a US specter of deflation. We only need to look at Japan in the last 30 years to understand the risks of deflation that can appear when bond yields slip into negative territory. What would it take to spark off the China stampede? Very little indeed. China is attempting structural reforms in the banking market but will it be too late because investors are fickle? The whispers going round the trading floors right now are making large bond traders take a closer look at China once again in making the very first short positions. Once initiated, a large trader tends to develop the idea by watching other large traders, and a few shorts could lead to more whispers and even more shorts rapidly building up until the next IMF warning literally brings the whole house down and with it; even the US equities markets as demonstrated last summer 2015. It's that bad. Forget the Apple story this week; there's another story over the horizon looming ahead.
Altogether this week the USD took a beating and so far this year has depreciated about 4% against a basket of major currencies unlike last year where it appreciated by about 20%. Moroever, the COT figures show that some speculators are trying to short the USD now. Such short positions may be a short term move to capitalize on the traditional weakness of USD in Q1. Traditionally May is always a good year for the USD and as soon as the equities markets adjust and ease off the selling pressure we should see the USD coming back to the fore byt the end of May 16.
A completely new global macro trading scenario may unfold as follows:
Short Chinese/ Emerging Market equities and debt + long US equities and debt
= collapse of Chinese markets
= global contagion whereby global equities tank and flight to safety in US Treasury occurs and bids up USD in the process
= Dow comes under pressure and plunges 2000-3000 points before consolidation in a month
= US debt markets become saturated on the long end 10-30 year.
= Investors begin to move out of Treasuries and swoop to grab bargain US equities.
= US strengthens once again in the entire process.
The traditional havens for flight to safety like the CHF and Gold are fast losing relevance in the modern world and in the event of any crisis triggered by Brexit, or on a larger scale, China would lead to international investors piling into the only security worth holding - US treasuries because of the sheer scale of currency movement that may occur and would dwarf nominal value of bullion and CHF trades.
The result would be the next deflationary demise whereby China becomes the may-have been story of the new century. China is fast sinking into a copy cat scenario along the manner of Japan in the 90's and still Japan cannot emerge out of the asset deflationary spiral.
In my global macro analysis the major barometers I am look at for 2016 are as follows:
US Dollar - 93.054 -0.710 -0.91% - the global base currency (hedge funds are neutral at the moment waiting fresh signals from the US Fed on 1-2 25 bp rate hikes later this year. USD needed to pause as GDP slowed down for Q1 16 but Q3 should see GDP expansion and thereby push forwards the USD again. If the China crisis part 2 emerges this year there will be a stampede for US products)
EUR/USD - 1.14535 +0.00951 +0.84% - the 2nd liquid currency
(hedge funds are neutral at the moment with revised shorting if a spike to the 1.20 mark and a China crisis could sink the Euro to the 1.05)
(hedge funds are neutral at the moment with revised shorting if a spike to the 1.20 mark and a China crisis could sink the Euro to the 1.05)
GBP/USD British Pound 1.46110 -0.00060 -0.04% - the 3rd liquid currency
(hedge funds may shortif GBP breaches 1.50 but a Brexit volatility will increase nerves and widen uncertain trading ranges)
30 DAY FED FUND May 99.6375 0.000 0.00% the basis for US rates
(hedge funds are shorting at every spike)
DJI 17773.64 -57.12 -0.32% the body for US equities
(hedge funds are buying at every dip as the market corrects itself after this week's disappointing earnings season for Q1 16 and GDP data. But a China crisis has the ability to push the Dow down 2000 points just like that whereas a stumbling Apple was shrugged off - hedge fund traders are selling deep out of the money calls but very reluctant to sell puts commanding very high premium now)
SP 500 2065.30 -10.51 -0.51% the core engine for US equities
(hedge funds are buying at every dip but nervous now the China whisper is spreading around the top trading units - straddles are coming into play)
VIX 16.90 + 0.4 - 2.50% - the volatility of US stock options
30 DAY FED FUND May 99.6375 0.000 0.00% the basis for US rates
(hedge funds are shorting at every spike)
DJI 17773.64 -57.12 -0.32% the body for US equities
(hedge funds are buying at every dip as the market corrects itself after this week's disappointing earnings season for Q1 16 and GDP data. But a China crisis has the ability to push the Dow down 2000 points just like that whereas a stumbling Apple was shrugged off - hedge fund traders are selling deep out of the money calls but very reluctant to sell puts commanding very high premium now)
SP 500 2065.30 -10.51 -0.51% the core engine for US equities
(hedge funds are buying at every dip but nervous now the China whisper is spreading around the top trading units - straddles are coming into play)
VIX 16.90 + 0.4 - 2.50% - the volatility of US stock options
Crude Oil WTI - 46.02 -0.01 -0.02% - a barometer of world trade
(hedge funds are shorting at any possible test of the 50 mark and this week saw some strong gains in WTI as a result of short term Dollar weakness. A China crisis has the ability to sink crude oil in line with the Goldman Sachs prediction to 25 Dollars a barrel - volatility is creeping back into the crude market)
Gold - 1292.995 +27.420 +2.17% - a hedge against inflation
(hedge funds are going to short the next challenge in the 1300 area but a China crisis could lead Gold over the 1300. Gold has gained dramatically this week over 60 Dollars in an impressive showing as USD came under pressure thus presenting investors with a chance to buy gold cheap. Hpwever, in the longer run the USD will continue to grow and gold will thereby sink in price over the longer term.)
(hedge funds are shorting at any possible test of the 50 mark and this week saw some strong gains in WTI as a result of short term Dollar weakness. A China crisis has the ability to sink crude oil in line with the Goldman Sachs prediction to 25 Dollars a barrel - volatility is creeping back into the crude market)
Gold - 1292.995 +27.420 +2.17% - a hedge against inflation
(hedge funds are going to short the next challenge in the 1300 area but a China crisis could lead Gold over the 1300. Gold has gained dramatically this week over 60 Dollars in an impressive showing as USD came under pressure thus presenting investors with a chance to buy gold cheap. Hpwever, in the longer run the USD will continue to grow and gold will thereby sink in price over the longer term.)
Pieter Bergli - Trader X16
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