The models are broken
The market is trying to get back to the pre-Covid and pre-war times, but that model is broken. A new dawn is here and the financial world needs to adapt.
Steen Jakobsen,
Chief Investment Officer
Chief Economist & CIO
Summary: US equity markets probed new highs for the cycle yesterday, but the move was rejected in late trading yesterday, though the action overnight has seen what seems the inevitable bounce. Today sees the release of the latest FOMC meeting minutes, though these are not hotly anticipated. Instead, we are focusing on the key technical resistance levels for equities and support levels for the US dollar.
What is our trading focus?
What is going on?
In testimony before a US Senate committee, US Treasury Secretary Mnuchin and Fed Chair Powell offered a different attitude on what is needed for the US economy, with Mnuchin arguing in favour of more aggressive opening up and “wait and see” approach and Powell indicating that more support for the US economy from the government is needed, although he was cautious to avoid too pointed support from obvious Democratic attempts to get an endorsement for their more aggressive approach.
Cboe Equity Put/Call ratio plunges to lowest 1% percentile as option traders are positioning themselves for further momentum and gains in US equities. This might be an ideal time to add long volatility in the portfolio.
The May German ZEW Expectations rose to 51 vs. 30 expected and 28.2 in April (March was –49.5). But do keep in mind – this is a typical “diffusion” survey, meaning that those questioned are merely asked to compare with how expectations are relative to the past month - i.e., yes May expectations are improving, but “current conditions” for this month were the worst for the cycle at –93.5 vs. -91.5 in April, I.e., expectations are expected to improve from an utter stand-still.
What we are watching next?
US FOMC Minutes are set for release late today. We have heard a great deal from Fed Chair Powell recently, so these may contain few surprises.
US 20-year Treasury Auction – today marks the first ever auction of US 20-year treasuries, and after a spot of weakness in US long-date US treasuries in recent days, is worth watching for the implications for the direction in yields and risk appetite. The Japanese yen is particularly sensitive to US yields, tending to rise broadly when long yields fall and vice versa.
Economic Calendar Highlights (times GMT)
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