Chris Weston, Chief Market Strategist at IG Markets
There are huge correlation-breakdowns occurring in capital markets amid random sell-offs in equities, which is strange considering the limited news which supports the selling.
I can understand the moves in Twitter (down 17.8%), however the date of the lock-up expiry has been well known to traders for some time and many had been shorting the stock in anticipation of insiders and employees dumping stock at the first possible opportunity. What effectively has been seen is a sell the rumour, sell the fact scenario play out, and those who are still long would be worried. In saying that, the social media name is three deviations from its 20-day average, while its nine-day RSI is below 20. Those who follow simple mean reversion strategies would be thinking of dipping their toe in the water. However, it must be said that when you see 134 million shares changing hands, it could be an idea to leave the open to those more brave and hope for another big flush out before jumping in. Still, on 816x consensus earnings for 2014 there has to be easier opportunities.
Earnings from Tesla will be interesting in today’s US post-market, with the market seemingly happy to defend the $200 level. The stocks many people in the market are (or should I say, were) calling ‘high-fliers’ are showing this space is for only the very brave, with huge moves occurring on limited news.
Can the Italian 10-year bond close below 3%?
The trade that continues to work well is developed market fixed income, with peripheral debt (namely Italy, Greece and Spain) looking really strong. Australia 10-year debt has traded down a further six basis points today to 3.83% and has now fallen 40 basis points for the year. Clearly the Japanese funds who were vigorously buying Aussie debt in Q1 are sitting pretty right now, with good total returns. Weaker-than-anticipated March retail sales have certainly assisted this trade today and the 10-year bond is now at the lowest levels since September 2013. Two- year yields are now negative when adjusted for inflation, and the spread against US treasuries (on the 10-year bond) has narrowed to a modest 124 basis points – this was 152 basis points in mid-March.
The USD is still a key focal point, with the dollar index at a key juncture. Over the last few years we’ve seen similar set-ups as what we are currently seeing, with huge horizontal support seen on the daily and weekly chart; so I have to feel we are at a key inflection point for the USD. With US bond yields at the bottom of their recent range, it seems logical to think the bond market is at a critical stage as well. The S&P 500 seems key here, and if we do see follow through selling in today’s trade then US treasuries should find further buyers.
All eyes on Janet Yellen
Janet Yellen takes centre stage speaking in front of the Joint Economic Committee today. The Fed chairman has been one of the key players in contributing to the current low volatility, low correlation market, and to be fair has done a good job of making amends after the rates could go up six months after the QE program finishes mistake. The market has a fairly clear understanding of her position on Fed policy and like we have heard time and time again, the timing of adjustments in the fed funds rate is purely data dependant. It’s also worth remembering that Janet Yellen speaks on behalf of the whole FOMC, so there is a real possibility that she adopts a more hawkish tone than many are positioned for. There is also a question and answer session, so it seems likely Mrs Yellen will be probed on the recent improvement in US data and whether the Fed’s inflation targets of 1.4% to 1.6% are still on track.
Price action in Asian equity markets has been negative, with weakness in Australia and Japan. The Nikkei has re-opened after being closed for two days and although price action seems whippy at present, our clients seem to be confident on a near-term bounce, with long contracts representing 84% of all open positions. USD/JPY is once again testing the February uptrend at 101.50 and this is a level that is getting a huge amount of attention from traders today. A closing break here should see the key 100 level in play.
European markets should see weakness on open, although US futures haven’t really been affected by the weak sentiment in Asia. Janet Yellen’s speech will be the clear focal point, however French industrial production and German factory orders will also be in play, with traders getting some final positioning in ahead of tomorrow’s ECB meeting.
Italian and Spanish debt will continue to be in focus and a simple look at the daily chart of the ten-year maturities shows one of the strongest and most compelling downtrends seen anywhere right now. Further inflows into these markets should continue to put upside pressure on the EUR.
FYI, on Saturday May 17 Evan Lucas and I will be in Sydney giving a free seminar designed to help traders and investors understand why central banks are so important to determining the direction of global markets, and will give you the tools and strategies to take advantage of market movements using CFDs across a wide range of assets including shares, forex, indices and commodities. If you’re intersted you can register here.