SPX: BOJ MISS = BULL RUN END +2% + 2016 SAFE HAVEN TREND RESUMES
End of the bull run
Global Equity Indexes:
1. SPX/ Global Equity indexes in the past 2/3wks saw a post-brexit central bank easing induced rally, as many CB released dovish statements following the vote which spurred investor confidence in fresh easing.
- IMO much of the bull run was based on BOJ easing hopes, given the size of the economy (4th largest) stimulus from the BOJ had risk sentiment increasing affects - though now in light of no new easing from the BOJ and many CBs shrugging off/ UK internalising the brexit impacts I believe this bull run is over.
2. Technically speaking we may see another week or two of sideways or +1% as the market awaits easing policy information from the BOE (6th largest economy), but past this and regardless of what the BOE does i think the upside bias will cease. BOE is only likely to inject 50bn over probably 6m+ which is a drop in the ocean relatively as the BOJ does 100bn+ in one month, so by mid august latest I expect risk-markets to turn sour and a 10% correction is likely.
Confirmation the risk-rally is over:
- During this bull run we have seen risk markets/ SPX make gains rather frigidly, one day up one day down has been the trend - rather than the usual breakout green green green rallies of the past - this to me indicated that the topside was cautious and reinforced my view that it was central bank driven (not equity market performance driven). Thus, Confirmation of the trend turning to risk-off will be consecutive days of risk markets falling (SPX/ global indexes) OR consecutive safe haven markets rising (Gold, UST, Yen) and the emergence of a strong negative correlation between the two assets will be a solid second indicator that the 2016 risk-off trend is back.
Trading Strategy - a number of ways to play this one:
1. Short FTSE100 @6700 or 7000 (wait for BOE) - this is my favourite trade but has a few conditions. We have built some resistance at the 6700-800 level so here isn't a bad place to sell however i think we will get a better selling vantage point next week, assuming the BOE cut the bank rate 25bps.
- The BOE easing should move FTSE100 up 3-4% in a few days into the 7000 ATH key level as easing boosts business conditions and a lower GBP increases FTSE company international competitiveness. The 7000 level is where I am aiming for FTSE shorts with sell-limit orders as 1) its all time high levels; 2) I like to fade central bank action since it is artifical; 3) the broader risk-run is over so FTSE will suffer with the rest of the market
2. Short US Indexes @Market - SPX is perhaps the best short ATM given it trades right at its newly set all time high levels and on the backdrop of the BOJ miss we should see some downside soon.
3. Long Yen @mrkt - in the immediate term my favourite trade I like long Yen (for 200-400pips) against USD and GBP, given the BOJ backdrop is most related to JPY markets. We have already we seen the risk-off transmission taking place in here as Nikkei sold off 2% after the result and JPY grew 3% but i still think in the immediate term e.g. 1wk we can see more JPY topside and Nikkei weakness - me prefering to trade the FX strength over the equity as the equity often follows as a function of FX strength.
4. Long Bonds or Gold @mrkt - for the medium/ longer term I like buying govt debt, particularly UK gilts (BOE QE increases demand) or Gold - Gold we saw move higher on Friday in reaction to the BOJ so it will be interesting to see if we can get risk-off confirmation run from this next week (look for 3/4 green days).
Risks to the view:
1. US Earnings have outperformed imo on average this Q, so the risk-run may be sustained for longer than the 2wk window that I expect. Nonetheless, i think even this is capped at 4wks e.g. we should be in full bear mode by the start of September - look out for the confirmation, a run of 3/4+ days of consecutive safe haven gains is often all the markets have to signal to show
Global Equity Indexes:
1. SPX/ Global Equity indexes in the past 2/3wks saw a post-brexit central bank easing induced rally, as many CB released dovish statements following the vote which spurred investor confidence in fresh easing.
- IMO much of the bull run was based on BOJ easing hopes, given the size of the economy (4th largest) stimulus from the BOJ had risk sentiment increasing affects - though now in light of no new easing from the BOJ and many CBs shrugging off/ UK internalising the brexit impacts I believe this bull run is over.
2. Technically speaking we may see another week or two of sideways or +1% as the market awaits easing policy information from the BOE (6th largest economy), but past this and regardless of what the BOE does i think the upside bias will cease. BOE is only likely to inject 50bn over probably 6m+ which is a drop in the ocean relatively as the BOJ does 100bn+ in one month, so by mid august latest I expect risk-markets to turn sour and a 10% correction is likely.
