The Week Ahead From Nic Lenoir
Nic Lenoir of ICAP
The data calendar is very light this week. The most of important piece
of data is the Empire manufacturing survey which will or will not
confirm recent uptick in industrial production. Claims will be of note
as well after last week's uptick. We are still far from seeing a trend
confirming the job market is on stable footing. If this continues we
will end up with yet another disappointing NFP headline and lower
unemployment rate as the participation rate in the active population
Most of the focus will be on the international scene: food riots in Algeria and Tunisia where it led to the ousting of the president are not without reminding me of those observed in 2008. As I was in France over the weekend I did get much closer to the situation with Tunisian protesters creating havoc in Paris and gruesome scenes of violence. The level of public anger is scary and there is little doubt that this is something a lot of political leaders around the world should watch and reflect upon: it could happen to any of them faster than anyone thinks.
In 2008 like now inflation/peak oil was all the rage and the concern of financial observers. History showed us however that inflation driven by a weak USD is not sustainable in the face of a weak economic tissue. The USD is at levels that are not sustainable from an economic standpoint here. Interestingly after taking profit at 80.80 on our DXY longs the market tested Friday and this morning again the key support/buy level 78.80. As long as we do not have a daily close below that support longs initiated in the 78.80/79.00 should be held as I believe a bullish break-out would be the ultimate pain trade which Murphy's law tells us always materializes. Similarly watch for gold trading below 1,350. For now the precious metal is stuck on the 1,352/1,397 range, and a breakout either way should indicate the direction of the next big move.
Bunds have underperformed US treasuries as we expected and appear to be moving towards our 121.45 target. A break below 123.76 will confirm further acceleration. 10Y US treasury futures appear to still be shaping a bear flag. As long as 121-25 holds as resistance we keep a bearish preference.
2Y Swap spreads are getting close to support. If DXY holds support and since EURUSD has rejected the 38.2% retracement so far one cannot exclude that the latest round of European bail-out talks will spur anxiety in credit markets. So far Europe is offering nothing new and rolling out the same lame lipstick on a PIIG strategy for every country.
Little new to add on my end on the subject other than the problem is structural and will not be solved by the EFSF or any other joke of the sort. Entering swap spreads in the high teens would make sense here having played that trade successfully a few times already. With EDM1 approaching 99.60 put structures such as 99.62/99.37 put spreads are starting to be attractive again as well.
Watch VIX here. We had succesfully recommanded 17/16 January put spreads late in December, but here we are flirting dangerously with the lower Bollinger bands. This kind of excess usually leads to sharp reversals.
We would close out bearish structures and look for upside here.
Yesterday was a holiday but the Nasdaq posted a bearish key day reversal on the announcement of another medical leave for Steve Jobs. We have seemingly a 5-count bullish pattern completed since the lows in July also so a pull-back could be quite sizeable. Keep in mind that Apple represents 21% of the Nasdaq.
Good luck trading,