Guest Post: Global Macro Update

Submitted by Nic Lenoir of ICAP

Certainly today started with a very strong risk appetite, and the ISM release will help carry the momentum with PMI/ISM giving the markets an excuse to shrug disappointing GDP data. It also feels like there is a building consensus that going into the fall elections markets will have a strong bid. It makes sense to expect all sorts of stimulus, stimulus promises, and information spin, given that a populist approach where major equity indices are the benchmark of success for politicians has been the mantra for Western democracies over the past 30 years. Basically monetary expansion and propping of financial assets has been the response to the shocks of the 70s after the end of the fight against inflation, and please keep in mind when thinking about this issue that credit expansion and monetary expansion are very different from rates policy, though both have been used to achieve the same goals over the past few decades. In that sense comments by Mr. Greenspan that a rally in equities would be more beneficial to the economy than anything else is very revealing, if not incriminating in my opinion...

Technically even though in the medium and long term I remain bearish, I have been bullish for the near term. I do not think the current increase in risk appetite will carry as far as the elections. We had a violation to the downside at 1,083.50 for the S&P future on Friday (I had 1,087.50/1,085 as key support) but if we are willing to consider this an irregular wave 4 then the updated upside target inferred from the sub-structure of the rally since 1,050 is 1,025.75. We have also already discussed using the attached daily chart that 1,026/1,046 is a huge cluster of resistances, so for the short term we will watch the pattern evolution of the move from 1,083.50 in conjunction with the key resistances coming up in order to pick the top before our medium-term bearish picture kicks in. Watch the 1.0130 support in USDCAD and the 127.10 support in Bund futures as they could well coincide with the highs for equity indices.

Let's keep an eye on VIX to support this analysis. As highlighted several times in the past reversal patterns outside the bollinger bands for the Vix have been key turning points for the equity markets, with the pattern observed in April the best testament to this trading pattern. We see that the bollinger bands for the VIX have been converging as VIX's volatility (do not cross eyes) has abated. This is a necessary step in the process of forming a bullish volatility/bearish equity market reversal.

On the flip side we keep an eye on the Nikkei. We keep focusing as always on our 9,090 support above which we are consolidating, and until broken indicates that we have considerable upside (close to 10% from here). USD 3M Libor versus 3M Euribor are also indicating that EURUSD is undervalued by over 10 big figures here, and a rally in EURUSD would typically be associated with a rising stock market.

Gold has held our intermediary support (trend support of wave 3) in Elliott) and looks like it has completed a bearish impulse from the highs (see 180-minute chart). We can therefore expect a corrective rally before the next bearish impulse which should take us below 1,150 and possibly down to 1,044 where fundamental traders will get an excellent buying opportunity. The corrective rally in the near term is coherent with our short-term bullish outlook in equities (the top could be reached soon at this pace).

Beyond those directional calls there is an interesting relative value opportunity building up in EURGBP. As can be seen on the chart which compares the rate spread between 2Y swaps in EUR and GBP and the EURGBP currency pair, we recently have had a quite unusual divergence between Fixed Income and FX. If the Elliott Wave analysis proposed in the charts EURGBP Daily and 180 is accurate, 0.8182/0.8202 could be a good buy level for EURGBP, and for people who prefer to remain market neutral buying short sterling puts could be a great way to play the convergence without directional market exposure. We had already recommended buying a couple weeks ago short sterling puts against selling Eurodollar puts as both skews were extremely high yet USD rates are in our opinion going to stay floored a lot longer, and are less at risk of a sovereign scare triggering a bond sell-off. The market timing also seems pretty good to be selling UK Fixed Income, so the relative value play is very attractive here.

Good luck trading,



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