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Trader thoughts - a classic risk aversion day

Chris Weston
Head of Research
9 Mar 2023
It’s been a strange old day – equity has been sold, as has the USD and crypto, while US bonds have rallied hard.

Everyone is trying to find a reason and while we can point to prepositioning ahead of US nonfarms, Challenger detailing the largest number of announced job layoffs since 2009 and fears of a deposit run in SVB Financial - one questions if this news flow truly warrants what has been a classic risk aversion day.

Tesla (-5%) has been given increased attention and is trading heavy on the day, where shorts have worked well, with the stock starting top left and closing bottom right – a short seller’s dream. In the financials space, there are legal issues afoot at JPM and the stock has found its way to $129.21 before buyers have supported, although the bounce is hardly convincing.

The XLF ETF closed -4.1% and has smashed through its 200-day MA and looks destined for lower levels. The regional bank ETF (KRE) has been where the main focus has been placed, with the market smacking this 8.1% lower on worries about SVB Financial solvency (the stock is -60%) - concerns that a deposit run has led to a chunky capital raising, with S&P giving them a rating downgrade in the process.

We can go inside the S&P500 where just 95% of stocks closed lower, and we see utilities and staples as outperformers, but even these sectors closed lower and there was no green on screen in either sector. The intra-day tape of US500 shows the market crumbling as price traded through 4000, with a relentless liquidation into 3907, before the selling abated and consolidation kicked in. The 200-day MA has failed to hold the market and we’ve seen a close below the 2 March swing low – one can imagine CTAs would have been cutting longs and options dealers hedging flows would have resulted in shorting single stock names and S&P500 futures – how much of this can be put on 0DTE option flow?

Traders have been good buyers of volatility, with the VIX pushing up 3.5 vols to close at 22.6% - this could be at 25% if we get a hot NFP.

We’ve seen US Treasuries well bid, notably in 2’s (-20bp) and 5’s although the ultra-long-end (the 30yr Treasury) has barely moved – rate hikes have been modestly priced out and we now see 39bp of hikes priced for the 22 March FOMC meeting – clearly sentiment and broad market positioning now hinge on today’s US nonfarm payrolls report, it is the big landmine for traders to navigate.

The consensus estimate for US NFP is set at 225k, with hourly earnings called up 4.7% YoY – while the market has clearly pared back positioning on the day – having been super short bonds – it feels like the market is still positioned for a print of 250k and above consensus surprise. After all, NFP has beaten expectations in 10 of the past 10 releases.

The USD has followed US bond yields lower but it’s against the JPY and CHF where the USD moves are most pronounced. USDJPY found sellers into the 200-day MA and hasn’t looked back since and we look down to 135.37 as the next support level.

We see the BoJ meeting in play today (no set time) and BoJ gov Kuroda's final hoorah at the helm of the BoJ. In theory, it should be a non-event but there is a non-zero chance that Kuroda goes out with a bang and alters YCC – so if running JPY and JPN225 positions do consider your exposures and monitor price moves into the Asian afternoon.

Crypto has been given a working out by the market on the Silvergate collapse and as we close out US trade and roll into Asia the moves are getting a bit ugly. Bitcoin trades -6.5% and ETH -6.3%. On BTC we’re seeing better buyers below the 18 Jan lows, and ahead of the 200-day MA but there is limited conviction to the buying – the bulls will want a bounce here, but I question how high rallies go before traders fade the move.

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