From Nic Lenoir of ICAP
Markets have remained range bound since the start of the year in Fixed Income and very little conviction seems to be present. Equities have been grinding higher but a lot of technical signs are flashing red and volumes are anemic so participation is minimal. Finally in FX the USD has also been range bound with the dollar index stuck between 77.5 and 81.5. Last week was another example, with slightly higher yields and weaker USD, but overall not much worth expanding on in the G10. However emerging markets took a beating from Wednesday onwards. Mexico & Brazil's stock markets are posting worrying technical patterns, following Asia which has been leading the way south. AUDUSD is sitting just above the 01/12 lows and the 100-dma and a break would confirm a move lower towards at least 0.95. The market broke the trend since last May on Wednesday while a retest pf the trend line as resistance is customary we would only look for selling opportunities here. This is in line with poor trading in emerging market bonds of late and China seems to be experiencing a liquidity crunch with the Shibor experiencing a lot of volatility (see chart).
Arguably other than jobless claims and GDP on Thursday and Friday the rest fo the releases should have only marginal influence on trading.
That leaves us with 2 sessions with relatively low volume on Monday and Tuesday where foreign news should dominate the tape before the state of the union speech on Tuesday. If recent history is any indication no matter what moronic promises are made on Tuesday night the market will celebrate on Wednesday. Sadly this tradition which should be serving an informative and accountability role has turned into a mindless populist positive self-reinforcement exercise. But how much progress or damage is done until then will most likely dictate the mood barring any shockers on Thursday and Friday. A lot of people are talking about a repeat of the HIA allowing companies to repatriate USD from abroad tax free. Note that the first HIA was the only positive year for the greenback between 2001 and 2008 pretty much. Definitely something to keep an eye on, though the question if it indeed happens is what will be the tradeoff. I have a hard time seeing democrats let Obama get away with that without demanding something in return, rightfully so as it is embarrassing to have big corporations getting away barely legally with single digit effective tax rates.
So with that in mind, range breaking price action is what one should be focused on going into this week. The USA 10Y CDS flirted with trend highs last week and any further advance past recent highs would be quite worrying as to the evolution of the sovereign credit crisis. 10Y US treasury futures are stuck in the 119-20/121-20 range, but a deterioration of the US CDS could take bonds through support. Similarly the market could take HIA 2.0 as bullish for the US economy and drive yields higher. Having been in a consolidating phase since mid-December a break-out will most likely trigger a lot of follow through. Our view is unchanged that the recent price action is more in line with a bear-flag consolidation before further weakness than a bottoming process.
Equity markets remain in an uptrend in the US and Europe but bullish momentum appears to be a lot more vulnerable. Watch for a break in the Dax below 6,950 (bullish trend line support). As discussed last week Bollinger bands for the Vix have converged quite dramatically recently making a bullish reversal in volatility outside the lower band possibly only a session or two away. Certainly given emerging market price action we will keep our eyes on developments in Vix and DAX confirming a more global risk-off trade is in the works. Friday the Nasdaq closed lower and has broken through recent trend support, and the Russell also closed lower (in fact it closed at the lows). The Russell has been a relative good leading indicator in recent history, so it definitely warrants caution.