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Measures of interest rate volatility (vol) have been falling progressively since late 2022 and FX vol has started to turn lower. We see strong bullish trends and underlying momentum in DM equity indices, with the NAS100 putting on 4.3% last week and breaking key level after level - the HK50 is a juggernaut, gaining 5.2% on the week – the AUD outperforms in G10 FX, although the bulls would love a closing break of 0.7142 to keep the dream alive.
Life is good in markets and the flow in risk assets suggests the path of least resistance is higher. As a risk manager one could easily feel reducing exposures into the raft of event risk is a prudent idea – where buying weakness in risk seems the right approach, with the idea that if the script does indeed change and the markets hear something new that suggests this lower vol world is mispriced, then we can adapt and revisit short exposures with more conviction. For now, we look at the data flow and see a market that senses a positive outcome for risk assets and where pullbacks should be shallow.
One aspect I feel is concerning is the rise in commodities – gasoline prices are 27% off the December lows, while crude is 13% higher from the lows. Copper has been on a tear, as has lumber. I can go on but while market measures of inflation expectations are rising, they are not setting off alarm bells just yet. Still, if commodities continue to push higher, and granted the moves are premised on a better demand picture, then it could pose a greater concern for central banks and by extension, financial markets – of course, it’s not all about commodities and we can consider other aspects within goods and services, as well as wages, but with the market positioned for core PCE inflation to head towards target late this year/early 2024, anything that really muddies the waters could see a return to volatility.
To surmise, inflation is falling but if 2022 taught us anything it's to expect the unexpected – for now, though the trend is your friend. So staying bearish on the USD and positioned for further outperformance from the NAS100. I’d like to see an upside break of 1.2435 in GBPUSD for a move to 1.3000 and silver is a must-watch, with price consolidating between $24.50 to $23.15 – A bullish break and silver could fly.
Daily chart of silver/XAGUSD
Volatility matrix – we look atoptions pricing of volatility over the coming week, where we can calculate the implied move and trading range.
Key event risks to navigate:
US
US corporate Earnings
As it stands, we’ve seen 29% of S&P500 companies report quarterly numbers. 69.7% of those who have reported have beaten EPS expectations, by an average of 2.1%. 50% have beaten on sales by an average of 0.9% - the guidance from companies has been quite neutral considering what we’d heard in the lead-up and how market expectations had been reduced. This week is the marquee week for earnings though and we see 31% of the S&P500 market cap reporting – as we see from the table, we see a number of trader favourites out, notably, Meta, Apple, Amazon, and Alphabet to name a few - so this is the week to keep an eye on the micro and notably the after-market trade.
China
Europe
UK
Japan
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