HYCM Market Insights & Trading Tips

More downside for the dollar on S&P500 fall

USD to be pressured

After the Federal Reserve brought forward a 50bps rate cut from the March 18 meeting this week we saw the USD fall off quickly on the announcement. The expectations from the futures market were 100% for a 50bps rate cut and 70% for a 75bps rate cut. The delivered cut, early, pushed the dollar lower and the DXY is held under the 200EMA on the daily chart.



According to JP Morgan the last instances where the Federal Reserve has cut interest rates in an 'inter-meeting', it has cut rates in the next meeting as well. History would indicate that further dollar declines are ahead.

S&P500 historical fall from 2018 and impact on the dollar

Furthermore, reading Bloomberg this AM, we came across another historically interesting piece. This time it was about the response of the Bloomberg Dollar Index to the last heavy S&P 500 falls. When we had the last US-China trade war-induced stock sell-off in 2018, it took a few weeks for the dollar to bottom out. In this case, the USD remains a sell on rallies if history is to be repeated.



We expect to find USDCHF sellers at a pullback to daily resistance. If coronavirus fears continue to mount, then the CHF will find buyers.



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Gold and silver on their way up - what's to stop the move higher?

Profit takers on gold again?

There was a rumour last Friday that caused us to close the short term gold longs. Namely, that equity investors were cashing out their profitable gold positions to pay for their equity margin calls.

Ok, that makes sense, in theory. The price action was very weird, so we closed the short term longs. Yet, we were not convinced because we haven't seen the evidence for it. However, for the sake of argument, let's assume it is correct. Could the current environment for gold still see gold sellers - like last Friday?

Well, if the rumour is correct - we shouldn't expect lightning to strike twice. Those investors who had their margin calls have serviced them and presumably adapted to present market positions - deleverage and widened stops. Another drop in equities should only support gold buyers.

Good conditions for gold buyers

It is hard to see a better picture for gold buyers at the moment. We loaded up gold and silver longs again after the Fed cut rates this week by 50bps. Record low US bond yields, with 10-year Treasuries below 0.9%. A weak USD as the futures market looks for further cuts on March 18. A flight to safety as JPY, CHF, and gold all find buyers. We are expecting overhead daily resistance to crumble without a fight.



After all, who would be selling gold as the world's central banks cut rates one by one in double-quick time? Furthermore, coronavirus cases will continue to grow all weekend. Who fancies being risk 'on' into that? If anyone closed gold positions on Friday, like we did. Surely they have loaded up after the Fed cut rates by 50bps? Looking at the equity markets and US bond markets this AM - the case for more upside is golden.



As a final note - don't forget silver. It is still very cheap relative to gold.

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Don't be a hero, be a bargain hunter!

It's wild out there

Ok, it's a crazy day out there and one we will all remember this day going forward. We were there. So, here are some things not to do today as well as other things to do, so you are still trading tomorrow. Fortunes are lost AND made on days like these.

Things not to do - Don't be a hero

Don't over leverage. With markets crashing, circuit breakers in the equity markets, and monthly moves in minutes you will get badly burned if you trade with high leverage. You will either make a fortune or lose your entire trading account. Usually the latter. Trade with wide stops, low/little leverage or not at all. Remember that old adage; there are old traders and bold traders. However, there are no old, bold traders. If you were around in 2015 and saw the SNB remove the 1.2000 peg you have no excuse to get caught out today. Unexpected events can and do occur, in markets. Today is such a day across multiple markets.

Things to do - Be a bargain hunter

With US Oil down -28% be a bargain hunter. Look for that ridiculously cheap price. In 1998 we had oil prices down to under $10 a barrel. Why not put in a few pending orders, so if this is the mother of all crashes. which it looks like it is shaping up to be, you can grab a bargain along the way. Just use no leverage so even if the market floors you are still sitting pretty.



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Has the relentless bid in bonds left investors locked into future losses?

Bond bonanza in Bloomberg Barclays Global Aggregate

According to Bloomberg, around $54.8 tln of the $60.7 tln of securities making up the Bloomberg Barclays Global Aggregate Index have negative real yields. This means investors have been happy to park their money, even if it means a negative real return. That tells you how strong the demand for bonds has been as 90% of the total bonds on offer are showing negative real yields.

Coronavirus to turn the corner in April?

