As such, we continue to search for high-probability set-ups and react to what the markets put in our path, with the strategies deployed and our approach to managing risk determined by the compression/expansion in the ranges, volatility and intraday direction.
The ‘surprisingly’ outsized sell-off on Friday in the respective US equity indices was a clear example of not overthinking the ‘why’. Where despite a 1.1% decline for the S&P500 there was no obvious smoking gun or trigger to fundamentally justify such a broad-based sell-off in US equity.
There was talk doing the rounds of rebalancing flows notably from mutual funds, which have strict end-of-month/quarter rebalancing mandates. This makes sense - however, given the sell-off in US Treasuries through Q424, these same players should have also been buyers of US Treasuries to rebalance the fixed income leg of the portfolios. That aspect wasn’t obvious, with UST 5yr to 30yr yields 3bp-5bp higher on Friday.
Some have also suggested that the broad sell-off seen in USTs, JGBs, UK gilts and German bunds on Friday was a factor weighing on equity risk, as it was for gold and silver.
US 10yr Treasury vs Citi US economic surprise index - the recent move higher in yield is not backed by the data
There is a clear logic to this thesis, and there is increasing risk that the higher long-end US bond yields rise, and without the backing of better US economic growth data, the more the higher discount rate will matter to equity risk and broad market sentiment. However, a simple overlap of the intraday moves on Friday in S&P500 futures and the UST 10-year offers no obvious relationship between these two variables.
Ultimately the selling in the US equity on Friday was broad-based with 90% of S&P500 constituents closing lower on the day, and while these leads will impact the Asian equity open today, we note that S&P500 cash volumes were some 33% lower than the 30-day average.
The silver lining for the traders who haven’t covered long positions in US equity indices is that despite Friday being a down day, S&P500 futures did find better buyers below 6000, with price rising 0.8% from the lows into the close. NAS100 futures also traded weaker to 21,498 – testing the Monday gap up low - before also finding buying support and rallying 1% off the lows into the close.
As another year in FX markets comes to an end, we see that despite paid forecasters almost universally calling for a weaker USD in 2024, the greenback looks set to close the year higher against all major currencies with the buck reigning supreme.
Incidentally, the same directional call is true for 2025, with FX strategists forecasting a modestly weaker USD in 2025, with the median Q425 DXY forecast set at 105.3.
Corporate Treasury departments typically find quarterly and 12-month forecasts of some use when they assess locking in forward exchange rates. Yet, speculators/traders are once again reminded that forecasts are to be ignored and there is a stark difference between forecasting and that of making money in markets.
Shorter-term, over the past 5- trading sessions we see that being long of USD’s has also been a fair place to hang out, with only the SEK and GBP outperforming over this period.
EURUSD continues to be front of mind for those still actively trading, and while the daily timeframe shows sellers last week working orders into 1.0440, we can see that EURUSD is an out-and-out interest rate trade, with the EURUSD spot rate moving in lockstep with the relative pricing in EUR-US 2-year rate expectations. An upside break of 1.0446 offers the risk of further push into 1.0500.
USDJPY also kicks firmly onto the radar, with the buyers dominating. It rarely sits well buying into any market pushing new run highs, but in my view, any upside break of 158.00 is good for chasing - although JPY shorts do run the increasing risk of credible MoF JPY jawboning and possible intervention.
We continue to see good client activity in AUDUSD, with the spot rate holding the YTD lows of 0.6200 and needing to pull something out of the bag to compel the shorts to cover for a sustained reversal higher. While we can't rule out a technical bounce, I see a greater risk of a downside break of 0.6200, where momentum accounts would look to add to short positions on this development.
EURAUD is also screening well for the momentum and trend accounts, with the cross rate at the best levels since August – I am skewed to look at long positions on any shallow retracements this week. GBPAUD could also kick through 2.0300 this week with the set-up looking strong.
Crypto markets remain lively with sellers getting a better say in our suite of coins over the past 5 days, backed by net outflows in the 11 BTC ETFs in 5 of the past 6 sessions. While the direction of the daily ETF flow is an important factor in explaining the variance in the Bitcoin price, we see that it also holds a reasonable relationship with NAS100 and S&P500 futures - subsequently, crypto traders may be keen to watch the price action and volatility in US equity through the week.
We can see on the higher timeframes that the momentum has come out of the post-election move and the Bitcoin price holds a range of $100k to $92k. The current set-up, therefore, means losing any inherent bias for higher prices over time and adopting a more two-way trading approach – initiating longs into $92k and reversing into short exposures around $100k. That said, a downside closing break of $92k would be significant and would obviously negate the range trade, opening a deeper move towards the 100-day MA at $81k.
With the sour leads from US equity, we look to start the week on a soft tone to the Asian equity markets, with the ASX200 and NKY225 called down 0.4% to 0.5%. Again, local markets are at the mercy of any remaining end-of-year portfolio flows, and the potential for more active managers to reduce risk, sensing limited remaining reasons to chase the tape from here.
Unsurprisingly, the known event risk this week is limited this week, with the US ISM manufacturing report (Friday) US weekly jobless/continuing claims and China’s PMIs (Tuesday) the highlights.
Good luck to all trading through the week, and I wish you all a prosperous and healthy 2025.
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