Two distant worlds

The AUD is and has gone down under in many ways. What is the culprit? China, US tapering, Commodity weakness. One may argue there is common ground to all three. And that is a generally negative sentiment for anything that is not American. The Taliban would likely not like this point but I speak economically on this.

Now Australia is about as Far East you can go (lets leave aside New Zealand for now) as the US is about as far west you can go. The furthest away get hit the hardest? Even the JPY is hit. This may be a coincidence but then again, investor psychology works in unknown ways and we will never quite know why certain things happen in the financial world. Enough to say that for now, yield differentials reign supreme and the Australian Bond market is in no rush to sell off. While the US rates market is generally selling like hot potatoes. And then contagion not only drives AUDUSD lower but also AUDNZD, AUDCAD, AUDGBP etc etc. More to go in these.

The Third Arrow with attitude

The Chartonomist had the pleasure of watching Shinzo Abe speak at a conference yesterday. The Japanese premier, his excellency, was uber-bullish. If we all were in the same shoes as Abe, the Nikkei would not be lingering around 14,500 but would be closer to 20,000. The three Abenomics arrows of monetary, fiscal, and growth policies may or may not revitalize the economy but the exuberant confidence of Abe has certainly already triggered a change for Japan.

The big goal is for such sentiment to persist. Sentiment eventually drives the data and this gives some room for policy error, so long as the premier keeps positive. The risks are thus skewed to a Japanese recovery so long as the LDP stays at the helm, and Abe as the boat steerer. Unless, of course, he changes his attitude.

Shinzo Abe marches down the aisle to deliver his boisterous speech

Time to time

The goods that we transport are invaluable. This is because we intend to transport them in the first place, otherwise we would just junk them. By association, the companies that transport our goods are also valuable. Thus, the Dow Transportation average is in many ways more important than several other global indices.

That the Dow Transports (Trannies if I may call it) have given up their gains of the past few sessions is precursor to a small correction. By no means an end to the comfortable rally of the past three weeks but we are only attempting to time the market and we all know that timing is key. A view, is a view, is a view, and unless you are Warren Buffet with very deep pockets which can hold onto large losses, timing is important. Heck, even Warren Buffet needs it despite all the fundamental investment, for if you invested in Berkshire Hathaway 12 years ago, you likely would have made nothing while wearing large volatility.

It's time to time a small correction and take some profit in existing equity length. Rebuy next week (at the risk of micromanaging the overall bullish position)

It's a boy!

Markets seemed more interested with what is going on with the new British heir to the throne than price action. One website said the new boys fortune will be one of "extreme ups and downs". That sounds more like the fate of cable.

I know we wanted to punt cable to the short side but we also wanted to flip our view to bullish should 1.5310 give way. Which it did and we managed to catch onto a nice rally to the 1.54 handle. We think this can go higher still. Why? Because of gold.

And also because of inflation expectations which are trading higher by the day. This is optimism at its best. The Fed is tapering and stopping printing machines (effectively), yet the economy is able to inflate its debt away. The Fed needn't be involved. At least for now. And thus, even gold has rallied given the inflation hedge that it is. On gold, we continue to think that either a long term base is in, or we are very close to one. 5 years later we will likely be kicking ourselves as to why we did not buy this in our personal accounts if we haven't already done so.

But this is more about the pound and inflation expectations. GBP/USD and Treasury Inflation Protected Securities have been correlated for months and as these TIPS increase in value, so will GBP/USD. Particularly given the country's irritating history of high inflation. Even in future kings to come, inflation is likely to remain a mainstay for the UK.

Gold recovering:

Going for par

The LDP victory is another feather in the abenomics cap. Now for the flurry of investors rushing to USDJPY, Nikkei and other Japanese assets. Perhaps even JGBs! Though for JGBs we think that Treasuries matter more and that relationship probably deserves greater attention.

Meanwhile, USDJPY above to 103.50 and likely 105 in the coming months. It can help the US dollar index get back a couple of percent higher for now as its multi month choppy ascent continues. If 'risk' is measured by local stock market price action, this should be healthy. Even healthy for EM, despite JPY weakness, for we think that confidence has improved, in contrast to a few months ago. This is exemplified by gold and oil having recovered and global assets holding up fairly well along with this. It's not a hole in one by any means but at least we can go for par on this punishing financial course.

Hurrah Mickleson.

A cable punt

Although Indian by origin, I am a proud British citizen. Proud for a reason, not just because I got naturalised. The reason being the open culture. The only major (or even minor) central bank to appoint a foreign citizen as the governor. I mean many do not even allow you to apply if you are not a citizen. But not the case for the Bank of England. A country that would probably sell the Big Ben if she had to.