Confirmation the risk-rally is over:
- During this bull run we have seen risk markets/ SPX make gains rather frigidly, one day up one day down has been the trend - rather than the usual breakout green green green rallies of the past - this to me indicated that the topside was cautious and reinforced my view that it was central bank driven (not equity market performance driven). Thus, Confirmation of the trend turning to risk-off will be consecutive days of risk markets falling (SPX/ global indexes) OR consecutive safe haven markets rising (Gold, UST, Yen) and the emergence of a strong negative correlation between the two assets will be a solid second indicator that the 2016 risk-off trend is back.
Trading Strategy - a number of ways to play this one:
1. Short FTSE100 @6700 or 7000 (wait for BOE) - this is my favourite trade but has a few conditions. We have built some resistance at the 6700-800 level so here isn't a bad place to sell however i think we will get a better selling vantage point next week, assuming the BOE cut the bank rate 25bps.
- The BOE easing should move FTSE100 up 3-4% in a few days into the 7000 ATH key level as easing boosts business conditions and a lower GBP increases FTSE company international competitiveness. The 7000 level is where I am aiming for FTSE shorts with sell-limit orders as 1) its all time high levels; 2) I like to fade central bank action since it is artifical; 3) the broader risk-run is over so FTSE will suffer with the rest of the market
2. Short US Indexes @Market - SPX is perhaps the best short ATM given it trades right at its newly set all time high levels and on the backdrop of the BOJ miss we should see some downside soon.
3. Long Yen @mrkt - in the immediate term my favourite trade I like long Yen (for 200-400pips) against USD and GBP, given the BOJ backdrop is most related to JPY markets. We have already we seen the risk-off transmission taking place in here as Nikkei sold off 2% after the result and JPY grew 3% but i still think in the immediate term e.g. 1wk we can see more JPY topside and Nikkei weakness - me prefering to trade the FX strength over the equity as the equity often follows as a function of FX strength.
4. Long Bonds or Gold @mrkt - for the medium/ longer term I like buying govt debt, particularly UK gilts (BOE QE increases demand) or Gold - Gold we saw move higher on Friday in reaction to the BOJ so it will be interesting to see if we can get risk-off confirmation run from this next week (look for 3/4 green days).
Risks to the view:
1. US Earnings have outperformed imo on average this Q, so the risk-run may be sustained for longer than the 2wk window that I expect. Nonetheless, i think even this is capped at 4wks e.g. we should be in full bear mode by the start of September - look out for the confirmation, a run of 3/4+ days of consecutive safe haven gains is often all the markets have to signal to show
Comment:
UPDATE:
1. Some Bearish UJ bias coming in from JPY Officials/ GS:
- MR YEN SAKAKIBARA: ABE STIMULUS PLAN WON'T HAVE A MAJOR IMPACT 100 $YEN LEVEL NOW EYED
- JAPANESE PM ABE ADVISOR HAMADA REITERATES OPPOSITION TO HELICOPTER MONEY
2. GOLDMAN: RISK RALLY DRIVEN BY COMBINATION OF LIGHT POSITIONING INTO BREXIT AND SEARCH FOR YIELD
-Risk Appetite Indicator Now Neutral, Suggests Markets More Vulnerable To Growth, Policy Disappointments
1. Some Bearish UJ bias coming in from JPY Officials/ GS:
- MR YEN SAKAKIBARA: ABE STIMULUS PLAN WON'T HAVE A MAJOR IMPACT 100 $YEN LEVEL NOW EYED
- JAPANESE PM ABE ADVISOR HAMADA REITERATES OPPOSITION TO HELICOPTER MONEY
2. GOLDMAN: RISK RALLY DRIVEN BY COMBINATION OF LIGHT POSITIONING INTO BREXIT AND SEARCH FOR YIELD
-Risk Appetite Indicator Now Neutral, Suggests Markets More Vulnerable To Growth, Policy Disappointments
Comment:
UPDATE:
1. JAPAN FINMIN ASO: NO COMMENT ON FX LEVELS
2. JAPAN FINMIN ASO: RECENT FX MKT SHOWS EXTREMELY NERVOUS MOVES
3. JAPAN FINMIN ASO: NEED TO CAREFULLY WATCH FX MOVES
1. JAPAN FINMIN ASO: NO COMMENT ON FX LEVELS
2. JAPAN FINMIN ASO: RECENT FX MKT SHOWS EXTREMELY NERVOUS MOVES
3. JAPAN FINMIN ASO: NEED TO CAREFULLY WATCH FX MOVES
Comment:
UPDATE - Expected fiscal package from JPY MOF by BBG, seen at 7trn below expectations of 10trn+
1. Actual spending will only make up about 7 trillion yen, according to a person familiar with the matter, with the rest consisting of loans and other financing, probably spread over several years. The package is the latest in a long series that have had limited impact on the economy, while Abe’s promise to make structural reforms -- tackling areas like immigration and employment regulation -- has fallen short of expectations.
