Senior Quantitative Analyst, Saxo Bank
Forex: USD focus yielding to JPY focus as risk appetite deteriorates, yields drop.
• USD: less focus on the rally as JPY and CHF safe havens take over, but firm against EM, riskies.
• USD: if risk appetite continues to deteriorate, we see a conflicting signal as lower yields remain bearish and USD liquidity supportive.
• JPY: EM woes are supportive, and rally goes into hyperdrive if risk appetite weakens further and yields/oil prices drop.
• CHF: finding its old safe haven bid in line with developments in Italian yield spreads with core EU bonds.
• CAD: watching closely for major deterioration if oil prices correct. Risks to CA economy from macro-pru policy shifts.
• GBP: ongoing Brexit woes and slightly inflation miss keep pressure up on sterling. 1.3450-1.3500 key pivot area broken. 1.30-1.29 potential.
• EM: most emerging markets are weaker but not disorderly so as major equity indices have held up well until very recently. Risk is high, however.
• TRY: the weakest link among the more liquid EM currencies and the move has gotten disorderly; we see contagion risk.
• CAD, AUD, NZD: the commodity dollars were resilient until risk appetite weakness came into focus; this is a big downside risk for all three if risk conditions worsen.
Tech levels on watch for developments
• EURUSD: 1.1710 area last notable support ahead of full range low toward 1.1555 and then the old 1.1500 line.
• USDJPY: 110.00-25 was a key focus on the way and now acts as the downside pivot.
• EURCHF: 200-day moving average (now 1.1650) has often been influential; we have traded below this week on Italy concerns.
Trade themes
• USDCAD upside: On a close above 1.2900 after this week's FOMC minutes, and assuming oil prices capped, looking for 1.30-1.31 break.
• EURJPY lower: If risk appetite weakness continues and US yields drop further, a break of 129.25 could lead to 126 or lower.
• GBPUSD downside: bears may stay short on the 1.3450-1.3500 break for a test toward 1.3200 or lower.
Equities: Global stocks fail to break above March highs
Countries
• Switching to negative from neutral on US equities as USD is strengthening and risk is coming off in EM.
• Switching to negative from positive on EM equities as strong USD and rising rates are opening cracks across EM credit and equities.
• Switching to negative from neutral on UK equities as the drivers (oil, weaker GBP and M&A) behind the recent rally are exhausted.
• Switching to neutral from positive on European equities as a weaker EUR provides a tailwind and the macro surprise cycle can only surprise to the upside.
• Remain positive on Hong Kong equities as long as Hang Seng stays above 29,000; potential upside catalyst is China stimulus and A-shares inclusion.
• Switching to neutral from positive on Japanese equities as momentum is likely to end on stronger JPY in risk-off scenario.
Industries / factors
• Best factor strategy in 2018 has been long least-leveraged companies and short most-leveraged companies.
• Preferred industries: semiconductor, retailing, software, apparel, automobiles.
• Least preferred industries: media, telecom, beverage & tobacco, biotechnology, household products.
• We are still overweight automation, battery, miners with exposure to lithium and nickel.
Themes
• The US 10-year interest rate is above 3% and with a strong USD, the EM segment is under pressure.
• Increasing stress is witnessed in EM countries such as Turkey, Argentina, and Pakistan.
• Italy's new populist government has pushed the Italy-Germany 10-year yield spread up by 75 bps.
• Brent crude at $80/barrel is a headwind for growth and increases living expenses dramatically in EM, on top of the strong USD.
• US/China trade relationship remains volatile with no conclusion yet; North Korea summit in June is likely to fail.
Commodities: Brent range raised to between $71 and $82/barrel
Energy
• An ongoing and future threat to supplies from Venezuela and Iran has shifted Brent's trading range sharply higher .
• Buying fatigue emerging above $80/b with funds cutting bullish bets to five-month low.
• Opec and Russia seem ready to increase production to meet the shortfall from Venezuela.
• Sanctions and tariffs together with rising fuel prices may eventually lower outlook for global growth and demand.
• Bias: Failure to extend beyond $80/b has raised the short-termrisk of a correction to $75/b.
Metals
• Gold finding support at $1,285 but needs to break back above $1,305/oz before attracting renewed fund interest.
• Hedge funds have cut their net-long to a 10-month low and are unprepared for an upside break.
• Bias: Bullish above $1,305 and neutral below $1,262/oz.
• Silver continues to find relative strength against gold with demand seen above a gold/silver ratio of 80.
• Copper: Rangebound between $2.95/lb and $3.3/lb with focus on global trade tensions, EM slowdown and the stronger dollar.
Agriculture
• We maintain a bullish outlook for grains as the outlook improves.
• Unfavourable weather potentially impacting global stocks while intrinsic demand continues to rise.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
