When the market talks...

American readers of a certain vintage may recall a series of advertisements trumpeting the advisory acumen of broker E.F. Hutton, noting that "when E.F. Hutton talks, people listen."



While the most acute listeners in the 1980's turned out to be the Feds (Hutton was done for check kiting and money laundering for the mob, causing it to be merged out of existence), yesterday's price action called to mind those hackneyed adverts of decades gone by.  In this case, however, the agent worth listening to is not some brokerage savant but the market itself.

Macro Man noted in yesterday's post that the DXY had reached what seemed to be a critical level of support.  Early doors, it looked like the level had broken and the door opened for a further downdraft.  It was at that point, however, that the market spoke...and your author, for one, was listening.  Price action around key technical levels can often be revealing, not only in whether a given threshold is breached but the market's path in doing so (or not, as the case may be).

Yesterday's failed attempt to punch through DXY support, followed by a strong intraday rally to close higher on the day, offered a fairly compelling argument that the dollar's downdraft may be over, if only temporarily.   For sure, the candle is one consistent with a bottoming/reversal, particularly when it comes after a period of such pronounced weakness.


Obviously, there have been some dollar-supportive catalysts along the way.   Tuesday's decision by the RBA to cut rates was not particularly surprising, but neither was it an obvious outcome, either.   To be sure, Q1 CPI was shockingly low, but there are legitimate questions as to how much impact the RBA can really expect to have on domestically generated inflation as the cash rate moves ever closer to "pushing on a string" territory.   The obvious channel by which the rate cut could could impact inflation is of course the exchange rate, and the Aussie has duly wet the bed.

While the AUD has also weakened on a cross basis, its recent travails does draw some negative attention to other commodity currencies, particularly given suspicions in some quarters of the market that much of the recent commodity rally is merely a function of some big Pangzi scheme.  The magnitude of the rally in some other commodity-linked currencies has been little short of stunning; yesterday morning, USD/CAD was more than 22 figures below its highs of the year.  Needless to say, it didn't close there, and broke some naive trendlines off the highs to boot.


Again, the candle really couldn't be more bullish...but what about the fundamentals?  Macro Man re-ran the simple USD/CAD model he wrote about a few months ago, but this time regressing 6 month changes in the variables, rather than simply levels.   Unsurprisingly there's a pretty decent fit over the past few years, and the message currently is that USD/CAD has overshot to the downside.


While the magnitude of the "mispricing" is certainly not unprecedented, combine it with the powerful statement from yesterday's price action and there looks like a decent set up.   Positive technicals, positive fundamentals, and good risk/reward checks most of the boxes for a solid tactical trade, and Macro Man has acted accordingly.

Finally, given the importance of China in, well, everything, Macro Man would be remiss in not mentioning developments there.    While USD/RMB fixed 378 pips higher last night, that was actually not much of a story...the basket was totally unchanged.  No, the real story was the previous day, when USD/RMB fixed largely unchanged...and, thanks to a large dollar decline against everything else, the CFETS basket dropped some 60 bps.


Now, you only need vision a little better than Stevie Wonder's to see what Chinese FX policy has been this year.  Following the volatility of the first eight weeks of the year, the authorities have managed to weaken the RMB on the Q.T., with little disruption to the rest of the world.

However....IF the dollar is going to bounce and IF SAFE remains intent on a gradual weakening of the RMB versus the basket, the necessary upshot is that USD/RMB is going to have to turn around and start boogieing higher.  Readers can reach their own conclusions as to what it might mean for other assets.   As for Macro Man, let's just say that the message he's getting from the market makes him  more inclined to trim his (still long) GDX than (short) SPX position at this juncture.


Previous
Next Post »

30 comments

Click here for comments
Polemic
admin
May 4, 2016 at 7:35 AM ×

Here's one theory why usd/cny is flat with the index weakening. Because Shanghai G20 plan is for US to ease and EU and Japan to tighten to achieve just that.

http://dailyreckoning.com/japan-secret-shanghai-accord/

Apply pinches of salt to taste.

