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The schooling of traders - risk is flying as sentiment switches yet again

Chris Weston
Head of Research
14 Oct 2021
We end the week with risk flying – one by one the market concerns get swept aside and the wall of worry is climbed.

The VIX index sits down 1.8 vols at 16.8% and eyeing a move into 16%, with both 1-month put and call volatility falling – the VIX futures curve is moving deeper into contango, which again just incentivises traders to sell volatility for the carry – but it’s clear that portfolio hedges are being unwound, which may prove to be premature but tells you about the backdrop for risk – hedges are a drag on portfolio performance in good times and always need to be assessed.

Daily of S&P 500


(Source: Tradingview - Past performance is not indicative of future performance)

We see the S&P 500 pushing for a break of the 50-day moving average again and I like to think good things happen above the 50-day, so a break here and I’d feel more confident of a challenge at the all-time highs of 4545. We’ve seen the first higher high on the S&P 500 for a while and tech guys will see that as a clear positive. Q3 earnings from Bank of America, Wells Fargo, MS, and Citi have seemingly helped shape things, but the commodity trade has worked too, with industrial metals pushing strongly higher, and crude working into new highs on this bull run.

Breadth (in the S&P 500) has been good on the move with 93% of stocks higher, led really by materials and tech – and there are no sectors in the red. We watch for earnings from Goldman’s in the session ahead, with a focus on US retail sales (23:30 AEDT) too.

Rates pricing was getting rich, and we’ve seen some buying on the day in Eurodollar and fed funds future into 2023/24, with a small degree of implied hikes being priced out, which I guess is giving some additional life to risk assets – there has been a clear test of the Fed’s ‘tapering is not tightening’ view of late, but traders are sensing some value here now, and perhaps that’s a reflection of the new commitment from some key players to go after the bottlenecks plaguing businesses (and inflation) – whether that continues is yet to be seen, but it is weighing on bond yields with 10yr real rates -3bp to -102bp. This has kept the USD in check, and we see higher beta FX positions working well, notably the NZD, SEK, and CAD.

The JPY finds sellers again, although it’s hard to say this is really a carry move, but more that equities are going up hard, and the JPY has no place as a hedge if the S&P500 closed +1.7% and NAS100 +1.9%. USDJPY is where our flow has focused on and clients are now quite widely short the pair, with 85% of open positions held short. NZDJPY (+1.4%) has been the trade du jour in G10 FX as the cross eyes the YTD highs of 80.18. CADJPY has broken out firmly through 92.0.

Daily of CADJPY


(Source: Tradingview - Past performance is not indicative of future performance)

The trend-following crowd would be all over this JPY move – the JPY crosses would have flashed up on the radar some time ago and they would have been adding to length. It’s the macro discretionary players that also need to be riding this, especially anyone who has to benchmark performance for fees. CADJPY has rallied 8.3% from the Sept lows, but how many would have held into 92? This is the art of trading for me – it’s not about cutting losses – that is a given, get it done early and never regret it. Holding on when the trade is working and extracting every ounce of performance is where these players will outperform – a couple of 8% trades (pre-leverage) in FX is always going to get it done, so when you see moves like we’re seeing now in the JPY pairs you’ve got to nail it.

Daily tech on XAUUSD


(Source: Tradingview - Past performance is not indicative of future performance)

Needless to say, Gold in JPY terms (XAUJPY) is pushing further higher and is in beast mode. XAUUSD is up smalls but is pushing the June downtrend, with the recent inverse head and shoulders targeting a move into $1830. The set-up does look interesting into $1833, as this is the neckline of the far more pronounced inverse H&S – which if broken in the weeks ahead could take us to new all-time highs. I am not saying it will be the case, but $1833 is the level all gold heads need to have on the watch list. Take the timeframe out and see a cup and handle (I don’t make these names up), which has got some attention for the long-term Gold bulls.

Good weekend to all and if this week has shown us is that sentiment can shift on a dime – there's still no love for risk assets here, but we simply have to have an open mind and respect the flow.

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