It’s uplifting that the S&P 500 closed -0.2%, while the Dow transport index closed +1.2% and implied vols actually declined modestly. When the very variables that compelled US equities to all-time highs are now part-working against equity sentiment. Notably, the near 3% sell-off in crude, punished the S&P 500 energy space, as is the case today in Australia, with the ASX 200 energy sector -1.1%. A 7-basis point move higher in ‘real’ US 5-year Treasury into 55bp, married with fed funds future pricing out a further 3.5bp of cuts through the remainder of the year and we could argue risk aversion should have been more intense. The bulls will see this as a small win.
For what it’s worth, we now see 13.5bp of cuts priced by year-end, so a 50:50 proposition – with this setting sitting at -20bp earlier in the week, and clearly what we heard from Powell yesterday didn’t justify a market heading to price a full cut this year.
The bearish key day reversal in the S&P 500 (highlighted in yesterdays note) was confirmed, with price overnight closing below Wednesday cash low, although the price action has shown indecision here, with the US benchmark closing close to its opening price. The jury is still out that the bears have truly wrestled back sufficient control. A close tonight though below 2896.35 would print a bearish weekly reversal and that can often be quite powerful, although traders aren’t overly concerned here and, as detailed, implied volatility actually fell on the session (the VIX index now sits at 14.42%) – another big surprise, especially given the event risk that is due in the coming 12 hours or so.
We are seeing reluctant sellers in gold, and again the sell-off in both nominal and ‘real’ bond yields in the past few sessions are a sizeable headwind for the yellow metal. It is not just a USD issue, as gold priced in AUD and EUR are also looking unconvincing, but it’s gold in USD terms (XAU/USD) that’s of most interest, and specifically, if we get a closing break of the double-bottom of 1266, then the rate of change could increase. I remain a long-term gold bull, but if I remove any emotional attachment and trade price in isolation, then a break of 1266 should be respected.
The USD flow has been unconvincing despite this move in US rates, although we see the USD index (USDX) above its 5-day EMA. USDJPY continues to grind lower in a bearish channel, although the set-up could be construed as a bull flag, where a topside break of trend resistance should see the pair push into 112.50 and even higher. GBP buyers are still ever present, although cable is happy to consolidate here, and traders have been better buyers of GBP against the petro currencies (CAD, NOK and SEK), and the weak link of G10 FX today – the AUD. GBP/AUD looks ready to push through the March highs and into the top of the bullish channel its worked in since July 2018 at 1.9120, and while the UK local elections results are coming out thick and fast as I write, everyone is expecting a terrible showing for the Tory party.
AUD sellers have been a clear focus in our flow data, with AUD/USD pushing into a low 0.6985, and briefly below the Aussie Q1 CPI session low of 0.6988, after we saw the 15.5% decline in Aussie March Building approvals before the support kicked in. It remains incredibly difficult to be long AUDs here even if fast money is already positioned short. However, even if we don’t see a cut this coming Tuesday, the probability at which the market ascribes a 60% chance (i.e a 40% chance of a cut), the key issue then is whether the statement justifies the 42bp of cuts priced over the coming six months.
The RBA may even cut rates, prompting a decent initial move lower in the AUD, but if the statement leaves an impression that they will wait sometime to assess the impact of easing, then we could see weakness reverse fairly quickly. It's incredible to think AUD/USD implied volatility (expiring on Tuesday) is sufficiently low enough that the market only sees a 50-odd point move (in either direction) through Tuesday. And, with 1-week risk reversals at -0.57x and detailing that traders have already been paying up for AUD/USD put vol, if the RBA doesn’t cut, and the statement is not sufficiently dovish enough, then we could see a punchy move higher. Implied vol looks too low.
We close out the week though with traders eyeing a mountain of event risk in European and US trade; notable keep an eye on EUR exposures with the EU April CPI estimate at 19:00aest, where the consensus is inflation lifts to 1.6% (from 1.4%). So, a failure to live up to expectations should see EUR/USD heading towards the low 1.11’s. In the US, sharp moves may be seen in the payrolls report at 22:30aest, but we may need to see some real outlier numbers to believe it will greatly influence the Fed’s thinking. The raft of Fed speakers at the Hoover Institute Policy Conference may well be the true catalyst that drives the USD and rates pricing more intently, so as we should all do around figures keep an eye on exposures here. Especially given the adjustment in the markets thinking after Powell’s confidence that core inflation is to turn higher and that the bank is prepared to tolerate low inflation.