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Trader thoughts - it's been a day of trading gaps

Chris Weston
Head of Research
Feb 28, 2022
It’s been a day of trading gaps but generally, sentiment is sour.

Certainly, in equity indices we saw the NAS100 and US500 close the Friday close, but at the time of writing is attracting sellers and US cash indices are lower (the S&P 500 is -1.2%). These are markets for the short-term players with volatility (vols) this high and where so much of this is driven by options flow. Just as we saw on Friday where market makers were short gamma and as funds closed puts, market makers bought S&P 500 futures – as said before, this is all flow.

On the subject of vols, the VIX index opened and traded into 33.51%, but as risk came into the market – perhaps as a function of headlines of talks that could increase the prospect of a potential ceasefire – we saw this pullback to 28.43%. It now seems to have been overshadowed by scenes of heavy bombing in Kharkiv, and S&P 500 implied vol sits back above 31%. Feels like the market will be vol sellers above 35%.

EU and UK100 equities rallied hard from the lows, the GER40 notably rallied 2.5% off its lows, although stopped short of reclaiming Friday’s close. However, there has been a decent bid in the market even if the net change in the cash markets was lower – again, expect EU markets to chop around, certainly making life tough for momentum and trend traders.

We’ve seen the risk-off vibe play through in FX circles where long CHF and JPY have clearly been the positions to be long – the USDX is modestly higher, but EURCHF shorts have been my play of the day and that is breaking to new lows. EURCHF 1-month implied has exploded higher and sits at 7.2% - the highest since March 2020, so position sizing in this cross (if trading spot) should be reduced – traders can see that anyhow in the rise in the 5- or 10- ATR.

The exception to the risk-off vibe in FX has been the AUD, which is looking good here, with AUDUSD trading into 0.7155 in early Asia trade, only to find a wall of buyers all through Asia and into EU trade – the pair easily filling the gap and pushing into 0.7264 – today’s RBA meeting (14:40 AEDT) is the risk event to watch out for, but little is expected – certainly the fact we’re seeing commodities working well, sans copper (-0.3%), is helping the Aussie ‘battler’ and traders are happy to trade AUD as an out and out commodity play than a risk proxy. I like it short vs EUR and AUDCAD is a grind but heading higher.

EURUSD traded into 1.1122 and rallied into 1.1246 on the covering of risk hedges, although we’re seeing better sellers here and we sit at 1.1220. The daily shows solid support below 1.1200 but the fact we’re seeing US real rates down so violently (5’s are -22bp, 10s -20bp) must be negatively impacting the USD, as is the case in rates where traders have pared back some 19.5bp of hikes from fed funds this year.

Crude is +4.1% and holding the break of the March 2021 uptrend – the moves in crude clearly helping the NOK, where we’ve seen USDNOK fall 2.2% from its highs – EURNOK another solid short on the day – for Crude traders, eyes fall on tomorrows OPEC meeting – that said, if the market genuinely felt OPEC was going to lift output by more than 400k barrels then we’d be flat on the day. The US and its allies continue to talk up the prospects of releasing some 60m barrels of oil reserves but again the market isn’t overly keen on shorting crude or taking longs off the table on this news alone – the clear path to crude really pulling back through $90 is through genuine de-escalation in geopolitics.

XAUUSD has pushed to 1930 on open but fell to 1893 as risk came back into the market through Asia – a rally into 1918 was met with another wall of sellers but the net change on the day is +0.9%. Price action feels like we trade a 1930 to 1878 range for now and consolidation wins out over trend – happy to react if this proves incorrect of course.

Crypto hasn’t felt the full risk-off vibe and has attracted strong buyers from the earlier lows. Bitcoin sits at 41,200 +9.3% and has a fell that this could squeeze into 45k in the near term.

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