Reply
avatar
washedup
admin
May 4, 2016 at 8:44 AM ×

Pol - that makes sense and I happen to be one of the believers of the shanghai 'understanding', calling it an 'accord' gives it too formal a label.
The only problem, of course, is that just because markets were worried about a certain issue from, say, july 15 to march 16, basically guarantees that by the time the policy makers are patting themselves on the back for having put yet another genie in the bottle, the markets will already be planning to worry about something else altogether, which may not even be in the realm of something within the bailiwick of central banking.
The turning point during major previous episodes of risk aversion in the last couple decades (and no, the last year does not fit the bill of major illness, just the average 2 and half colds per adult per year criterion) was when micro scale news, such as company reports, accounting scandals, CFO's showing up at earnings calls clearly reeking of vodka etc etc, started to lend color and shape to the macro landscape. We have not seen that this time - the closest we got was the DB coco issue, but was more in the realm of small kitchen fire as opposed to major building conflagration.

Reply
avatar
Polemic
admin
May 4, 2016 at 11:17 AM ×

BTW .. great post MM.

I m actually so confused as to what to do now I feel like going flat everything and just owning some "Leicester City"s. Where can I get that 5000/1 gold bet you mentioned yesterday?

Reply
avatar
Bruce in Tennessee
admin
May 4, 2016 at 12:34 PM ×

I think if the markets still have a discounting mechanism, (remember that markets are always looking ahead groupthink of another era?), that Trump's possible election after last night means Lefty's ideas on the strengthening dollar should carry more weight this morning.

Reply
avatar
Bruce in Tennessee
admin
May 4, 2016 at 12:56 PM ×

"Barclays has become the first high street bank since the financial crisis to launch a 100% mortgage in the latest sign of a return to riskier lending. The bank is allowing some buyers to take out a mortgage to 100% of the value of the property, without needing a deposit." (FT)

...Here's the deal. Greenspan woefully underappreciated the dangers in the first housing crisis. 100% financing then, too...I am still patient and awaiting an inflection in these markets. Credit seems to be the only real driver at this point in the experiment. I understand my reasons for what I plan to do in the near future. I hope everyone else has had a thorough looky-see at what they expect this yeaz.

Reply
avatar
abee crombie
admin
May 4, 2016 at 1:29 PM ×

ADP missed by ~ 40K, Only the 3rd time we have missed by that amount since mid 2013. ISM employment still below 50 as well. Perhaps we miss NFP, but are the markets going to be really upset? 6m avg of NFP remarkably stable for past 2 years, I think this is what fed start to look at not just 1 or 2 months, like others said

Looking at MXN resistance at 18 as possible EM FX weakness tell. Getting close. JPY crosses as well

Not very opinionated as well at this juncture. No crystal ball here

Reply
avatar
Booger
admin
May 4, 2016 at 1:37 PM ×

That was an impressive dollar rally but still mainly technical, given the oversold level. I still think there is a good chance of DX going to 90 before the turnaround. ADP weak today and NFP may also be weak. I think that may well take out interest rate expectations for the rest of the year.

I have said it before, quite incorrectly, a few times, but I can't resist at this point ! I feel a big mudslide coming on soon so grab the nearest fixed toilet seat ladies and gentlemen, and watch for nice entries to position into long dollar. But be wary of NFP and getting in before the dollar correction plays itself out.

Reply
avatar
Booger
admin
May 4, 2016 at 1:43 PM ×

Abee: the market should care, when employment starts rolling over, there is nothing much positive left in terms of macro leading or coincident indicators. I guess one month does not make a trend though and it depends on the extent of the miss. I think with temp employment going flat recently, home sales, retail sales all going midly backward, GDP slowing, a poor patch in employment will start to create worry.

Reply
avatar
Anonymous
admin
May 4, 2016 at 1:50 PM ×

From one of my bookies today. Pantheon , whose data forecasting has been very good , think ADP will underperform today on Easter distortions - that won't be in NFP (note in NFP there will be a "lift" to Av Eanings on bi monthly payment dates)

Reply
avatar
Bruce in Tennessee
admin
May 4, 2016 at 2:01 PM ×

http://www.bloomberg.com/markets/economic-calendar

Highlights
The nation's output is slowing despite an increase in hours worked in what is the latest signal of structural weakness for the economy. Productivity fell 1.0 percent in the first quarter for the 4th decline of the last six months.


...Falling productivity in a time of ZIRP....Bulls make money, bears make money...but some may get caught this year..

...Come on over to the dark side JBTFD! I'm sitting up in the hammock, as I hear footsteps in the woods...

(it is a bear............)

Reply
avatar
Skr
admin
May 4, 2016 at 2:03 PM ×

Pol 11:17

I understand your confusion, that is why I tore up the rule book. Old hands need only back their gut and experience in these strange times.