The coronavirus is bad, and the worst is undoubtedly still to come. However, the Hang Seng and Shanghai Comp. traded higher on the session today with news of a further reduction in China's additional coronavirus cases. President Xi also visited the epicenter of the Wuhan coronavirus outbreak in a symbolic move showing that China is controlling the virus outbreak. Is the coronavirus worst over for Hubei? Yes, it seems to be. Now, the Hubei outbreak really got the market's attention around Jan 23. Traders were shorting the N225 futures as market sentiment shifted. Around 6 weeks ago. So, back of the envelops stuff, it looks like a 6-week curve from onset to peak reduction. In 6 weeks' time, the worst of the coronavirus will be behind us. However, lots of investors will most likely find themselves locked into negative-yielding bonds. The US has around 88% of its market in negative real yields and the eurozone, Japan and New Zealand have more than 90%.

Bond bubble as negative real yields abound?



This could be the top of the bubble for bond prices. Others have been warning of it for months. Bonds have been bid and bid for good reason. However, in around 6 weeks' time, this horrible virus will be behind us. Then bond prices may well look ridiculous and investors pull the plug. This is especially the case when emerging bond markets do offer positive yields e.g. Malaysia, Singapore, Thailand, South Korea, Mexico, and Russia. A more genteel global economy could see risk assets being ditched. This looks like the view from the top for bonds. If not here, not far from it. What do you think? Unfettered optimism? Will bond prices march ever onwards or can you see a potential top from here?

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US oil: Mind the gap, please

Oil falling

The recent capitulation in the oil market has come due to a number of conspiring factors. Firstly, the breakdown in OPEC talks with Russia reluctant to agree to the 1.5mln bpd production cuts. Secondly, the effective declaration of 'oil war' with maximum production planned for April 01 by Saudi Arabia. Thirdly, the falling oil demand as coronavirus spreads. These three factors, alongside existing oversupply, have created a perfect environment for oil sellers.

Mind the gap, please

There remains a gap from the shock news over the weekend from Saudi Arabia's price war that is still to be filled. If you take a look at the chart below you can see the large gap on the chart.



Expect sellers from the $39 and $40 region if we move back into that region. The main picture for oil remains bearish, so expect this region as a sensible place for sellers to re-join the downtrend.

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S&P500 Futures have 30% reversal insight as coronavirus declared a global pandemic

Via Bloomberg

This AM Bloomberg Market's Live Blog highlighted that S&P500 futures latest falls bring the 30% fall figure into play. That would take it back to the December 2018 trade war outbreak low between the US and China.



Now at the start of the year, the question was, 'will bond yields rise and follow equities, or will equities fall and follow the falling bond yields'. It was the mother of divergences that has finally been answered, 'Equities are in deep falls in line with bond yields falling to record lows'. It just took a global virus to decide the case.

How low can we go?

With the World Health Organisation declaring the coronavirus a global outbreak and the speed of the virus spreading. It is a slightly delayed chart, but If you have been following it for the last couple of weeks, you could see that a global pandemic was inevitable.



So, at what point do long term investors step in and grab a real bargain? With the virus outbreak anticipated to be temporary, this could be a great opportunity to buy into some of the world's best indexes at good prices for the long haul. With the peak of the virus still ahead, it seems that new lows are imminent. However, at some point, the market will get ahead of itself and good long term bargains can be had.

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Will coronavirus provide an unexpected Brexit cure?

The law of unintended consequences

As the global equity markets crash the world is increasingly being brought to its knees. Companies who were just about getting by now faces imminent disaster as consumer behaviour changes quickly. Over here in the UK, I had to travel to London on Tuesday for a CNBC interview. The train station, Birmingham New Street, is usually full of commuters. It was notably down. The train itself had only one other person in my carriage. The commuters were spread out in the next carriage, leaving a distance between one another. Last night I was picking my son up from his regional tennis training outside a central collection point; a cinema in a retail park. The cinema looked empty, apart from the staff. The hit to the economy, temporary or otherwise, is obvious.

Weakness leads to looking for alliances

It is no coincidence that the UK and EU have agreed to 'dial down the rhetoric' over EU-UK trade negotiations. Diplomatic sources are claiming that both sides would like to lower the temperature. In times of distress, you need to multiply friends, not make enemies. So, one of the consequences of the virus is that it will throw the EU and UK together to try to arrange a deal. The longer the virus drags on the more likely the EU and UK will be to actually negotiate a deal. The scaling back of the rhetoric is the first step. It is hard to deal with one another when you are point-scoring.

