We knew it was an event heavy week and that extreme fear was priced into risky assets, but the ensuing moves across markets were prolific.
The question for this week is whether to chase, to buy weakness within the short term trend or to counter.
The fact we saw US 10-year Treasuries drop 26bp on the week to 4.57%, with 10-year real rates -23bp to 2.17%, catching a market that was positioned heavily short. As buyers covered and even reversed in US Treasury exposures, the pressure valve was released on the equity market, where the result was the biggest weekly gain in the S&P500 (+5.9%) of the year, reclaiming the 50-day MA. High short interest stocks went on a blistering run.
The Nasdaq100 had its best weekly gain since January and price eyes trend resistance at 15,181. The VIX index was crushed 6.4 vols to 14.9%, while High Yield credit spreads tightened 39bp.
The market has certainly questioned the US exceptionalism story, which had resulted in so much capital flowing into USDs. While the US Treasury Department’s preference to skew upcoming bond issuance to shorter tenors helped flatten the US 2s v 10s yield curve, we also saw a clear cooling in the US nonfarm payrolls report, marrying with a weaker ISM manufacturing and services, and consumer confidence report.
A weaker USD has changed sentiment
FX implied volatility is trading at its lowest levels since 2022, and we saw the USD universally shunned, losing 1.4% w/w, with high beta currencies (CLP, COP, MXN, NZD, AUD) all putting on a show and seeing some huge gains. GBPUSD stopped short of 1.2400, with EURUSD eyeing 1.0750.
- The first full trading week of the year awaits
- 2025 Outlook: What next for developed economies and currencies?
- A high-stakes week for traders in global markets
Positioning has played a big part in the moves, with both bond and equity shorts covering hard, and risk hedges being unwound, amid a dusting of aggressive organic longs being put on. With a decent amount of the re-positioning out of the way, while a cooling of data is acceptable, if the economics darkens there will be a tipping point where it negatively impact sentiment and we’ll likely see equity and bond rally concurrently.
The fact that Secured Overnight Financing Rate (SOFR) futures priced an additional 20bp of cuts for 2024 (to price 106bp of cuts) highlights the markets vision of slowing economic trends. Debating when the first rate cut comes from the Fed is all the rage again, where the market prices this action at the May FOMC meeting. Look for US mega-cap tech to work well if this theme gets traction.
Will the market pause for breath?
As we look ahead at the new week, we see the event risk is on the light side, so we may see the market pause for breath. With 17 different Fed speakers, including Chair Powell, due to speak this week we may see some modest push-back on easier financial conditions and that may unsettle risk. My preference is to buy weakness in equity and risk FX, as it feels like the rally in long-end US Treasuries has been a tad too powerful. An open mind is always essential.
Out of the US data and central bank chatter, the RBA meeting, China data and data flow from the LATAM region will garner interest.
Trades I like include short NOKSEK, USDCLP, EURAUD, EURCHF (into 0.9670) and US crude. On the long side AUDCAD, coffee and GBPCAD.
Key event risks for the week ahead:
Reserve Bank of Australia (RBA) meeting (Tuesday)
The meeting offers a clear risk for both AUD and ASX200 exposures. While economists are largely on the same page with a 25bp hike, the rates market prices a hike at 60%, with a total of 43bp of hikes priced to peak rate in June 2024. The base case is for a 25bp hike, but it certainly wouldn’t be a complete shock to see them on hold. AUDUSD looks constructive for 0.6600, however, I also like short EURAUD trades for a swing move to 1.6250.
RBA Statement on Monetary Policy (Friday)
The RBA will release its new economic projections, with core CPI likely to be revised up 40bp for Dec 23 to 4.4%, and headline CPI to 4.5%. We should still see the RBA getting back to the 2-3% inflation target range by December 2025. Unemployment should be revised lower, while GDP assumptions revised modestly higher in the years out.
China trade balance (Tuesday)
The market consensus is for a further improvement in the pace of decline with imports to come in -4.5% and exports at -2.9%.
China CPI/PPI (Wednesday)
The market looks for CPI to print -0.2% and PPI -2.8% (-2.5%). Unlikely to be a major event risk, with USDCNH driven by the USD.
UK Q3 GDP (Friday)
The consensus is for -0.1% qoq / 0.5% yoy, which are hardly inspiring growth numbers. While GDP is old news, the data could still influence the GBP given how sensitive traders are to growth metrics. Positioning shows a market heavily short of GBP, notably real money accounts who hold an extensive net short exposure. Leverage funds (mostly hedge funds) hold a decent short exposure too and have built on it over the week.
