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The Daily Digest is authored by Ivan Delgado, Head of Market Research at Global Prime. The purpose of this content is to provide an assessment of the market conditions for the next 24h of trading in order to assist one’s decisions on a regular basis. Follow me on twitter.
📊RATES BY NY CLOSE📊
Note: Markets in the US were closed to honor the memory of former US President Bush senior. As one can immediately tell, the board continues to be dominated by a sea of red.
In the FX space, movements were largely contained within familiar ranges, with the British Pound putting up a fight even if no technical resolutions were noted so far. The Aussie succumbed after a terrible Aus Q3 GDP and ended up the worst performer.
A dovish BoC led to a significant decline in the Loonie and the Canadian bond yields as the expectations of further rate hikes were dialed down. The deterioration in risk assets continues, and at the open of the ES futures market on Globex, a major sell-off forced the Chicago Mercantile Exchange to implement circuit breakers. This occurrence fits the storyline of risk-off.
Today’s major focus shifts towards the OPEC meeting. I’ve noted option traders tuing more bullish via the aggressive buying of ITM Calls + OTM Puts as protection. There are some tentative signs that some type of agreement will be sealed to reduce the oil output.
My prop risk-weighted index continues to deteriorate further, currently trading at the lowest levels since early July after the latest sell-off in the S&P 500 just cracked through the August lows, which as a reminder, happened to be when the China-US trade war was at its highest.
The impulsiveness of the move down in equities, via the S&P 500, bodes ill for risk sentiment right off the bat here in Asia, with futures testing the 2,660.00 region. Tuesday’s sell-off, when the market opened for the last time, came accompanied by the highest volume day since Nov 21, which tends to be a precursor of more pain ahead as it suggest a committed sell-side campaign in underway, with a clear target of 2,630 in sight now.
Shifting gears, the technicals in the US 30-yr bond yield communicate that we are likely to find some respite short-term, as the yield meets a major weekly support area (in red). On the way down, the yield absorbed with surprising ease an area of daily support (in blue) in a fall that carried much higher volume than its normal 20-day average. What this means is that the sell-side action is definitely finding plenty of commitment in a move that has meat on the bone.
The picture in the DXY is less clear, with very messy price action as of late, which indicates most of the cues to make judgement calls on risk will be obtained via the royal battle we are seeing between bonds and equities. The disconnect in Gold as a function of USD performance, now acting as a safe-haven vehicle once again, should be a major red flag that the risk-off environment, while potentially getting some risk-on intraday swings, continues to be structurally conducive to act defensively by sitting more in cash. At the bare minimum, it suggest a market that is tuing less constructive towards the US Dollar as the Fed slows down rate hike exp.
Bottom line, the risk conditions from an order flow and structural perspective, suggest that we remain in dangerous territory. Even if the US 30y bond yield recovers, the speed and volume of the declines in the S&P 500 make me wary of any risk-on flows finding sufficient support.
EUR/USD: Buy on weakness favored as valuation point north
The pair has been stuck in a 100+ pips range ever since the spike in demand off Nov 28 lows. Market makers and range traders have been dominating for now, with 1.13 to the downside being the line drawn in the sand by value buyers. I say ‘value’ because at present, any Euros being exchanged nearby the 1.13 are definitely offered at a discount based on where the German vs US yield spread and the Italian premium trade at. The decoupling is too obvious to ignore, which makes buying on weakness a very viable strategy. Ever since the origin of the demand candle on Nov 28, the price has been achieving higher levels, while any attempts to transact offers that meet the 1.1315/20 periphery are rejected in no time. Overall, this is a market that has written on the wall, buy it at discount prices for now.
GBP/USD: Playing with fire around the 1.27 area
As usual, this is a very tricky market to trade as we approach next week’s Brexit vote in the UK parliament. The sentiment surrounding the Sterling remains overwhelmingly negative as the market factors in a rejection of the Brexit pre-agreement by UK PM with the EU. I am expecting that any downside risks will steem as a result of Sterling’s demerits vs USD-centric strength. Neither the UK vs US yield spread on the long-side of the curve nor the DXY index offer enough justification to support a sustainable breakout unless is a GBP-induced move. The hourly chart remains extremely choppy, with 1.2680 – 1.2840 covering the near term eventualities for now. The implied volatility in the Sterling continues to highlight volatility ahead. Be reminded that intraday trading in the GBP pairs remains largely dominated by algo trading.
USD/JPY: Bearish tendencies set to extend
Selling on strength should be the main play in this market unless the technical picture is negated. For now, the technicals, with an active downcycle on the hourly, are leading the way. If we think of valuations, the flows should also be JPY positive judging by the depressed risk-off profile this week, coupled with new cycle lows in the US vs Japanese yield spreads. The area highlighted during Dec 5th report at 113.20 found enough of a supply imbalance to revert the short term recovery, with 113.00 (round number and POC) now being targeted ahead of the 112.70 hourly liquidity that lies undeeath. It really feels as this is a market that is prone to be sold on strength at every chance one has of engaging of decisions points. If this first attempt fails, watch for 113.40/50 as another major resistance area to engage.