So what does Carney really bring to the table? Dovish expectations fought by hawkish rhetoric, the market is overall in a mess. It probably doesn't matter. We look at the charts and say, we are near a tipping point. Sell with a stop at 1.5310 targeting 1.5150 or we just flip to bullish if the market moves above 1.5310. But in this scenario of higher prices we likely revisit this post.

Why we want to sell is because the USD is inherently bid. If US yields are to eventually rise, which we think they do, then for GBP/USD the USD leg of the trade should awaken and cable should fall lower. So we pick our levels based on market commitment (1.5310 is where the last significant selling was seen) and trade with that.

Choose one or the other

Sorry we are beating this one to death. Another post about the INR. We just think it is important in the global context. Important because it is a high yielder. Important because it has solid demographics. Important because it is (was?) a part of BRIC.

But what this post is about is a bit beyond the INR as well. Some of the worst performing currencies (taking a longer term horizon over, say, 10 years) in the world have something in common. They all love gold. Turkey, South Africa, India, Mexico (ok this one likes silver more, but still). It all starts to make sense. Blame it on culture, weddings and gifts but currency is a part of culture. And gold is a preferred currency over the ZAR, INR, MXN, TRY for a reason. These are all inherently weak currencies. Bottom line - you may not know it but if you like gold, you are bearish INR. If you are bullish INR, you probably don't like gold as much. Both gold and INR can't strengthen together in the long run, as we have seen.

Image: Gold price in INR - Gold still winning overall

Global impact, local silence

Increasing base rates in India and attempts to reduce volatility by the authorities only has limited meaning for the INR. What is more important for the INR and what has always been more important is how the world perceives the currency. For globalisation has not only hit the world recently, it has been with the world for generations. The Dravidians didn't build the Angkor vat all the way in Cambodia for no reason.

Thus, lets look abroad. The yield differential between the US and India has widened as a result of this move. This trumps any equity inflows or outflows for the moment as realistically yields are all the markets have been looking at. Bond outflows there may be but the attraction of carry is likely to underpin the INR for now. Lets look lower towards 58.95 for USD/INR and then reassess.

The INR Nose-Dive

I have been watching, and mercilessly transferring INR back home (we are all Indians here) over the last six months. Every time the rupee scaled new highs, I thought I was out-smarting everyone with an awesome bargain, only to watch the rupee sink to ever lower lows month after month. So what's the deal with India?

Part of it has to do with the whole Fed Taper talk. With cheap money fleeing emerging markets, EM currencies are likely to be hammered. Just look at this chart for a comparison of the Indian Rupee, South African Rand and the Brazilian Real. But the Fed taper is just a manifestation of a stronger US going forward. For all of its problems and poor policies, the US is actually head and shoulders ahead of EM. Why?

First of all, there are real signs of improvement in the US economy: falling unemployment, rising payrolls, rising house prices, resurgent manufacturing, energy independence, and a consumer that will consume come what may (unlike the "savers" of Japan from the lost decade) all point to good things for the US in the coming cycle - which makes it a better relative value trade for many investors.

Second, there's been a serious slowdown of EM consumption. GDP growth in China and India has been lagging inflation - which essentially means that wages are not keeping pace with rising prices. This quickly turns into a vicious cycle - as weaker currencies means imports get that much more expensive, leading to further higher inflation.

On top of that, in India's case at least, there is little confidence in corporate governance and the political leaders of the country have given us no reason to believe that they will do what is right for the country. They have consistently acted in self-interest, and corruption scandals these days are just as commonplace in India as are petty crimes around India gate!

So how can all this be fixed? That can be the topic of a future post...

Whats next?

So we understand that uncertainty is on the rise. We here at DeepThought keep hearing how people are close to neutral on most positions. No overweights or underweights either way. At least not in size.

But humour us this. You know rates are going to rise. 10 year UST's are ending the year 2.75% to 3.00% by most sell side estimates. Most buy side as well. And yes estimates are just that and very rarely hit the mark, but we'd say the probability is heavily skewed towards higher rates (tapering is coming and the scale is the variable not the if part)

So why would you not be short rates? Why wait for better entry points. Leg into it, but put it on regardless.

And then the tricky part. Higher rates with higher credit spreads/lower equity or higher rates with lower credit spreads/higher equity levels? Well, volatility is going to rise, or better yet VIX will rise. It's too low, the fed keeps giving confusing and contradictory statements, there's too much priced in, etc etc.

As of now, we're betting for higher rates, higher credit spreads and lower equity levels in the next 3 months. If we're wrong on one of those 3 its bearable. More than that, we never had this conversation.

by CrazyDiamond

A bloodbath of optimism

While CrazyDiamond has posted an attractive image and some solid points from a traders perspective, Chartonomist is unable to avail images very frequently due to the nature of his responsibilities. Though this does not allow Chartonomist to ruminate.