Be interested in your view on Dr Copper.

Reply
avatar
johno
admin
May 4, 2016 at 3:25 PM ×

Interpreted yesterday's dollar price action similarly, but for lack of a strong view on any G-10 cross, just bought DXY. At 1.28, CAD looks about right to me, regressed on rate differentials and terms of trade. Inflation has held up, exports have done well (unlike Mexico, interestingly), and outside Alberta, the economy is fine. Chinese still pouring money into housing market (when/if this stops, Canada goes into the deep freeze). All to say, I'm not bullish CAD rates. And I'm not ready to sell oil here at $45, hence no strong view on CAD. Your trade looking good though ... interesting to see CAD the worst performer in G-10 despite oil bouncing. Very nice!

Reply
avatar
Anonymous
admin
May 4, 2016 at 3:26 PM ×

BnT -

When you finally do what plan to do, please, just the raise of a pinky finger as a sign would suffice.

Thanks!

-72bat

Reply
avatar
jbtfd
admin
May 4, 2016 at 4:03 PM ×

About those 100% mortgages, I think it's not quite as dire as the papers would have you believe. I heard that said bank will provide said 100% mortgage only if the relevant millennial buyer is backed by the bank of "Mom&Dad". Anyway, all property is over-priced, I would welcome a property crash (thus not gonna happen).

Back to non-property markets... I have looked closely at FX and can tell you definitively that I have no clue what's going on there. Some equity indexes are rolling over, but it's all a bit boring. Wake me up when the Chinese 'rebar speculators' crash everything and equities open down -5%.

Reply
avatar
Leftback
admin
May 4, 2016 at 4:15 PM ×

We have been short AUDUSD for a while, that's working nicely. We also started short CADUSD a few days ago, and finally added short EURUSD, to go along with long UUP. The point about the dollar is this: the usual Q1/early Q2 soft patch is almost over, so the FX market is starting to look ahead, and the infinite dovishness of Easy Janet along with some degree of softness in Friday's number has already been priced into USD and USTs over the last few weeks. At this point the whisper number for NFP is low, so anything around 200k is an "upside surprise", and could even trigger another sharp mini-squeeze in DX.

We would be very wary of US fixed income longs here, and anyone who has a lot of REIT common shares in the portfolio might get better prices in a month or two. Just sayin'...

We are short USO, and continue to note the oversupply in the market evident in storage levels for crude and gasoline that are extremely high by historical standards. We view the recent rally in crude oil as mainly technical, driven by relief of oversold conditions, a prolonged short squeeze and then maintained by short dollar "carry trades". A stronger dollar terminates the carry trade and exposes the crude oil market to trade on its fundamentals once more. We remain short IWM as US small caps (and HY) seem very sensitive to oil prices.

The above arguments regarding crude also seem to hold for industrial metals, where there is a lot of evidence of speculation driving the recent move. Gold and silver seem likely to follow their usual relationship with the dollar.

Reply
avatar
Polemic
admin
May 4, 2016 at 4:29 PM ×

skr -

Copper. It's looking as though its part of the rebar China commodity future spike and dump. Add in oil and, as LB says, we have seen a huge shorts wash out that eave us, s with equities in a mushy no-man's land of wash. So add that to my ' I don't know' list. Which makes sense because if I knew what was going to happen in coper it would be a good guide to general mood and hence what to do in other things.

Yours 'NFI Pol'

Reply
avatar
Anonymous
admin
May 4, 2016 at 4:33 PM ×

What happened in FX? Everyone wants to get out of the same position in a one-sided market, that is what it looks like.

Anyway, why are REIT ETFs rallying this strong? Is it the safe harbor right now? Or people believe that another real estate boom is developing?

Reply
avatar
Anonymous
admin
May 4, 2016 at 4:38 PM ×

To all commenters - what makes the secret Shanghai accord as a plausible event and not a conspiracy vs. the conspiracy of intermittent buying/lifting of markets by CBs and affiliated entities that's the been described as irrational/tin foil hat/etc? Both situations seem like he said she said w/o solid evidence...

Just interested in commenters' boundaries for the absurd...

Reply
avatar
abee crombie
admin
May 4, 2016 at 5:37 PM ×

From Gross, could agree more

"Investment implications: Prepare for renewed QE from the Fed. Interest rates will stay low for longer, asset prices will continue to be artificially high. At some point, monetary policy will create inflation and markets will be at risk. Not yet, but be careful in the interim.
Be content with low single digit returns."