- www.bloomberg.com/ne...yen-stimulus-package
2. Hopefully these claims are true, 7trn is much below the expectation of 10trn-13trn and should certainly help $yen and £yen grind lower today.
1. Actual spending will only make up about 7 trillion yen, according to a person familiar with the matter, with the rest consisting of loans and other financing, probably spread over several years. The package is the latest in a long series that have had limited impact on the economy, while Abe’s promise to make structural reforms -- tackling areas like immigration and employment regulation -- has fallen short of expectations.
- www.bloomberg.com/ne...yen-stimulus-package
2. Hopefully these claims are true, 7trn is much below the expectation of 10trn-13trn and should certainly help $yen and £yen grind lower today.
Comment:
UPDATE:
1/ Meanwhile in Japan, the Nikkei Stock Average was down 1.3% as investors awaited details of Prime Minister Shinzo Abe's much-touted 28 trillion yen ($274 billion) stimulus plan, which will rank as the largest supplemental government spending package since the global financial crisis in 2009.
But actual new, direct spending will total only about Y7.5 trillion, spread out over two years, people familiar with the situation said earlier. That would be less than the Y10 trillion package Mr. Abe introduced in his first year in office.
1/ Meanwhile in Japan, the Nikkei Stock Average was down 1.3% as investors awaited details of Prime Minister Shinzo Abe's much-touted 28 trillion yen ($274 billion) stimulus plan, which will rank as the largest supplemental government spending package since the global financial crisis in 2009.
But actual new, direct spending will total only about Y7.5 trillion, spread out over two years, people familiar with the situation said earlier. That would be less than the Y10 trillion package Mr. Abe introduced in his first year in office.
Comment:
UPDATE - Official details are out:
1. JAPAN FISCAL MEASURES COMPRISE 7.5 TRLN YEN IN NATIONAL, LOCAL GOVT SPENDING, 6 TRLN YEN IN FISCAL INVESTMENT AND LOANS -GOVT
2. JAPAN PM ABE'S CABINET APPROVES FISCAL MEASURES WORTH 13.5 TRLN YEN IN STIMULUS PACKAGE TOTALLING 28.1 TRILLION YEN -GOVT
1. JAPAN FISCAL MEASURES COMPRISE 7.5 TRLN YEN IN NATIONAL, LOCAL GOVT SPENDING, 6 TRLN YEN IN FISCAL INVESTMENT AND LOANS -GOVT
2. JAPAN PM ABE'S CABINET APPROVES FISCAL MEASURES WORTH 13.5 TRLN YEN IN STIMULUS PACKAGE TOTALLING 28.1 TRILLION YEN -GOVT
Comment:
UPDATE - RISK-SENTIMENT INDICATES RISK-OFF TREND HAS RE-BEGUN:
1. Gold today, assuming it closes higher (already up 1%) will be the 3rd day in a row of gains. This as discussed above significes that the risk-off/ safe haven trend of 2016 has likely restared (given in this risk run gold hasnt had 3 green days consecutively once).
- 3/4 greeen days confirms it for sure - the more in a row the more confidence we can have that safe havens are here to stay.
1. Gold today, assuming it closes higher (already up 1%) will be the 3rd day in a row of gains. This as discussed above significes that the risk-off/ safe haven trend of 2016 has likely restared (given in this risk run gold hasnt had 3 green days consecutively once).
- 3/4 greeen days confirms it for sure - the more in a row the more confidence we can have that safe havens are here to stay.
2. US rates sold-off despite a Hawkish FOMC on Thursday as US GDP undershot the mark by quite a margin at 1.2% vs 2.6% consensus - as a result rate hike expectations fell somewhat on the day from 18% to 12% chance in september (25% earlier in the week), and Fed speaker reiterated dovish sentiments in his speech inlight of the GDP print - lower rate expectations are likely to boost risk markets, and lower USD - both of which increase risk market attractiveness.