Weekly Review and Outlook 15th February 2016

Mark Nugent2016 H1, February 2016, Trading Plan

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Review of Last Week – week commencing 8th February 2016.
Fundamentals and Sentiment – Market Moves

For most of last week until Friday the risk appetite was definitely off. The Vix > 25 for the entire week. Commodities plunged to multi-year lows but recovered on Friday. WTI hit $26 per barrel during Thursday but recovered on Friday to $29 per barrel. Brent fallowed the same profile. Stock markets were all heavily down but turned upwards on Friday. Bonds – US, German and UK 10 year bond yields are all down on the year and the month but showed a small recovery on Friday as risk sentiment turned to on. The JPY index saw weakness on Friday after two weeks of strengthening.

Fundamentals and Sentiment – Economic Calendar

Fed Governor Yellen testified for two days in the house. Perhaps the most important statement she made was that she wouldn’t take “negative interest rates off the table”. Astonishing.

Since last week’s final Daily Alert, RBA Gov Glenn Stevens says that things don’t look particularly good with the global economy but he does think that the recent market turmoil is excessive. German preliminary GDP was on target. US Core and headline Retail Sales beat target.

Trades

I placed two trades last week. Both closed at breakeven. Firstly there was EURGBP long which was based on the theme of GBP weakness aided by safe haven flaws strengthening the euro. This trade was clipped out at breakeven.

The second trade was GBPJPY which was a new idea. I was trading the negative sentiment and going against the fundamentals. So this trade was about Japanese Yen strength. I got in at the end of the move and was lucky to escape with my capital intact.


Outlook for This Week – week commencing 15th of February 2016
Fundamentals and Sentiment – Big Picture

There is a fabulous article on CNBC which details the fundamental strength of the US economy and the fundamental weakness of the Euro zone economy. The link is at the bottom of this article. If you read one thing this week you should read that.

European banks – there is no real capital market in the Eurozone other than through the banks. This is different to the situation in the US and the UK. What this means is that if the banks have a problem then the European economy has a problem. The major European banks have seen huge share price falls over the last 12 months and recently their corporate bonds are being sold off by investors on fears of default and/or failure to pay the interest (which is allowed with these contingent convertible “CoCo” bonds if business performance slips).

Interestingly, former Vice Chairman of Citi Bank has said that Draghi has told him personally that his desire to implement more QE in December 2015 was derailed by Germany. I suspect that further pressure has built up since then and Draghi will not be so easily swayed in March.

People’s Bank of China governor Zhou Xiaochuan voiced support for the Yuan and set it’s fix vs the USD at a one-month high. This has been instrumental in maintaining risk on sentiment into this week.

Japan negative interest rates continue to show the Bank of Japan’s concern about the Japanese economy.

Fundamentals and Sentiment – Economic Calendar

Monday is a US bank holiday. Draghi will be speaking.

Tuesday – UK CPI and New Zealand Global Dairy Trade.

Wednesday – the highlights of the week. The FOMC minutes are released. This will tell us surely that the members of the committee no longer think that there will be four interest rate hikes this year.

Friday brings UK Retail Sales, Canadian Core CPI and Core Retail Sales and US Core CPI.

Big Picture + Economic Calendar = Themes + Trading Ideas

We can trade in two ways:

  1. a) Follow fundamentals and complementary sentiment (i.e. risk on) or
  2. b) Follow short-term negative sentiment and go against the fundamentals.

I will focus on a) but I will allude to b) at the end.

  1. Fundamental Euro Weakness – Sell EURUSD; Sell EURCOM.
  2. Fundamental USA strength – Sell EURUSD (as above); Buy USDSGD; Buy USDJPY.
  3. Fundamental JPY weakness – Buy USDJPY (as above).
Watch list
  1. CAD/oil – may have missed the boat.
  2. UK EU agreement on Cameron’s demands (Buy GBPCOM).

The above assumes we are risk on, as adjudged by equities (up) and bonds (prices down, yield up).

If we are risk off and you want to trade, trade JPY and Euro strength and COM weakness. I will trade fundamentals with complementing sentiment, i.e. risk on.

Monday Morning Sentiment

A quick look at the bond and equity markets show that Friday’s improved positive sentiment has rolled over into this week. We are risk on.

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The link to the CNBC article about the US and Euro Zone economies is HERE. You can download the presentation slides HERE