So EM did have the recovery that was in the making but who would have expected such heightened enthusiasm. Ben has done a brilliant job as far as I am concerned. Picture this: two months ago, saying US yields will be 60 basis points higher, and stocks will be at exactly the same place globally, if not higher. He has steered market confidence to the upside. Not just locally, but globally.

It is time to step aside. Perhaps EM underperformance kicks in again. But not right now. Lets load up on the high yielders, or perhaps even the low yielders. Lets load up on anything because perhaps it is just outright risk 'on'! What we do need to get out of is cash...at least for a few sessions. Ironically, this means not being too bullish on the USD despite the USD leading the global normalization in rates space.

Short term trade: Buy AUD if it gets up above 0.9350 as we suspect in this scenario, there would be pain...a lot of pain. A lot of bearish positions will bleed.

By Chartonomist

Chart of the day

I'm of the school of thought which bears a tattoo stating "a picture is worth a thousand words". And so I'm always hunting for good charts with good stories - and when I find them I'll share them here. Cause I'm nice that way.

So thanks to JPM and their brilliant Q3 guide, I give you two thousand words:

Yes I know what you're thinking with the chart above, but I've burnt a few fingers shorting this monster already. Not that that would come in the way of future shorts....


USD is probably the no-brainer trade for the short to medium term. But despite fixed income getting creamed off late, a 1000 foot view looks favourably for HY still - short term that is. With rates slated to continue to rise, correlations would kick in and all fixed income gets hit on a total return basis.

By CrazyDiamond

Sneak preview

Banking stocks are flying higher, tech stocks are recovering, confidence is increasing. It's been solid for the states but is the flight out of EM already over? The weakness we liked could be coming to a crossroads. Can US investors gain enough confidence to put their money to work abroad once again, rather than repatriating it back to their own equity markets? This is bound to happen at some point. This is just a sneak preview of things to come. But for now, it is just that.. A sneak preview but not a sustainable trend. A temporary bounce for EM would not surprise.

This doesn't mean that EUR and GBP bounce. As deepthoughts42 has argued, these remain plagued currencies for the Northern hemisphere summer.

By Chartonomist

Flavor of the day

The other day, I was asked which are the key markets to look at to understand the world. The hit list. This is something like the flavor (market) of the day. It keeps changing. Especially when the flavors start to get stale or neglected. The flavors are only as good as the needs of the customer (the market participant). In other words, it is not me who decides the flavor, but the customer who decides it. And this customer just happens to be terribly whimsical, forcing a change in the flavor every so often.

For today, the markets are GBP/USD, EUR/USD, US 10s, WTI crude, and the MSCI EM Index. But tomorrow, this could very well be different.

By Chartonomist.

(Un)rising tide

Lets get short EM equities. We've seen a rally off the June lows in several EM stocks and a bounce in a bear trend is usually an opportunity to sell. So, lets get short. Timing seems about right after a solid NFP and the US once again demonstrating signs of outperformance. The first down the hole is also the first to come out. FIFO as they say (first in first out) in geeky terminology. This makes us think about EM because they haven't even gone down the hole yet. Still to come, watch this space.

Do place tight stops though. These are volatile times and the risk is that a spurt of US optimism demonstrated by the Dow strength carries EM higher. A rising tide lifts all boats. For now, the tide is likely not strong enough.

By chartonomist.

Easy on the easing

The ECB and UK MPC backed dovish policies. Though when there is a dove there is usually a hawk lingering somewhere. Or we can perhaps call it an Eagle given the American nature of the hawk. The US has clearly moved away from dovish rhetoric. It is simple Maths. Yield differentials warn of a meaningfully weaker GBPUSD and EURUSD. What then of the other USD pairs? Well, the US has fled the currency war in general.

This is the state of affairs. Higher US yields and a higher USD.

By Chartonomist

Thin conditions

Newly Fabricated Perceptions. This would be a more accurate augmentation of NFP. Payroll numbers are hardly something that can be calculated by spreadsheet. They are more like readings of weather patterns or readings of the tea leaves.

What we can infer though is what the market may be thinking as we head into the numbers. Though this time around even this is moot. It is July 4th. ID4. The day aliens invade our planet. In such circumstances, not many would be trading financial markets. And if the aliens don't arrive, most would be on holiday anyhow and price moves are likely suspect.

This perhaps can explain why the USD has sold off against major currencies in the last 24 hours and why this has happened while US yields have risen. This doesn't make sense until it does when we think about the timing of this.. The US Independence Day and NFP - a two pronged attack on liquidity this week. Price action in such a week is certainly not enough to derail the greater trends of higher yields and a higher USD.

By Chartonomist.