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IG Markets - Trading Wrap

IG Markets - Trading Wrap

It’s been a pretty crazy day in Asia given all the information the markets have had to price in and absorb. The end result has been another move north in the USD, with the dollar index (DXY) the highest level since September 5, and US futures moving in-line with the USD, while Asian equities have found good buying interest.

The flows in sterling have been interesting with cable pulling back to 1.5073, while EUR/GBP saw strong inflows, with 0.8774 the high. Interestingly the market seemed to either take profits, with some players looking to square and reverse positions, and while the fundamental picture in the UK looks bleak, we get the sense that the market may ‘buy the fact’ with regards to the Moody’s downgrade. We know that both Fitch and S&P still have negative ratings on the UK, so there is every chance (more so Fitch) that more downgrades are on the way. The open of the FTSE and gilt market will be interesting and while yields should rise, we’d expect this to present itself with a buying opportunity given previous moves in both the US and French bond market post-downgrade. In the case of France, ten-year yields actually outperformed German bunds in the week following the French downgrade in January 2012.

Cable is still our preferred way to express sterling bearishness, although short GBP/SEK looks good as well. In a world where the trading community is constantly looking for the next JPY-styled move, sterling seems to be a front runner. With the BoE showing no concern for inflation, the bank has given a green light for traders to sell pounds. We prefer selling rallies to the 2012 low of 1.5271 though, given the current positioning of traders.

Japan is the Asian outperformer and our long Nikkei/short S&P idea has started on the right track. The weekend news flow has been all about Haruhiko Kuroda getting the gig as the new BoJ head, with Kikuo Iwata as deputy. While this speculation was tempered through the day with the cabinet secretary telling the market that Mr Abe had not chosen a governor, we feel this potential combination is significant and very market friendly. Hopefully this will be announced this week and from here Mr Abe’s appointment will need approval in the upper house and cooperation from the opposition parties will be key. We feel there are some technicalities which will need to be addressed, but ultimately if Mr Kuroda is appointed then it should pass further down the line. Whether the BoJ can then do what Is needed to get inflation to 2% is clearly debateable, and that makes the April 4 BoJ meeting that much more interesting as it will be the first key meeting under the new senior management.

The ASX 200 is up 0.8%, although it found sellers after lunch on a disappointing China HSBC PMI print. The report showed further expansion of China’s small business sector, but it was well below expectations, and the export sub-sector reversed January’s expansion print and went back into contraction. The Shanghai Composite and AUD/USD fell also on the back of this print, and it’s interesting to see an increase again in the negative China narrative in different publications. In a loose sense, any negative news about China could be construed as positive as it feeds into the perception of a RBA rate cut, which re-enforces the yield trade that has supported once again today.

So, with all the excitement in Asia, European markets should get off to a mildly positive start, and although S&P futures are down modestly they remain 0.3% higher than the close of the European cash session. Our out-of-hours flows have been heavily biased on the short side (68% of all open positions have been short, although this does not separate new shorts from those who have closed longs), which is what we’d expect given the Moody’s downgrade; however the FTSE looks set to only modestly underperform on a percentage basis. Italy perhaps is the bigger issue now that needs to be resolved, and the up-coming elections have the premise to cause a spike in volatility. It seems the lower house is set to be won by the centre left, but the real drama comes in the 340 upper house elections. Polls close at 14:00 GMT (01:00 AEDT), with results expected to trickle out an hour or so later. Look for EUR/USD to push towards 1.3075 on a hung parliament decision. When you have a country with such high levels of public debt, the bond market will not be happy with political instability and the risk is that some of the trust the market has built up under Mario Monti’s technocrat government will be un-done.

US markets will also be keen to see if an agreement can be formed between heavy-hitters Harry Reid, Mitch McConnell, John Boehner and the President Obama in the short-term, so that the CBO (Congressional Budget Office) can look over the proposal, prior to the potential vote that would be needed in both houses. San Francisco President John Williams suggested the drag on GDP from the sequester could be as much as 0.6%, although many feel the rhetoric from the President (who actually came up with the idea) portrays this situation as far worse. The talk in the market is that the President is using the sequester to get the Republicans on side to raise revenues by imposing higher tax on the rich, so perhaps this is more a political exercise. Either way, pushing the sequester back by another three months could in theory make the impact on GDP worse.


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