EOW SUMMARY: RISK THE OVERALL WINNER - US30 & SPX @ 2% NEW HIGHS
Updated
End of Week Summary:
1. On the week we saw risk outperform safe havens for the first time since the brexit vote and the SPX and DJ30 set new all time highs by 2% and 1.2% respectively - somewhat encouraging given this was the longest period post-crisis that equity indexes have had since new highs, with a total time of apprx 1 year.
2. Given the articles attached, this week was also the first week where risk-on/ risk-off positive correlations broke down and went back to some degree of normalcy, with Gold, Yen and bonds ending the week down some 5 - although the TRY Military Coup did cause some risk anxiety late on friday and caused safe havens to par some of their losses by 1% to close down apprx 4%.
3. Drivers of the risk-on rally i must say did come as a surprise, given the relatively subdued economic climate post brexit, with little planned risk-on drivers in sight. However, it was JPY's surprise talk from PM Abe/ BOJ Kuroda easing/ stimulus speculations at the start of the week (speculations around y10-20trn) that gave risk markets some legs - despite the reliability of the claims being denied by much of the JPY Govt though there certainly is no smoke without fire.
4. The other winner of the week was USD, much of which was safe haven demand on Friday (TRY Coup) but $ strength had built through the week on the back of hawkish FOMC speak sentiment (see attached) and risk markets rallying, causing rates to also rally (UST 10y averaging +4-5%) where all have contributed to increased market confidence which has translated into higher projected rate hike probabilities for their Sept/ Nov/ Dec meetings - currently at 12.9%/14.4%/38%, which is pretty much a 100% increase in expectations on the week.
- Once risk got going, given the severe depression, it was unsurprising that it did manage to run away higher - as safe havens needed a correction higher, if only in the short term.
Next week Projections:
1. Given last week, and most of friday, the obvious expectation would be to expect risk to continue on the offer and making new highs - however, late on friday afternoon we saw risk-on/risk-off balance tip in favour of safe havens as the TRY Coup uncertainty increased risk-off demand.
- Friday traditionally is a weak day for risk anyway as 1) end of week sellers/ weekend flat risk books cause a natural selling of risk, and a natural buying of safe havens as portfolios look to hedge weekend event risk over the two days that the markets are closed (especially as the session ended i the middle of the TRY coup).
- That in mind, i was surprised to see risk even trading better than safe havens on mid afternoon Friday at all (until TRY) - with Yen falling to 106.3 and goldd down 0.9%, i was confident that we would enter Monday with a risk-on tone.
1. On the week we saw risk outperform safe havens for the first time since the brexit vote and the SPX and DJ30 set new all time highs by 2% and 1.2% respectively - somewhat encouraging given this was the longest period post-crisis that equity indexes have had since new highs, with a total time of apprx 1 year.
2. Given the articles attached, this week was also the first week where risk-on/ risk-off positive correlations broke down and went back to some degree of normalcy, with Gold, Yen and bonds ending the week down some 5 - although the TRY Military Coup did cause some risk anxiety late on friday and caused safe havens to par some of their losses by 1% to close down apprx 4%.
3. Drivers of the risk-on rally i must say did come as a surprise, given the relatively subdued economic climate post brexit, with little planned risk-on drivers in sight. However, it was JPY's surprise talk from PM Abe/ BOJ Kuroda easing/ stimulus speculations at the start of the week (speculations around y10-20trn) that gave risk markets some legs - despite the reliability of the claims being denied by much of the JPY Govt though there certainly is no smoke without fire.
4. The other winner of the week was USD, much of which was safe haven demand on Friday (TRY Coup) but $ strength had built through the week on the back of hawkish FOMC speak sentiment (see attached) and risk markets rallying, causing rates to also rally (UST 10y averaging +4-5%) where all have contributed to increased market confidence which has translated into higher projected rate hike probabilities for their Sept/ Nov/ Dec meetings - currently at 12.9%/14.4%/38%, which is pretty much a 100% increase in expectations on the week.
- Once risk got going, given the severe depression, it was unsurprising that it did manage to run away higher - as safe havens needed a correction higher, if only in the short term.
Next week Projections:
1. Given last week, and most of friday, the obvious expectation would be to expect risk to continue on the offer and making new highs - however, late on friday afternoon we saw risk-on/risk-off balance tip in favour of safe havens as the TRY Coup uncertainty increased risk-off demand.
- Friday traditionally is a weak day for risk anyway as 1) end of week sellers/ weekend flat risk books cause a natural selling of risk, and a natural buying of safe havens as portfolios look to hedge weekend event risk over the two days that the markets are closed (especially as the session ended i the middle of the TRY coup).
- That in mind, i was surprised to see risk even trading better than safe havens on mid afternoon Friday at all (until TRY) - with Yen falling to 106.3 and goldd down 0.9%, i was confident that we would enter Monday with a risk-on tone.
Note
2. IMO now the ability of risk to continue being offered higher will depend on 1) TRY politics - hopefully most issues are quashed and safe haven demand can be stopped in its tracks, however if issues intensify/ spread in the area this could certainly drag risk lower, even though TRY isnt a massive economy. 2) The bulk of earnings season begins next week and thus presents perhaps the biggest risk, if on average companies surprises to the upside this could certaintly fuel the rally, however the inverse could tip the scales back into the risk-off hole. 3) BOJ/ JPY Govt rhetoric is also a highly weighted variable. If speculative rhetoritc of aggressive stimulus continues then surely risk will likely follow higher, especially as we move in BOJ on the 28th where investors are likely positioning for heavy stimulus given the Yen's strength, unchanged rate since January and the economic conditions in JPY. However, the opposing risk is if the rhetoric aggressively shoots down stimulus expectations - a certain view of "no stimulus" would surely send risk lower and UJ would likely head back to 102.00. 4) Strong UK Data MAY apply the breaks to a risk-rally if investors think the strong CPI/ Employment/ Retail Sales prints reduce the likelihood of a BOE rate cut in August - however, Business investment/ confidence is what the BOE is closely eyeing given this is what was hit the most by Brexit.Note
Trading Strategy:IMO I will be waiting for 4PM GMT to see what the sentiment is after US Markets have opened. By then information should have priced, and we should know the sentiment of the week.
However, i will be closely watching TRY Coup developments, aggressive moves could certainly set the sentiment from the offset on Sunday - whilst other factors will take time to play out in the week.
Note
ECB Interest Rate Decision on Thursday/ ECB Mario Draghi Speech on Friday may provide some stimulus for risk (the risk here is certainly to the upside as no cuts are expected.. a surprise cut possible given brexit uncertainty?)Also, NZD CPI print coming in on Sunday Night at market start - this will likely be indicative for the RBNZ OCR decision in August - a miss of 0.4% (Or hopefully less will make it 80-90% likely of a cut) this could also help buoy risk, but if CPI comes in higher (e.g. +0.5% then the opposite).
Note
TRY issues continue somewhat with arrests now totalling 6000 people (military and justice system officials). IMO its hard to see TRY recovering on open, instead more likely for further downside.Note
Risk rally looks like its winning this week again - Microsoft outperformed earnings overnight, being in the top 10 largest firms this likely gave some stimulus to the bull run today. DJ30 Sets new intraday highs at 18630, let the bull continue!!!
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