AUD/USD: No end in sight to the long liquidation
The Aussie has seen a substantial removal of liquidity off its trend highs as buyers pulled the plug out of its trend-trading mentality as the rate adjusts to worsened fundamentals following a dismal Australian GDP in Q3. The daily cycle remains bullish, and I must say that the volume on the way down has been far from impressive, partly due to the close on markets in NY. The next level where a cluster of bids is expected can be found at the 0.7250, where the origin of a strong demand candle meets with an ascending trendline in the daily (major confluence). The Aussie may continue to flounder near term, vindicated by risk-off and weaker fundamentals, but technically wise, and as we know, the Aussie is a very technical-oriented pair to trade, any level below the 0.7250 area does offer some pristine levels to potentially be a buyer. Just be aware that the sentiment is very negative at present time.
EUR/USD: The Dec contract, about to expire by the end of the week, shows an interesting development as over 477 ITM Puts were bought on Tuesday, Dec 4th. Similarly, almost 2k OTM Puts were pulled out of the market. When combined together, it suggests that the outlook for the Euro this week is far from promising, which could easily be attributed to the increase in risk-off conditions the market was hit by during Tuesday. The increase in ITM Puts communicates players with an interest for a directional move prior to the contract’s expiration, while the reduction in OTM Puts equates to a decrease in interest to tap into options as a vehicle to protect one’s long views in the pair near term. Nonetheless, by scoping out the info presented in the chart, it’s still very notable to see the Put vs Call ratio in volume terms at 2.14, which means there is still a lot of interest to purchase cheap protection via OTM Puts.
OIL: Ahead of the crucial OPEC meeting, options traders are starting to show their hands. Based on the data collected on Dec 4th, Tuesday, the latest activity has taken a bullish tu as reflected by the increase in ITM Calls by over 800 contracts, which complements with greater commitment to buy OTM Puts to the tune of 3,418 new contracts. The highest concentration of OTM Puts remains around the $50.00 mark, while OTM Calls sees the most activity at $55.00.
US10Y: A lot of profit taking in the US bond market in the 10-year, which is no wonder considering the overstretched movement we saw. The decision to remove close In The Money (ITM) Calls by almost 75k contracts could be a precursor that the downside may be limited near term. Those removing their exposure must have a similar belief or else they’d still be in the trend. This action marries really well my views above that long-dated US rates may have reached an exhaustion climatic stage after the overextension seen this week.
Remember, if implied vol is below historical vol, the market tends to seek equilibrium by being long vega (volatility) via the buying of options, which is when gamma scalping is most present to keep positions delta neutral by covering one’s risk. On the contrary, if implied vol is above historical vol, we are faced with a market with unlimited risks given the increased activity to sell options. Other than GBP, which runs a far greater implied vol than any other currency, one should not be oblivious to the downside risks in EUR/JPY based on the current ratio above 2%, which means a market significantly short vega (volatility), as such, a follow through acceleration move through 127.70/80 may be on the cards amid the absence of gamma scalping.
📈BONUS CHARTS: WHAT ARE YOU MISSING? 📈
Stephen Spratt, Global Rates Strategist at Bloomberg, via a tweet, posted the sudden tu in fortunes for the rates outlook in Aussie land, noting that the “RBA OIS curve has now inverted”. The likelihood of a rate cut is now greater than a rate rise in 2019.
Did you know that our prop EM FX index has recently regained the 200-day MA. Throw into the mix the bearish structural breakout in the USD/CNY, and one can probably start making sense why JP Morgan, in yesterday’s research report, was constructive on EM FX. Read below.
One of the anticipated culprits that may lead to an eventual slowdown of the US economic activity is housing. In the chart below, Joe Weisenthal, Co-host of ‘What’d You Miss?’ on Bloomberg TV, shows some shocking stats about the state of affairs in the housing and real estate front, based on the deviation between actual data and expectations.
Morgan Stanley stands by its perma USD bear calls. In its latest research report, the bank reveals that it has added a new long play in EUR/USD for an ultimate target of 1.18. As I argued above, Morgan Stanley sees the downside resolution in USD/CNY as a potential catalyst to unravel further weakness in the US Dollar. EUR shorts in money markets may soon run to the exits, the bank believes. Find an extract of Morgan Stanley’s research below:
Sacha Tihanyi, Deputy Head of Emerging Markets Strategy at TD Securities, put together his thought on what could go wrong for China in 2019. Risks of China under-delivering on growth expectations? The massive 40%+ decline in its stock market this year is a reminiscence of a country in trouble, hard to argue against that bit of evidence. The analyst argues that next year’s underperformance may lead to greater monetary and fiscal support for the economy, exacerbating China’s debt burden and as a result, may see the Chinese Yuan under downside pressure as capital exits. Read TD Securities research extract below:
🏆QUOTE OF THE DAY🏆
“History provides a crucial insight regarding market crises: they are inevitable, painful and ultimately surmountable.” Shelby M.C. Davis
📌 IMPORTANT FOOTNOTES📌