However, still expect GBP sellers

The UK Chancellor Sunak is expected to deliver a 'painful' budget in November as previous tax-raising plans were avoided due to the coronavirus outbreak. So, expect more medium-term GBP sellers as uncertainty still remains for the UK. The fiscal stimulus measures by the UK Gov't barely registered on the GBPUSD before it continued its grind lower. Now I was wondering what the impact of the fiscal stimulus combined with the monetary policy 50bps reaction would be and I thought we would see more support for the GBP. I find this a worrying sign as central banks around the world look to Govt's for fiscal support.



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US oil offering a discount for stock reserves, but they won't turn oil prices around

Support for the US Oil market from low prices

The reason OPEC negotiations fell apart two weeks ago was because of the coronavirus. It was the fall in demand from the coronavirus that led to OPEC needing to cut production by 1.5 million bpd. US oil is currently at 30.42 and Saudi Arabia must be hoping that these discount prices will cause countries to step in and top up their own oil reserves.



The US topped up its strategic reserves on Friday temporarily boosting oil, but oil was soon sold off as soon as the market re-focused on all the weekend headlines as COVID-19 spreads unabated. Central banks have tried cutting interest rates, Gov't's have tried fiscal stimulus, but this is a medical problem which needs a medical solution. The falling demand will keep oil pressured on any retracements.

So, a couple of things to watch for oil. Firstly, if China decide to stock up their reserves then expect a similar spike in oil as when the US topped up their reserves. If you have a news squawk then keep it on. Secondly, expect any spike to be sold into as the main issue remains - demand falling as the entire globe stops moving fluidly on these coronavirus fears.



There is still the potential of some oil bargains and pending orders down at $11.50 now.

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FX Week Ahead 16.03.20

The average loss for European Indices was an enormous -8.09%, the US Indices average fall was -7.21%, and US Oil also fell over 28% on Monday. Oil falls was due to tensions between Saudi Arabia and Russia resulting in the end of OPEC’s agreed production cuts from April 01. On Wednesday, the World Health Organisation declared the coronavirus a global pandemic this week and that prompted further extensive and heavy waves of equity selling across global markets. It’s been a terrible week for equity markets. The Bank of England was the latest bank to cut interest rates cutting by 50 bps last week. The bad news is that the peak of the coronavirus has not been reached yet and more shocks are still to come.

Key events from the past week

1. GBP: BoE cuts by 50bps, Wednesday, March 11. The Bank of England cut interest rates by 50 bps last week resulting in immediate GBP selling. The GBPUSD ultimately sold off helped by the strong dollar and EU-UK Trade pessimism.
2. US Oil: Oil markets plunge, Monday, March 09. The fall in the crude complex saw double digit falls as Saudi Arabia reminded the market of how low oil prices can be without the work of OPEC to prop up prices. Falling demand for oil, over-supply, and reluctance for Russia to cut, all point to further oil selling.
3. ECB: European Central Bank holds rates, Thursday, March 12. The ECB kept their interest rates unchanged, but announced a €120 billion package of quantitative easing. The EURUSD weakened on the action from the ECB sending the Dollar Index higher on Thursday and impacting the major pairs.

Key events for the coming week

 

1. USD: Fed rate decision, Wednesday, March 18. The expectations are that the Fed will cut rates by another 50 bps on Wednesday with the market odds of a 100 bps rate cut now at 85%. The main driver of the USD at the moment is the Fed’s monetary policy and hopes of further fiscal stimulus to the US economy.
2. CAD: Core CPI (Inflation), Wednesday, March 18. The expectations are that the BoC will cut rates even further after their surprise 50 bps rate cut last week. Weak inflation data this week will only strengthen bearish expectations.
3. Coronavirus: Watch out for the latest virus news. The impact of the coronavirus is once again felt this week as behavioural changes start to further impact markets. Expect profit warnings, falling equities, more enforced quarantines, and falling oil demand to all weigh on the market again this week.

