Focus Trades from SaxoStrats team

FX FOCUS

USDJPY

  • USDJPY volatility could be set to spike if safe-haven seeking extends here with equities down and bonds up. Given the massive consensus trade and heavy position in short US treasuries, a further equity sell-off that sees safe haven seeking in US treasuries and moves the US 10-year back below 3.1% or the 30-year back below 3.25% could see a short squeeze that really starts to feed the JPY volatility beast.
  • Technically, several JPY crosses are looking heavy and the big USDJPY starts to look the same if we poke back below the recent lows, which would already take the pair down through the multi-touch trendline stretching back to earlier this year.
  • Trade your view with Saxo [USD/JPY Spot]

AUD

  • Remain with sell on strength bias. not far from the multi-year lows posted earlier this month below 0.7050.
  • AUD remains vulnerable as a China proxy and as US/AU yield differentials widen, RBA is not in a hurry to hike the key rate. Therefore, the AUD will struggle to gain ground against the USD.
  • Break of 70 could be closer than we think. More strength in USD to come as yields higher in Q4, dip into below 70 cent territory.
  • Trade your view with Saxo [AUD/USD Spot]

USDZAR

  • The rand should be supported by local fundamentals and positive investor sentiment; favour a move to R14.20, with the possibility of targeting R13.90. However, the external environment can overwhelm local fundamentals and the direction of the rand. In this light, if the EUR/USD consolidates and remains above 1.14, we believe the rand has a good chance of strengthening. A break below 1.14 (on a stronger US dollar) would trigger another risk-off episode that likely removes any bullish momentum in the rand; in this case a break above R14.50 could be targeted.
  • Trade your view with Saxo [USD/ZAR Spot]

CONTRARIAN

  • Short US and long RoW - moderation in US growth over the coming months.
  • Higher rates will eventually bite the US economy, unless the tariffs/strong dollar/rising oil price bites first.
  • US outperformance won’t continue into 2019 – as profit margins peak given rising input costs – 1) higher rates, 2) oil prices, 3) wages, 4) tariffs and a 5) fading fiscal stimulus
  • Following a final push equity markets will succumb to ever increasing headwinds and Significantly lower earnings growth next year - earnings growth in 2019 of about 10%.
  • Two of the most underappreciated risks heading into Q4 of 2018 among investor consensus are the cyclical peaks in corporate profit growth and corporate profit margins – adopt a defensive posture as the associated rotation out of the domestic Momentum, High Beta, and Growth style factors could be quite violent given current positioning.
  • Trade your view with Saxo [DXZ8 - US Dollar Index Future Dec 2018]

EQUITIES FOCUS

EUROPEAN EQ

  • With almost 20% of S&P 500 companies having reported Q3 earnings, a clear picture is emerging. US companies are doing well, showing robust revenue and EBITDA growth up 8.6% year-on-year and 6.5% y/y respectively. On the other side of the pond, however, European companies are yet again stuck in the mud.
  • While it’s early days in the European earnings season, preliminary results see EU firms showing negative revenue and EBITDA growth as the region is obviously impacted by the slowdown in emerging markets and most notably China. Because of this weakness, though, we think European equities could be tactically interesting. As we pointed out in our recent Q4'18 Outlook, US equities are overvalued relative to both developed and emerging market equities.
  • When China’s stimulus feeds into the real economy, investor sentiment and the macro dynamics out of China will change. We expect the effects to start in Q1'19; due to the deep export links from Europe to Asia, we expect China’s rebound to lift European assets as well.
  • Trade your view with Saxo
    [VGK:arcx – Vanguard FTSE Europe ETF]
    [EZU:bats – iShares MSCI Eurozone ETF]

PULL BACK IN HIGH PE GROWTH STOCKS ASX200

  • Aristocrat Leisure is a manufacturer, developer and distributor of slot machines, online gaming content and casino management software. With operations in ANZ and the Americas. The recent pull-back in high PE stocks has created an excellent buying opportunity for investors.
  • ALL has a very strong position in the North American slot market which we expect to grow further as it releases a number of key titles over the year ahead. Aristocrat is now the second largest player in social casinos and the fifth in overall social/mobile gaming, with mobile gaming contributing most to growth in digital.
  • ALL is also expected to see solid growth in the digital side of the business following the acquisitions of Big Fish and Plarium during the year.
  • The recent strength of the USD will also provide a positive tailwind to Aristocrats earnings.
  • Trade your view with Saxo [ALL:xasx – AU equity Aristocrat Leisure Ltd]

CHINA TAX CUTS

  • China announced a plan for household tax deductions on Saturday, effective from Jan 2019, the latest move to cut tax burden and boost consumption
  • Ministry of Finance and State Administration of Taxation – Families can file for tax deduction for expenditures including education, healthcare, mortgage interests and elderly care
  • Consumer related stocks benefit from the increase in household income
  • Education tax deduction boosting education stocks - Hope Education, Yuhua Education, New Higher Education, China Education, Minsheng Education
  • Trade your view with Saxo
    [02823:xhkg – iShares FTSE/Xinhua A50 China Index ETF]
    [02822:xhkg - CSOP FTSE China A50 ETF]

CONSUMER STOCKS

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Weekly Most Traded A-shares *

Stock CodeStock NameSaxo CodeAverage Daily
Value Traded RMB
(18 Oct – 24 Oct)
601318 CH EquityPING AN INSURA-A601318:xssc7,055,590,400
600519 CH EquityKWEICHOW MOUTA-A600519:xssc5,259,955,600
600030 CH EquityCITIC SECURITI-A600030:xssc3,284,228,560
600518 CH EquityKANGMEI PHARMA-A600518:xssc2,715,231,992
300059 CH EquityEAST MONEY INF-A300059:xsec2,704,179,400
000651 CH EquityGREE ELECTRIC-A000651:xsec2,343,804,200
000858 CH EquityWULIANGYE YIBI-A000858:xsec2,326,896,600
000063 CH EquityZTE CORP-A000063:xsec2,105,250,600
600887 CH EquityINNER MONG YIL-A600887:xssc2,022,307,600
600276 CH EquityJIANGSU HENGRU-A600276:xssc2,000,182,600

* Source: Bloomberg

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