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US500

Risk on as the wall of worry is climbed

Chris Weston
Chris Weston
Head of Research
Oct 20, 2021
The risk-on vibe continues to hit home, and the wall of worry is being climbed to the point where the Dow has made a new high, the S&P 500 is not far off.

The VIX pushes towards the low 15% and there is some interest to use cheap volatility to hedge but it's not coming through just yet and while portfolio hedges may be cheap, they still cost.

Numbers from Tesla and IBM aftermarket have not been taken too well, and certainly, IBM has traded heavy with shares -4.7% with investors not overly enthused by its reported revenue.

Daily US crude chart

21_10_2021_D1.png

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

Crude looks so bullish on the daily chart, with the bulls piling into weakness and the conversations around $100 are certainly becoming more prevalent. Bond markets have sold off modestly in response – a poor 20yr Treasury auction has weighed too – but we see market-based inflation expectations pushing strongly higher and this has pushed down real rates - a factor supporting the silver and gold price. The latter which is eyeing another tilt at the June downtrend - $1833 remains the big level, although that is some way off.

The JPY continues to find few friends, and while our clients are now firmly of the belief that the JPY crosses have had their time in the sun, it is really only USDJPY that is showing any clear indecision in the price action. EURJPY, NZDJPY and NOKJPY have closed higher for 10 straight days, and certainly with NZDJPY that is the best run seen since 2005. We’re looking at the boards on the roulette table and seeing 10 straight blacks come in and saying” this must be time for red”. Well, the various oscillators we can apply to charts are naturally at sky-high level, which certainly challenges the risk-reward trade-off of initiating short JPY exposures here.

Further, it shouldn’t take much to promote profit-takers in these JPY crosses and JPY bulls will be keen to watch headlines on Evergrande, with its shares coming back online today. There are just two days until the 30-day grace period expires and the missed coupon payment becomes an official default. Do we increase our worry? We’ve also seen that the proposed sale of its 50.1% holding in Evergrande Property Services Group to Hopson Development, which would have netted them $2.6b has also fallen over, and that is not going to help its cash position. Again, if the equity gets hit on open, one questions if it resonates in JPY short covering, and maybe impact the AUD and NZD most? One to watch.

If the AUD doesn’t move on this news, then I have EURAUD on the radar – it is getting smashed and it’s on a one-way street. Rallies into 1.5550 are to be sold in my view, and this is one that has been getting some attention. If price can have a daily close above the 5 and 7-day EMA then I’ll change my call, but this has 1.5350 in its sights.

It’s hard to go past the breakout in Bitcoin to new highs – Another strongly trending market where dips have been shallow, and the bulls are riding this one like a dream. Head to Dash and DOT though, they may not be at highs, but we’ve seen solid technical breaks and I’d be potentially looking at putting small exposures here and hoping to add on a build higher. Link on a close through 28.0 is an alert to potentially keep an eye on.

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