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VIX hits highest closing level on record indicating stocks have more to fall

Problems mount for financial markets

The Volatility Index had its highest recorded close yesterday as it surpassed the highs from the 2008/9 financial crisis. The situation that is overwhelming the market is that too many different sectors are going to be impacted by the coronavirus at the same time. The mantra , 'too big to fail' from 2008 has become 'too many to fail'.

VIX close surpasses high closes from 2008/2009



The VIX indicates that there is still yet more stock pain ahead. Even though the S&P500 fell nearly 12% yesterday lower prices look ahead. A multiyear trend line has now broken this week and price is moving towards the S&P500 lows as President Trump took office.



COVID19 Spread Unrelenting

New Fiscal stimulus measures announced daily, central banks falling over themselves to cut interest rates, social distancing polices expanding on the hour and yet the markets tumble. The issue here is that this is a medical problem that needs a medical solution. As cases continually mount, along with the death toll, then fears will paralyse citizens as business can't be 'as normal'. The VIX is showing what the coronavirus case table is indicating: A growing problem.



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CADJPY with more to fall as oil looks to head lower

The case for further CAD downside

Canada has a strong export oil market, so the fate of the CAD is tied up with the movements in oil. With OPEC discussions breaking down and Saudi Arabia planning to boost its oil production in April to capacity this has led to heavy pressure in the crude market.



CADJPY in the 90's

The CADJPY pair going back to the 1990's has been down as low as 58. This was when spot oil was around the $20 point. It is circled in red on the chart below.



So, all of this makes sense for further CADJPY downside. Selling at market, or pullbacks make sense and a target of 71.50 in the near term.



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Don't buy gold until the VIX subsides

When VIX falls, look to gold. As long as VIX is high, look to USD.

The normal playbook is that in times of crisis, buy gold. However, although that is generally true ,it is not the case when there is a really strong crisis like we have now. In these instances gold sells off.

Look at the chart below and you can see that when the VIX (the fear indicator) is highly elevated, like in 2008/09 and 2011, gold moves sideways or downwards.



And in the late 90's:



Can you see the impact? Now at the moment people are liquidating all their positions and converting into cash.
So, if you are looking to buy gold, wait for the VIX to drop.

What about the dollar and the VIX?

Now the USD is bid as a safe haven when the VIX is high. So, if the VIX remains elevated then the Dollar index (USD) is bid.



The above is why the assertion 'when the VIX falls look to gold, when the VIX is high look to USD' has been made. The new swap lines will plug the dollar gap eventually, but not yet as the market has more panic to come. We are not out of the woods yet.

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Expecting AUDJPY sellers on pullbacks to 69-70.00

AUDJPY to find sellers

The rationale is as follows, with COVID19 spreading rapidly across the globe and the World Health Organisation recognising that the US could become the new epicenter of the outbreak any short term recovery in the AUD is likely to find medium term sellers. The US economic relief bill has given a temporary boost to stocks, but sooner or later the seriousness of the COVID19 spread is likely to return.

The JPY is supported as a safe haven currency and once the market starts to see profit warnings, dividend cuts, and share valuations slashed then the JPY will once again find support.

Expect AUDJPY Sellers



Any return to the 69.00-70.00 band is likely to find medium term sellers.

Outlook Risk

The main risk to this set up is a medical headline which indicates that COVID19 can be treated or cured. This would invalidate this outlook and result in AUD strength and CHF/JPY weakness.

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When will equities bottom? Here is one approach to take

Answering the unanswerable

Ok, no-one knows when the equity market will bottom, but it is worth doing a quick comparison to the 2008-2009 financial crisis to look for clues. One place to look at is the Volatility Index.

What is the VIX?

According to Investopedia:

Derived from the price inputs of the S&P 500 index options, it provides a measure of market risk and investors' sentiments. It is also known by other names like "Fear Gauge" or "Fear Index." Investors, research analysts and portfolio managers look to VIX values as a way to measure market risk, fear and stress before they take investment decisions.

The "fear index' is helpful to look at, because it is often when people feel less fearful that they step back into the equity market.

Look at the SP500



Look at the FTSE 100



Look at the Nikkei



So, in answering the question, 'when have stocks bottomed', remember the VIX. It may very well provide the guidance for when a bottom in the equity market is finally in and when a sensible time to buy is.

