Intraday Market Thoughts

The Central Bank Playbook From Here

Feb 11, 2016 23:37 | by Adam Button

Two central banks may have intervened on Thursday as market continue to cast a vote of no confidence in economic leaders. The yen led the way while the pound lagged. Japan returns from holiday in an attempt to salvage a brutal week in the Nikkei. In the Premium Insights, the FTSE short was closed at a gain, EURAUD was stoppped out and 2 new trades were sent today, bringing the number of open trades to 3.

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The Central Bank Playbook From Here - Gold Weekly Feb 11 (Chart 1)

The yen and Swiss franc both suddenly weakened Tuesday in a sign that central banks are once again out of ideas. The BoJ and SNB have tried to weaken their currencies with negative rates but both currencies have been in demand anyway.

Yellen was asked about negative rates at her second day of testimomy and left open the possibility, but said the Fed isn't yet clear on the legality. Even if they're permitted and more stimulus is needed, there are fresh questions about the wisdom of going negative as Japan has demonstrated.

Financials have been hammered this year in part because of a compressed yield curve and other skews because of low rates. Even the wisdom of weakening the currency to promote inflation or the economy is questionable. A 50% drop in the yen hasn't boosted prices or exports.

So central banks will be asked delve deeper into experimental policy. A well-known market commentator today advocated for monetizing debt.

The other option for central bankers is to admit helplessness. They've driven rates to record lows. But given the political and market pressure on central banks to 'do something', more experiments are likely. We are headed towards a permanent era of central bank experimentation. No wonder gold climbed the most in 7 years on Thursday.

Looking towards the days ahead, holidays will play a major role. Japan returns today with the Nikkei down 6.5% on the week but futures pointing 1.3% higher on yen intervention. However, it's tough to imagine investors suddenly feeling better with the US preparing for a long weekend and Chinese markets set to reopen Monday.

RBA Governor Stevens is sounding off a generally positive testimony, praising the continued recovery in the labour market as well as the solvency of local banks.

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Fed's William Dudley speech
Feb 12 15:00

Do You Believe in Yellen?

Feb 11, 2016 0:11 | by Adam Button

Market reactions depend less on the hawkish/dovish inclinations of central bankers and more on whether officials are in tune with signals from markets. The yen was the top performer as USD/JPY fell to 113.10; the Canadian dollar lagged. Expect quiet trading in Asia with China and Japan both on holiday. A new Premium trade has been issued ahead of Friday's RBA testimony and is curretnly in the red. Currently sitting on 240 pip gain on the Premium trade issued Monday, which may be closed during the Asian session. SMS/email will be sent to subscribers if/when closed. Stay tuned.

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Do You Believe in Yellen? - Us Jpn Yield 10 Feb 10 (Chart 1)

There is no doubt that the past six months have been a damaging time for central bank credibility. A virtually unanimous chorus of monetary policy leaders proclaimed a brighter future, rate hikes and rising inflation. It culminated in the Federal Reserve hiking rates and hinting at four more rate rises to come.

The Fed didn't see trouble coming and its inability to identify problems aside from pointing to 'unease about China' is worrisome. A doctor can't cure a patient if he can't diagnose the problem. Even worse if he doesn't recognize a problem at all.

The first day of Yellen's two-day Congressional testimony showed a paradigm shift in market reactions. The dollar first rallied when she was less dovish than market watchers anticipated. That's the normal reaction. But later the dollar dropped sharply as Yellen expressed a dogmatic attachment to economic data and no urgency to tackle or even understand why markets are signalling trouble.

The shift in market psychology makes sense. Fed funds futures are no longer pricing in Fed rate hikes in 2016. Before any central bank hikes, it will need to re-establish market confidence.

The inability of officials to get a firm handle on the commodity crisis is what's helping to underpin safe havens like bonds and gold. It's also adding currency volatility and shaking out US dollar longs. Until something changes, the trade remains the same.

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Fed's Yellen testifies
Feb 11 15:00

Market Waits on Yellen

Feb 9, 2016 23:53 | by Adam Button

Cascading downgrades in energy and financials persist but the Fed continues to point to China as the source of unease in markets. Yellen needs to demonstrate Wednesday that officials understand then potential economic downside to the commodity collapse. The yen stabilized in US trading Tuesday but may become unhinged again if the Fed plows forward.  In the Premium Insights, the gold long hit its final target, EURAUD short was stopped out and last night's trade is filled & in progress. There are 3 trades currently open and are all in the green.

