The G20 Was A Dud, So What Now?

From Nic Lenoir of ICAP

Surprise surprise, the G20 was a flop. At least the Brazilian delegation had the good taste of not wasting the use of a private plane, a few suites, and that meant more hors d'oeuvres for Tim and Ben. Nothing was achieved, the final statement was about as non-committal as the fine print of any official document nowadays. German officials actually called out the US hypocrisy of talking down currency intervention when excessive monetary largesse has for only consequence an implicit devaluation. So if anything we know that we can't really count on any cooperation in the future. And Japan reminded everyone it would do whatever is needed to prevent excessive appreciation of the Yen, though people still wonder where the BOJ was at when USDJPY printed new lows. Markets jumped the gun and initially looked at this as a "risk-on" / status quo opportunity. However I am not so sure we can see much more in that domain until the Fed lets the cat out of the bag for good. After all equities had a run up of 10% over the last couple months, the dollar index has sold of 12% since June, and a lot of that move has been driven by quantitative easing expectations, so would seem to me a bit ambitious for traders to turn around and add to positions or initiate fresh ones one week ahead if the actual announcement (unless Ben spilled the beans over a harvest of Korean BBQ this past weekend). Gold, if it breaks above 1,350 will clearly make a case for further extension of the QE trades that drove the market the past few weeks and as long as 1,328 is not violated on the downside it is possible to view the price action here as constructive. For the reasons mentioned above I would wait for a break rather than try to front run the herd front-running the Fed. The Shanghai composite also looks like it peaked its head above resistance and triggered a bullish exit after flagging but that market is tricky enough and uncorrelated enough to Western equities that I would gladly wait to see some follow through being endorsed more broadly than just take that Index's price action at face value.



That is why I walked in this morning a bit suspicious of the price action overnight and I will remain so until we see a clear reversal of the buy signal in the VIX (see chart), crude oil breaking out above 84.5/85 (in which case traders should definitely get long), or the DXY make a fresh low. USDCAD seems to me like it is consolidating after the initial impulse. EURUSD and AUDUSD are a bit difficult to read. In terms of Elliott they don't really exhibit too much bearish characteristic but they are so choppy it would not be surprising if they consolidate more and have wide trading swings. The Dax is very interesting. After indicating the 6,675/6,750 as a potential topping area last week, we tested the lower end of this range this morning and left an inauspicious candle on the highs after gaping up. Should we gap down at or below 6,634 on open tomorrow in fact we would have an island reversal which is quite bearish to say the least.



Treasury futures' behavior was a bit peculiar today. After going vertical off of the the H&S neckline/support, the market reversed quite abruptly in the afternoon following the TIPS auction which was the first ever negative yield print. While I really like the idea of owning TIPS in case the Fed cannot manage the impossible task of successfully creating inflation without it being hyper, one thing occurred to me: the coupons are based on CPI which is the most manipulated data series out there or close enough to a tie with NFP. According to shadow stats reading were north of 6.5% during the last Fed hiking cycle if one used the definition prevalent in the 80s (stated from memory, facts might not be absolutely accurate but definitely the idea is there, apologies for the slight lack of precision). However your coupon would have paid you based on the much lower official reading of the CPI. While in the case of hyperinflation it would be hard to use enough gimmicks to mask the extent of the robbery taking place, you're still getting robbed of a solid 4% on your coupons... And to believe the Fed and the Treasury have input as to how the CPI is calculated when it precisely impacts the interest paying burden of the country or the credibility of its policies is of course a wild assumption made by ill-advised conspiracy paranoids... or is it? Food for thought. Even though you will probably get robbed owning TIPS, it could turn out to be a lesser evil if the dollar starts moving below the key 74.90 support and if anything today's auction's results might have made the longs of Fixed coupons a bit more uneasy at these yields levels.



Good luck trading,

Nic