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FX Week Ahead 30.03.20

The main news last week was when the US announced a $2 trillion support package for the US economy. This resulted in the largest move up in the DOW JONES since records began as it recorded more than a 11% rise on Tuesday of last week. The S&P500 had not made two up days all month, but the relief from the US rescue package prompted back to back gains for the S&P500 midweek. However, the COVID19 crisis is far from over. With more than 500K cases worldwide we can expect further sellers in global stocks this week and elevated ranges. Manage risk accordingly.

Key events from the past week

1. USD: US Economic Bill Agreed, Tuesday, March 24. The US stimulus deal agreed last week is due to provide over $2 trillion in stimulus. The bill provides more than $130bln in aid to hospitals and $150bln to support state and local governments.
2. USD: Federal Reserve Announces QE, Monday, March 23. The Federal Reserve launched a limitless QE programme on Monday purchasing $75billion of treasuries each day last week. This move by the Federal Reserve resulted in Dollar weakness which had been very strong into the end of previous week.
3. COVID19: Spreading continues, Thursday, March 24. Intense focus remains on the spread of the coronavirus. Fundamentally, the market is selling off due to a medical issue. Therefore, if COVID19 spreads more severely, expect risk off tones to return into this week.

Key events for the coming week

1. USD: A dollar resurgence? All week With the USD the most liquid currency, if equity markets sell off this week expect more USD buyers to return. In times of severe distress, as we are having now, the USD can act as a safe haven currency alongside the JPY and the CHF.
2. USD: Unemployment rate, Friday, April 03. The expectations are that US unemployment will be deeply impacted by the COVID 19. Investors will be carefully watching this release for signs of high unemployment in the US.
3. Coronavirus: Watch out for the latest virus news. The impact of the coronavirus is probably now around three to four weeks away from its peak impact. The issue for this week will be whether the stimulus packages released around the world can support equity markets or whether COVID19 will prompt a fresh wave of equity selling.

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Euro shares: The winners among the losers

Everywhere we look it is doom and gloom. One of the sad things about working in finance is seeing trouble coming before most of your friends and family. Many thought that some people and media were overreacting about COVID19. In February there were hopes that this COVID19 would just be the ‘flu’ in a different form. Sadly, it was wrong. COVID19 is no joke and most of the world is sat at home while stock markets tumble, oil looks like heading to $10 and below and some unfortunate few are losing their lives. These are sad times and we are living through a historic moment. Those who come out of this time will come into a different world. However, not all are being battered by the storm.

Weathering the storm

European shares are heading for their worst quarterly drop in 33 years. However, among the multitude of losers there are some winners bucking the trend and not just surviving, but thriving. The main winners have been health care companies, food deliverers and video-game makers. Traditional defensive sectors have also seen increasing demand.

Take a look at this chart below outlining some of the European winners:



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UK consumer confidence will be smashed

Confidence is everything

In current markets average daily ranges have seen rapid increases. Currency pairs that normally move 50-80 points a day have been finding that they move 300-600 points. Equity markets which previously moved around a maximum of 1-2% a day are now moving up to 10% in a single market session. These are volatile times indeed. Intelligent traders are responding the following way:

 

1. They are widening stop losses. Instead of using narrow stop losses they allow for the heightened volatility.
2. They do not use high levels of leverage. Traders are making sure that they allow for the huge ranges by reducing their risk in their trades.

What is the general market outlook and when will the recovery take place?

The current market outlook remains dire. With the rapid spread of the coronavirus equity markets have been plummeting around the world and the outbreak will only get worse as more and more cases increase. The S&P500 has fallen over 13% this month, the Italian FTSE over 15% and Nikkei over 9% with more downside to come .The only thing that can change the current market outlook is if there is some effective cure or treatment found. Otherwise we can expect a rapid rise in unemployment, many more deaths, and most likely continued falls in the equity markets. These are very sad times.

How do we know when the recovery takes place?

Well, for some workers this will be a good time. They have kept their jobs and they are now saving up their disposable income. When the quarantine period comes to an end, then the income will be spent and a boost to the economy will be given. However, many others have lost their job and, even with government support, will find that they start to default on loans. We are about to have a surge of consumer defaults. Businesses will fold, one after another, and aid packages are coming. Will it be enough? Which group will win through - those who have money to spend? Or those who have lost jobs and defaulted on loans.

