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The Daily Fix: The equity bulls in complete control; Dow 30,000 in sight

Chris Weston
Head of Research
13 Feb 2020
A quick look at the price monitor this morning and its green on screen and the world is a happy place. European equities are flying, with the DAX the best performing European index (+0.9%), smashing to new highs, on volumes 7% above the 30-day average.

The S&P 500 has closed up 0.7%, with the NASDAQ maintaining its stance as the superstar developed market index, with a gain of 1%. The Dow closed at 29551 and is honing in to the 30,000 level.

Assessing the broad quality of the equity rally

We’ve seen cyclical sectors outperform defensives, small caps outperforming large caps, growth over value and high beta stocks working over low vol names. Semis are flying, with the Philli semiconductor index up 1.4% and eyeing a break to new highs. So, the quality of the move is there to compel the bulls and we are back firmly in the FOMO driven markets. If you’re active, then you’re acutely aware that the S&P500 is up 4.8% MTD, with the NASDAQ +6.3%. It still feels hard to be long here, but the market has regained its composure and the bull train is back in play.

Implied vols have taken a hit, which in turn has helped the equity trade, with the VIX index moving into 13.74%, and if we look at the S&P500 1-month call to put volatility we see puts trading at a 4.6 vol premium to calls. Given this differential was closer to 7 a few weeks ago, it shows traders have been keen to roll off portfolio hedges, and we have also seen this in the CBOE put/call ratio which is testing multi-year lows. For the hedge funds, the trade is a simple barbel strategy – Go long an equity index, while hedging the position with US Treasury’s and, or gold.

As for catalysts, well that's more a tough one as we can make up a scenario such as liquidity, a reduction in concern and intensity on the coronavirus, or decent corporate earnings. We can highlight US politics where the market has a spurious correlation between an increased probability of Bernie Sanders taking the Democrat nominee, which in turn seems to have resulted in a higher probability of a Republican win. The market obviously loves the known and the status quo, and regardless of the political view the market loves a Trump re-election.

Credit has worked fairly well, with high yield credit coming in 2bp vs investment-grade credit. Bond markets have seen modest selling, with yields up between 2 to 3bp across the curve. Importantly for the equity story real yields are unchanged and as long as real yield stays low and preferably (for the bulls) negative, then equity especially the NASDAQ, will find buyers easy to come by.

Energy has flown, with gasoline up a lazy 5.4%, with WTI and Brent crude up 3.5% and 4.3% respectively. Copper has gained a modest 0.8%, while iron ore futures sit up 2.3%. It's not hard to feel energy and materials names in Australia and the broader Asia region will perform well today and sit nicely in a broader equity tape that should work well. Eyes on the ASX 200 for a test and potential close above the January and all time high (ATH) of 7144.

Carry driving FX markets

In FX, the story has been about EUR weakness more than anything, with EURNZD shorts having the largest percentage move on the day, with kiwi rates selling off sharply and we see the prospect of a cut from the RBNZ halving to 26%. EURUSD has attracted the bulk of the flow though, with price breaking the October lows of 1.0872 and pushing the 76.4% fibo of the 2017 to 2018 rally at 1.0864. A break here will ramp up calls for 1.0700 and even a test of the 2017 lows of 1.0341. I’d want to see price close below the fibo level on a weekly basis.

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