Focus Trades from SaxoStrats team

FX FOCUS

USDJPY

  • USDJPY longs are looking interesting as we get into Nov, seasonality wise Nov tends to be a great month for USDJPY longs – having historically gained +4.01% over the last 5yrs for the month of Nov.
  • Seeing potential in long calls & calls spreads on USD/JPY (c. 114 strikes & upwards), looking for new highs to be set for the year as we potentially take out the recent 114.53 highs seen at the start of Oct. It worth bearing in mind that if DXY can close over 97.00 this potentially opens up broader dollar strength with a potential run up to 100 – majority of USD move has been from the breakdown in the euro.
  • Trade your view with Saxo [USDJPY Spot]

NZD & AUD

  • Both currencies continue to look strong in the near-term despite the stronger USD. Kiwi & Aussie longs again the likes of CAD (USDCAD seems to be in the midst of a break out higher), EUR, JPY & CHF. Note that structurally we are probably still due for lower NZDUSD & AUDUSD, yet that may not be seen until late Nov or Dec – when we enter the next Fed Hiking meeting on Dec 19.
  • On Euro shorts, it worth bearing in mind that flash GDP figures seem to indicate growth in the EZ is stalling, as we got Italian flash estimates coming in at 0.0% vs. 0.20% expected & for the block as a whole flash estimates came in at 0.20% vs. 0.40% expected. This is potentially going to complicate matter for an ECB that is keen on moving towards QT next year.
  • A scenario could be seen where the euro goes from these 1.1300 to 1.1600 range to sub 1.1000 – so one touch & euro linked put spreads are worth considering for the rest of 4Q18.
  • Trade your view with Saxo [AUD/USD Spot]

CNH

  • CNH is still all focused about the 7.00 level as we keep grinding higher – views are divergent on how big of a deal this is & whether we break through 7.00 & continue to grind up higher or whether it’s a break through & then a quick rerate to 7.10-7.20. KVP is more in the former camp.
  • One argument is popular tho - the consensus view is for a weaker yuan, not for a strengthening move which would surprise most people & hurt the USD/CNH bulls.
  • Trade your view with Saxo [USDCNH Spot]

Euro

  • GDP less than expected 0.2% vs 0.4% another nail in the coffin for the Euro. immediate challenges – the row about the Italian budget and next year’s Brexit – if break 1.13 level good chance the leg down is extended. Italy risk premium will only be priced out of the Euro once a viable solution to the budget debate emerges.
  • Until this point the euro’s appreciation potential remains limited, and the market situation may need to get worse before it gets better, with the key question being how much pressure will be exerted in order to bring about a policy reversal. At this point still assume the ECB will be able to begin to normalise its monetary policy next year, a move which is already priced in.
  • Trade your view with Saxo [EURUSD Spot]

Commodities

  • Gold is starting to crack back below the key $1230 level, as we are seeing signs of stabilization in equities – likely need to wait until after the Nov 8th US Midterms for a sustained rally in Equities & higher move back up in US yields & rate expectations. It is believed that we will shortly be back at the $1200 levels & potentially could make a run for new lows. Structural long gold bulls still likely have to wait for 2019 when the Fed is closer towards their hiking regime.
  • Copper has held up tremendously well on the face of a stronger USD & slowdown in China – hard to say if this is some underlying strength in the metal or just a delayed lag to a move down sub $250
  • Trade your view with Saxo [XAUUSD Spot and Copper Futures HGZ8]

EQUITIES FOCUS

Aussie Big 4

  • AU Banks consensus very pessimistic, fallen around 30% from the 2015 highs, so bar to surprise is low. But with so much uncertainty on the sidelines pressuring earnings unlikely to find the catalyst for the sector to enter a broad upgrade cycle. Need clarity on:
  • The Royal Commission final report due Feb 19
  • Further announcements of customer remediation expenses and restructuring costs
  • Removal of policy uncertainty surrounding franking credits and negative gearing emerging from the outcome of the Federal election (latest May 19)
  • Deceleration in decline of East Coast housing market. Whilst not the most significant pressure the negative sentiment surrounding the housing market will live the banks victim to offshore selling. Deposit and loan growth falling - revenue growth is going to be much harder to come by – hard to get momentum going.
  • Unlikely the FY18 earnings will be enough of a positive catalyst to deliver upgrades and re-rating. But despite the negatives, strong capital positions across the big 4 will reduce the likelihood of dividend cuts and with an average gross dividend yield of 9.8% further downside should be limited.
  • Trade your view with Saxo
    [Commonwealth Bank of Australia (CBA:xasx);
    Westpac Banking Corporation (WBC:xasx);
    Australia and New Zealand Banking Group (ANZ:xasx);
    National Australia Bank (NAB:xasx)]

Silver Lining

  • we are approaching a seasonally strong period for financial markets, going back to 1930, the average November-December price change for the SPX in midterm election years is 3.5%, with a median of 3.7%, the buyback blackout period will be ending, and global growth, whilst decelerating, is not actually contracting.
  • Equities globally are pricing in the worst-case economic outcome heading into a seasonally strong period which could lead to some positivity heading into the end of the year.
  • Positioned more defensively, taking a more bottom up approach stock by stock, prefer to tilt to quality and low beta, min volatility – can play this through ETFs. Still invested in equities, expected real rate returns are still higher for equities compared to fixed income if buying stocks for capital appreciation. Yield on a 2yr note or 1yr bill or mortgage bonds for a conservative investor is getting to levels where can compete with stocks dividend yields.
  • Trade your view with Saxo
    [Examples of ETFs: SPDR S&P 500 ETF (SPY:arcx);
    Vanguard S&P 500 ETF (VOO:arcx)]

Weekly Most Traded A-shares *

Stock CodeStock NameSaxo CodeAverage Daily
Value Traded RMB
(25 Oct – 31 Oct)
601318 CH EquityPING AN INSURA-A601318:xssc6,122,739,400
600519 CH EquityKWEICHOW MOUTA-A600519:xssc5,328,784,800
600030 CH EquityCITIC SECURITI-A600030:xssc2,859,375,800
000333 CH EquityMIDEA GROUP CO-A000333:xsec2,568,090,333
300059 CH EquityEAST MONEY INF-A300059:xsec2,213,279,800
000651 CH EquityGREE ELECTRIC-A000651:xsec2,067,675,000
600036 CH EquityCHINA MERCH BK-A600036:xssc1,962,042,200
000858 CH EquityWULIANGYE YIBI-A000858:xsec1,909,809,400
000063 CH EquityZTE CORP-A000063:xsec1,886,985,400
600518 CH EquityKANGMEI PHARMA-A600518:xssc1,765,478,800

* Source: Bloomberg

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