Will those who have kept their jobs be enough to pull the economy through? Will the helicopter money be enough?

No. Most likely, it won't be. A crisis like this is going to change consumer behaviour. Even those who have kept their jobs are going to be more thrifty. Why? Because they don't know how secure their job really is. Also, they will be trying to economise and brands that were premium before this crisis, will no longer have the same appeal. There was a similar effect post 2008/2009 and now we have two crises to shape consumer behaviour. Perhaps the fiscal stimulus measures will be enough to limit defaults. But it's not convincing. Some will not recover from this blow and it is going to be the lower paid, unskilled workers, who get hit the hardest. Again.

Take a closer look at March consumer confidence on Tuesday from the UK to get a handle on how the consumer will be hit. Spoiler alert, it is not going to be good.

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Coronavirus seven day rate of change slowing
By Giles Coghlan, Chief Currency Analyst at HYCM

A glimmer of progress, via Bloomberg

The global caseload has started to show some signs of easing now. The seven day growth outlook slowed down to about 107% towards the end of March from around a high of 123% on March 27. This data is taken from John Hopkins University. One issue here with the data below is that not all countries are testing as thoroughly as others. So for example in the UK all the people I know in my network displaying symptoms are told to self isolate at home and only contact the National Health Service (NHS) if symptoms worsen. Getting a true number on the number of COVID19 cases must be virtually impossible due to lack of effective measurement. This is why the measurement of deaths may be the most helpful indicator for the spread of COVID19.



The number of COVID19 cases is set to rise above 1 million this weekend. As long as the cases keep rising then expect further equity sellers.

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What bargains are to be had in the current crisis?
by Giles Coghlan, Chief Currency Analyst at HYCM

Carnival Cruises to weather the storm, via Bloomberg

The cruise line company, Carnival Cruise, is setting its coupon on its bond sale at 12%. It is also increasing the size of the bond sale to $4 billion. So, this means that if people are ever able to cruise again and Carnival Cruise can weather this financial storm then some investors are in for a good return on their investment.
Obviously, the high level of yield offered in the coupon is indication that the company is distressed, but the bond is still labelled as investment grade. According to Bloomberg, a BBB bond with a 12% yield is the stuff of legend. Apparently, there is a Russian 12.75% investment grade bond from 1998, but they are generally a rare thing. If Carnival can make it through this crisis, and being able to raise $4 billion is a sign it has a fair chance, then they may also be able to snap up some of the smaller struggling firms and expand themselves through the difficulty.

Now Carnival cruises might not survive with a BBB grade status, but they may still be here for another day.

What opportunities are you seeing out there that could pay the long term investor well? Oil at $20 a barrel was pretty tempting to hold until next year (especially after yesterday's news that Saudi and Russia were ready to discuss production cuts again). Or how about scaling into the equity markets over the next few months? Perhaps there are some good corporate bonds that you have your eyes on? What opportunities can you see?

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Why the dollar will strengthen if COVID19 cases increase

by Giles Coghlan, Chief Currency Analyst at HYCM


If the USD was in a vote for a popularity contest it would win. The JPY and the CHF would come in close, but when the chips are down people want USD. With 70% of all currency transactions involving the USD its popularity will remain as long as folks are scared. Folks are very scared right now, but feeling a little more optimistic today as COVID19 cases slow and Australia has a glimmer of hope with some lice treatment that are fast tracked for human trials.

Now, with the opening up of the swap lines to read some analysts you would think that the USD was about to go into a bear trend. Look at the USD bids we saw in the DXY as the COVID19 crisis really took off. The USD bids are here to stay as long as the COVID19 spread continues. Everyone will want the USD.



So, for the coming week or two it would make more sense to see a test of 102.50 in the DXY before a test of 96 or 97, as long as COVID 19 fears remain. If we do see a move down to 96 or 97 then we would anticipate buyers from the bottom of the range as well. So a clear buy from 96 and 97.

Last week we saw the USD strengthen on all the negative jobless claims out of the US. The USD was being bid as a safe haven play. As long as this narrative continues, slowing jobs and increasing COVID19 cases, expect more USD strength this week. What is interesting is to see the way the DXY responded during the global financial crisis of 2008/2009. See below.



If we see a similar response, then this tells us that global problems have the world reaching for the USD. After all, why would you reach for anything else?

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