I suspect utility and REITs have one final blowoff before tanking.. but its all just a sector game now with the quant funds. Big time negative correlation with some of hte more risk on sectors like financials & industrials with utilities and reits

Reply
avatar
Leftback
admin
May 4, 2016 at 5:52 PM ×

REITs are seen as safe - "b/c the Fed is one and done" seems to be the rationale. We like REITs in general, but not here. You'll get a better entry in the summer, 10%, maybe 15-20% lower. We are holding REIT preferreds but have been trimming the rest.

Reply
avatar
Leftback
admin
May 4, 2016 at 6:32 PM ×

Spoos, IWM and USO all making lower lows and lower highs in today's trading so far. Bearish short-term price action.

Support for Spoos at the 50 day around SPX 2040, so there is a good chance we see a bounce when we get down there. IWM likely to fill a gap down to 110 that we pointed out several weeks ago. If/when that is filled we will probably take some profits.

AUDUSD has support just below 0.7400, EURUSD around 1.1400, USDCAD resistance around 1.3000.

Reply
avatar
Skr
admin
May 4, 2016 at 8:14 PM ×

(Nfi) Pol

Copper.

Expecting indecision bars next two days, and looking for a down day on Friday for confirmation.
Forward same, to the weekly charts - rinse and repeat.

Best guesstimate.

Reply
avatar
Anonymous
admin
May 4, 2016 at 8:28 PM ×

Gundlach: Sell utilities, go long mortgage REITs

Reply
avatar
Anonymous
admin
May 4, 2016 at 8:31 PM ×

Drunkenmiller: Sell stocks, buy gold. Hard to disagree.

Reply
avatar
Anonymous
admin
May 4, 2016 at 8:36 PM ×

FactSet:
361 companies (80.0% of the S&P 500’s market cap) have reported. Earnings are beating by 4.6% while revenues have missed by -0.2%.
Expectations are for a decline in revenue, earnings, and EPS of -1.8%, -7.3%, and -5.0%.
EPS is on pace for -4.1%, assuming the current beat rate for the remainder of the season. This would be +1.0% excluding Energy.

Reply
avatar
Anonymous
admin
May 4, 2016 at 8:52 PM ×

Always suspected that Leftback was Jeffrey Gundlach but the above 2 divergent calls on mortgage REITs ends that notion, except, of course, if Leftback is of 2 minds lately :)

Reply
avatar
Leftback
admin
May 4, 2016 at 9:00 PM ×

REITs: Short term trim, Long term hold.

TUR appears to be "stuffed". USDTRY is soaring....

Tomorrow will be one of those meandering "day before the number" sessions unless something happens overnight. Wonder if the AUD is done falling? Keep half an eye on that and half an eye on Shanghai....

Reply
avatar
Cityhunter
admin
May 4, 2016 at 9:42 PM ×

Shanghai is becoming like a dead mkt - money is fleeing out. Wait for the iron and coal frenzy to burst.

Reply
avatar
Anonymous
admin
May 4, 2016 at 10:33 PM ×

I owe Leftback.err, Gundlach?, a few cold ones


https://www.dropbox.com/s/ag0y7jj17yg53p4/Holdings%20%20%20%20%20April-30-2016.docx?dl=0

Reply
avatar
Anonymous
admin
May 4, 2016 at 11:35 PM ×

LB - High inventories in oil are evidence of past oversupply not current oversupply. The supply/demand situation in oil is rapidly healing with US daily production down 800k from peak already, and further declines of c.100k per month locked in for next 6 months. There's a lot of uncertainty over OPEC supply (and obviously global demand would be impacted if we have the true china crisis), but probably we move to an undersupplied market sometime between early q3 16 to q1 17 (currently looking at very much earlier end of that). Once we start drawing inventories the price of oil will need to go up to $60-70 to stimulate increased capex spend to pull more future barrels out the ground given the long lead time.

Even shale needs 6 months to get properly motoring due to the delay in getting rigs back online. If the world needed US shale to actually grow in short order then it would be pretty expensive because there would be a lot of bottlenecks in the OFS side (getting rigs back from cold stack, getting new parts as you can no longer cannibalize old parts if u need to ramp quick). That would need expensive oil of more like $80+.

Reply
avatar