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Market Waits on Yellen - Db Vix Feb 9 (Chart 1)

The December JOLTS report beat expectations at 5607K job openings compared to 5413K expected. That may give Yellen a false sense of economic security heading into her testimony.

Markets and especially financials are sending a different signal. The market is convinced that energy and commodity companies will go bust and the focus is now on where the losses lie. The swift declines in financials, including Citi, BAML and Deutsche Bank, argue that traders are pricing in hefty losses.

If Yellen focuses on messages from lagging economic data rather than real-time market pricing it will underscore a lack of confidence in central bankers. At the moment, the S&P 500 is clinging to support form the Aug/Jan lows. If she doesn't address commodities, banking and disinflationary risks and instead highlights an upbeat hawkish outlook based on domestic data, then expect a breakdown.

USD/JPY has already faltered below 115.50 support and closed below it for a second day. Other key headlines from the IEA and EIA underscored the challenges to the oil market. Both cut demand forecasts and the IEA warned that production will continue to exceed demand by 1.75 million barrels per day for the first half of the year. Oil had been higher but finished 7% lower on the day.

Despite the drop in crude, USD/CAD finished lower on the day. The resilience of the Canadian dollar in February has been astounding and telling. A large portion can be explained by general USD weakness but the market is also having second thoughts about the idea of Canada heading towards a recession.

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JOLTS Job Openings (DEC)
5.600M 5.400M 5.431M Feb 09 15:00
Fed's Yellen testifies
Feb 10 15:00
FOMC's Williams speech
Feb 10 18:30

USDJPY Cracks on Fresh Energy Questions

Feb 8, 2016 23:53 | by Adam Button

Rumours of a major US energy company preparing for bankruptcy are a telling insight into the current market psychology. USD/JPY and the Nasdaq hit their lowest since late 2014 as risk aversion took hold. Australian business confidence highlights quiet Asia-Pacific trading. Ashraf's Premium Insights re-entered a new JPY trade, supported by 3 charts analysis. A new Premium Video has been  posted to subscribers, focusing on the US, European and Japanese global indices.

USDJPY Cracks on Fresh Energy Questions - Videosnapshot Feb 8 (Chart 1)

China on holiday and a quiet economic calendar might have given markets a chance to stabilize Monday but the opposite was the case. The weak finish on Friday spilled over and sentiment was soft at the start of US trading.

It crumbled shortly after a report surfaced that natural gas giant Chesapeake Energy had hired a restructuring law firm. Shares of the company fell 50% before being halted. The company later said it has worked with the firm for years and had no plans for bankruptcy but that only trimmed the loss to 33%. We have no idea what's on Chesapeake's balance sheet but when the market is capable of believing that a $2 billion market cap company is on the verge of bankruptcy is telling. It indicates traders panicking about the next shoe to drop in the latest commodity collapse.

An old saying on Wall Street is that whenever there is a crisis 'Citi is there'.  Meaning that Citigroup will be stuck with the bad assets. How hard commodity declines hit Main Street depends on how insulated financials are. But with shares of Citi down 27% since the start of the year, Wall Street is worried and the Fed remains wrongly focused on China.

One data point that may grab the Fed's attention from Monday was the NY Fed measure of consumer inflation expectations. It fell to 2.42% from 2.54% in another dagger in March hike hopes. Yellen will have the opportunity to acknowledge turmoil and back away from a hawkish stance at this week's Humphrey Hawkins testimony.

Markets might not be prepared to wait that long. USD/JPY broke below 115.50 Monday, taking out a rough quadruple bottom and leaving little support until 110.00. The Nasdaq broke a similar support level and the S&P 500 is on the cusp of cracking as well.

Gold is acting as an effective hedge and defensive play in a sea of volatility this year, hitting $1200 on Monday.

Chinese markets remain closed all week but the rough ride in US trading is likely to reverberate in Australia and Japan. Note that nickel fell 4.5% Monday to a 12-year low and that could hurt miners. The lone data point of note is the 0030 GMT NAB Australian consumer confidence index. It was previously at +3. 

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NAB's Business Confidence (JAN)
3 Feb 09 0:30