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Trader Thoughts - signs of life as debt ceiling anxiety start to hit home

Chris Weston
Head of Research
23 May 2023
It's good to see a bit of life back in our core markets, with the US500 and NAS100 cash markets closing over 1% lower and settling near the lows of the day.

In FX markets, JPY shorts have covered, and we’ve seen modest buying of volatility with the VIX trading close to 20%. The USD has performed well, despite US Treasuries modestly lower along the curve. Copper is lower by 1.3%.

There are signs that the market is starting to de-risk as the debt ceiling timelines roll closer to June. House Speaker McCarthy has stepped up the political brinkmanship – as expected – but we also see the US Treasury asking federal agencies if they can make payments at later dates. Payment prioritization is now real and while it seems highly prudent to have this conversation the markets anxiety levels has heated up consequently.

We’ve seen some big moves in US T-bills, notable in bills maturing on 6 June (yields are up 21bp to 6.02%) and 15 June (+59bp to 6.10%) – we’ve seen US CDS push out 18bp to 145bp, but again while these are big moves it is quite contained and hasn’t rocked markets too intently.

The bid has largely come out of the US equity move, and we see the NAS100 cash market closing at 13,672 just off session lows of 13,662. In the US500 we see 88% of stocks lower on the day, with tech and materials at the bottom of the sector pile and -1.5% a piece. All sectors were lower ex-energy, with crude the inspiration here and pushing up 2.4%.


On the daily, both the NAS100 and the US500 printed a bearish outside day reversal and has put many on notice - if the lows are taken out in the session ahead then the consolidation range lows of 4098 (in the US500) could easily come into play and there’s a trade there. Beyond that, a move to the 4 May swing pivot low of 4046 is not out of the question and should we see that then I’d expect the VIX to trade north of 20%.

I would close longs in an extended and well-loved NAS100/short US30 trades here, potentially even reversing – where, if market angst does ramp up then the defensive qualities of the US30 would see this index outperform.

On the stock side, the NAS100 simply can't lose leadership from NVIDIA, Apple, and Microsoft, but these names trade heavy and we’re seeing traders pare back exposure in NVIDIA ahead of earnings after market tomorrow, where the implied move on the day is now 4.1%. One for the radar for equity heads.

The JPY has worked as the safe haven of choice, notably vs the AUD. AUDJPY is the instrument of choice if the debt ceiling is your jam and will be the default hedge for many institutional funds. AUDUSD is also one that has real downside potential in the near-term, and we eye a move into the range lows of 0.6580.


The fact that copper has printed a lower low is certainly not helping sentiment towards the AUD, and while US manufacturing PMIs pulled below 50 and into contraction, we’re also seeing new cycle highs in USDCNH, which should be on every FX trader's radar. USDCNH goes under the radar ALL too often, but if the yuan is weakening then it is a headwind for the AUD (and other China proxies).

Chinese authorities are beefing up their rhetoric on speculators, but it is not resonating at this point, and a capital slight in search of yield is one they need to get in front of.

With modest gains in the USD and a sanguine backdrop in US Treasuries gold has held in and we see price holding the 18 May lows of $1951. Our client flow in XAUUSD has been above average, but the skew is indecisive with 54% of open positions held short. While momentum strategies have been hard this year – we’ve seen too many false breaks and the close-to-close percentage changes have been high in relation to the tight trading range – from a purely technical perspective I’d be open to sell-stop orders through these lows. However, the fundamental/tactical trader in me feels being short gold on a US debt ceiling spiral makes little sense.I guess gold works if the USD takes a bath vs the JYP and CHF.

Looking ahead, and we expect Asia equity opens on a weaker footing at this stage, with Japan and HK cash equity markets lower by around 1%. I have a close eye on the HK50, which is breaking down through consolidation lows and may look for a move into 18,800. The JPN225 printed a bearish outside and after big outperformance, this sort of price action may suggest an extended long position may be reviewed.While traders will keep a firm eye on US debt ceiling headlines, on the data side we get UK CPI (16:00) where the headline print is eyed lower at 8.2% (from 10.1%) and core CPI at 6.2% (unchanged), so keep an eye on GBP exposures. We see the FOMC minutes (04:00 AEST) and the German IFO survey and for those in EM we get SA and Mexico CPI data. On the Fed front, we hear from Christopher Waller on the economy at 02:10 AEST and he can be influential on markets.

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