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The Daily Edge is authored by Ivan Delgado, Market Insights Commentator at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth look of market dynamics, factoring in fundamentals, technicals, inter-market in order to determine daily biases and assist one’s decisions on a regular basis. Feel free to follow Ivan on Twitter & Youtube.
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It cannot be argued that risk continues on the mend. Equities found fresh buyers, bonds sold, the VIX came down to 15.00, but still, a key question must be asked. Is the market growing excessively complacent to the risks stemming from the new highs in USD/CNH? The ongoing depreciation in the Yuan tells us the market is not buying into the thesis that China and the US will reconcile its hard-line stance on trade, which leads me to think, the disconnect between risk up and Yuan down cannot go on much longer. In the meantime, the Yen has been sold in response to more benign conditions as the market goes through a round of re-leveraging into riskier assets. The USD, at times a candidate to depreciate when the market goes ‘risk on’, seems to find a greater endorsement by buy-side accounts on positive US data and improved ‘carry trade’ dynamics. The Canadian Dollar, even if fears of Oil supply disruption in the Middle East keeps the price of Oil underpinned, failed to sustain its strong buy side momentum from early Europe. The three currencies that are finding relentless follow-through sell side flows include the AUD, NZD and the GBP. The former Oceanic block in response to lower Yuan valuations and a mixed Australian employment report, while the GBP remains in incessant selling pressure, driven by technicals, which has deteriorated due to the uncertainty in the Brexit front as Theresa May starts to consider her own (Br) exit strategy as Prime Minister amid the protracted impasse on her withdrawal agreement.
* The Information is gathered bt scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
For the first time since the US-China knocked heads in the trade negotiation process almost 2 weeks ago, the S&P 500 has finally found enough buying interest to shift the focus back to the upside. Not only the hourly structure, based on the Dow Theory, is building higher highs and higher lows, but the micro and macro slopes, represented via the 25 and 125-HMAs, have reverted back to bullish. The drop in the VIX towards the 15.00, paired with higher pricing in junk bonds, aided the bull run.
When it comes to the US fixed-income, the picture is not as rosy, even if the run higher holds its fair share of merit considering the US-China stalemate in trade. Unlike the S&P 500, the US 30y bond yield is yet to break its bearish structure and revert its macro slope from its current bearish bias.
The bullish run in the DXY, at this stage, is not a function of risk conditions, but rather it appears to be mainly driven by improving US fundamentals, as per Thursday’s positive economic data, alongside the lowering of implied volatility in equities, which alongside the globally synchronized dovish bias by Central Banks, still promotes the idea of buying USDs as a vehicle to get yield via ‘carry trade’.
Interestingly, the recent ‘risk on’ flows in equities is yet to debunk the prognosis of a market in full ‘true risk on’. Based on the price action of the Japanese Yen index, it’s far too early to speculate on a sustained recovery in risk as the market has simply permuted into a period of consolidation. The bullish macro slope and the absence of a clean bearish price structure prove this point.
The ability of the RORO model to act as an accurate analytical tool in order to assess risk conditions, without a doubt, hinges on the performance of Chinese assets, intertwined like never before to the manifestation, via price action, of where the market sees the US-China trade talks heading.
The new highs in USD/CNY, getting into closer contact with 7.00, reveals a story of ‘disbelief’ about the ability of neither China nor the US to back off from their respective trade demands (no side interested in losing face here), with the depreciation of the Yuan a byproduct of the dire outlook in upcoming talks. The performance of Chinese equities, while improving, remains too modest in nature to read too much into it, especially when China’s sponsored funds have contributed to the rebound.
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