With 10yr Treasuries -5bp into 1.17%, while US equity markets were down smalls, under the hood we see a clear rotation into defensive sectors and out of cyclicals. Value sectors has been stung and largely as a result of falling bond yields – which, as have stimulated in prior reports, are starting to flash amber – a close through 1.17% in 10s and the momentum crowd take yields lower and we start really talking 1% on the benchmark – equities may see a higher volatility world here, and we can already see the VIX index closing at 19.46%, a gain of 1.22 vols on the day – 20% is in the sights.
The US ISM manufacturing report was the catalyst and it was a good number at 59.5, but could this be opportunity for traders? This has been in fitting with other global PMIs, and an economic slowdown is being priced at a time when the Fed are debating the idea of reducing the pace of QE, and other central banks in both EM and DM are in the process of preparing for hikes.
These are well worth watching for the growth argument and equity markets may go from a period of repositioning into defensive, to one further on where broad equity gets hit. Until mega-cap tech gives in on a volatility spike, then we’re unlikely we get a 5-10% correction and traders will lean into longs around the 50-day MA (US500).
FX markets have actually behaved quite well and there's been very limited volatility. Granted, the petrocurrencies (CAD and MEX) are lower, but the selling has been very measured. The big risk today is the RBA meeting and so devising a simple playbook (guesstimate) we see three clear outcomes:
On options 1 and 2, it would not shock to see a sudden and swift move in the AUD, with traders fading the move – so do watch exposures over the meeting. The AUS200 could be interesting and should the RBA leave the original schedule in place, it would not surprise to see the AUS200 tail off into the close. A pushback on tapering in September should cause too much of a reaction. Trade the opportunity with Pepperstone.
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