Quick Morning Macro Update
Submitted by Nic Lenoir of ICAP
S&P future are currently right against our 1,049 upside confirmation resistance. It is interesting to note that the hourly 21-RSI has retraced to 62 already with relatively little advance in terms of price compared to the recent sell-off. We feel there is a risk of another dip in the immediate future if data disappoint in any way since we have burnt a lot of upside momentum on consolidation. The wave count on the downside impulse would then imply we have only completed 3) and are in a consolidation before the final push lower.
This however is not incompatible with our assumption that a retracement to 1,064/1,070.50, which we think is in the cards, will only be a prelude to another leg of weakness for risky assets. If anything the price action confirms we are in an overall bearish dynamic, especially compared to other retracements in equities since June.
Gold continues to lead the decoupling between equities/FX and commodities. This price action becomes almost more rational here while opposite to correlations observed since March. If commodities keep pushing higher without the supply/demand or the overall economy justifying it, it should be a negative. Also, since the government deficits are pretty much a worldwide phenomenon at this point, it would make sense to see commoditiy benchmarks appreciate against all currencies as a hedge against the fiat money system. Still bear in mind commodity prices diverging too much from the physical picture, while it can last for quit some time, will necessarily be met with a brutal experience of gravity and reality.
It seems the expectations of better employment picture have spread across the market, which is part of the last 12 hours' positive dynamic for risk. The employment chart here shows how NFP headline is lagging against challenger and ISM surveys. Also this month's ISM employment component not featured on the chart was much better than expected and seem to invalidate the recent slowdown. Today's challenger will be crucial in confirming this, and justify the positive expectations for Friday's release. Our chief economist Lou Crandall argues that seasonal adjustment are part of the gap between NFP and the other indicators and could last for a while as the statistical weight of the past 18 months of very negative numbers gets slowly diluted.
There have also been many downside structures being put on in Fixed Income positioning the market to benefit from higher rates. This is a not only positioning for a good employment release, but also a change in the fed statement at today's meeting. We think the Fed will make a change reflecting a need for flexibility and reactivity if conditions keep improving at this pace, and the need to balance the difference of opinions within the commity. We had recommended 120 puts expiring in December for the Bund forecasting the anticipation yesterday morning. Now that we moved from 12/14 market to 25/27 we think a lot of the upside has already materialized, and we would in fact probably take paartial profits while keeping some exposure for those already in the trade in case something material happen, but should the Fed be overly aggressive and make a game changing statement there will be time to join the downtrend in Fixed Income after the fact rather than join in on already well subscribed and rich in premium strategies today.
Good luck trading,