On Monday, we warned that risk was squeezing and that we would not be trading the consolidation but the breakout. 2 days later, we have gotten a clear breakout of a weeks-long squeeze. While we were correct in essence (of a breakout), we were wrong on direction; we placed odds on a downside continuation.
Late Tuesday evening (just after U.S. session ended), we initiated long positions on risk. Our exposure was gained through a complex of instruments (which we will not reveal), but our key benchmark was the S&P 500 index (SPX).
By early morning on Wednesday, the SPX had already rallied a good 15-20 points, pulling risk assets along with it. Asian equities were well bid; most notably the Nikkei 225 (Japan), as yen carry trades were restarted.
However, we were (and still are at the time of writing), approaching this cautiously because from where we stand, we see another hurdle that has yet to be cleared before we can be outright bullish risk. We took most of our trades off the market when the SPX reached 1989, and are waiting to turn on a dime. So far, that has paid off well.
For any serious and committed buying, 1995 on the SPX has to be cleared. FX carry looks heavy to us, and are also at their respective pivotal zones. If we were to see continued ramp in risk, we want to see higher correlations and lower implied volatility.
So far so good. Selling into this short term rally has been minimal. Mainstream media has been reporting on U.S. equity indices coming out of their corrections, which might better sentiment on the street at the very least.
Going forward, we're obviously looking for reasons to be on the long side of the market, but are well aware of the volatility that can strike at any instance. And yes, keep watching China.
The Fed left interest rates unchanged during its June FOMC meeting, exactly as we previewed and exactly as the markets expected. According to most analysts, commentators, and in some part the financial markets themselves, just about every aspect of the June FOMC event was more dovish than had been anticipated.
Unsurprisingly for us though, as we had already warned of an indecisive Fed; a once credible central bank which had inherited the tendency to troll markets left, right and center.
We maintain our stance that the Fed will remain indecisive, further loose confidence about positive momentum in the economy, and thereby adhering more to a 'wait and see' rather than a 'do and adjust' policy.
There's never been a central bank more thuggish than the Fed. First, it delayed hiking rates by more than 11 months, only doing so once in December by a tiny 25bp. Remember the vicious cycle of "promising to hike, only to scare markets into a drawdown, refusing to hike, therefore talking markets into a rally" we have been taught by the Fed to abide by?
With each passing FOMC meeting (already 4 have passed this year), and with every twist and turn of the macro economic grade book, the markets have rallied and tanked in a vomit-including clusterf***, in the process trolling traders and screwing investors' portfolios.
When we first saw the 38,000 print, we thought it was an error with our news feed. But no, the U.S. economy added only 38,000 non-farm jobs in May, the lowest since September 2010, and the biggest miss on record. It's really hard to overstate how morbidly bad May's payrolls were. It is, however, commensurately easy to kiss a June rate hike by the Fed a sweet goodbye.
This report was so ugly that we feel it leaves almost no room for an alternative interpretation. Specifically, one of forgetting about a June rate hike. The Fed is almost certainly not going to hike later this month.
With the addition of May's payrolls, we are outright bearish the U.S. dollar and will be looking for good opportunities to gain some short exposure. We are of course fully ready to stop dead in our tracks and turn on a dime, as must be expected when dealing with such troll-worthy elements.
First it was the April FOMC statement that turned out to be more dovish than hawkish, and then it was the April NFP report that missed expectations badly, busting market expectations for a June rate hike.
However as regular readers and subscribers to our journals will know, we believed that despite soft economic data and cautious/dovish Fed language, there was still a good chance for a Fed hike in June. The tides turned this week upon the release of the April FOMC minutes, and very abruptly so.
A hawkish turn was something we warned about in the preceding days before the release of the April Fed minutes. It was also one of the risks we highlighted here, and here, under uncertainties regarding monetary policy.
Yellen, we have a problem. April's jobs data was a disaster (as we had forewarned) and markets are starting to get properly concerned this time, judging by the way in which they reacted. A June rate hike by the Fed now seems less likely than ever before, with the Fed Funds futures market implying a mere 4% chance of a hike next month when the FOMC reconvenes to decide on the future of the U.S. economy.
The April NFP report released Friday missed the headline expectation by 40,000 jobs coming in at 160,000, or the lowest since September 2015 when the U.S. saw only 145,000 jobs added.
Last week was packed with central bank activity, with the Fed holding interest rates unchanged exactly as we previewed the event, and the BoJ's shocking stunner of doing absolutely nothing (despite heightened expectations of more monetary easing) has sent the U.S. dollar into a free fall, testing its May 2015 lows.
The focus this week will be on the American jobs market where the BLS is set to release the April Non-farm Payrolls (NFP) report this Friday at 830am EST. This puts all the attention back on the greenback, which has already been capturing headlines from financial media all across the world.
The consensus expectation is for an addition of 200,000 new jobs to the U.S. economy, down from March's 215,000 print. The U3 unemployment rate is expected to hold firm at 5.0%, but the focus will almost certainly be on wage inflation.
Following our pre-FOMC primer on what to expect during today's April Fed event, the Fed has once again left the Federal Funds target rate unchanged at 0.25% - 0.50%.
This is precisely what we talked about in out last snippet, that the Fed will rather err on the side of caution than to tighten prematurely and risk having to reverse its path of policy actions.
The market now expects at least a 25% likelihood that the Fed will hike rates during their 15 June meeting, once again back loading the path of tightening. We reckon that the Fed will not wish to wait beyond June to throw in its next interest rate hike.
Other than what we've mentioned above, this statement was more or less a snoozer and came in mostly as expected. We maintain our current stance on the markets we track and trade.
The U.S. Federal Reserve will release its Federal Open Market Committee (FOMC) statement at 2pm EST this coming Wednesday (27 April). Market participants aren't expecting a rate hike at this point and with no press conference following the publication of the statement, the language of the document will be closely scrutinized for clues about the 15 June FOMC.
The Fed has downgraded its rate hike expectations for 2016 citing global headwinds that have limited U.S. growth. So far employment remains the strongest pillar of said recovery but the job gains and the lowest unemployment claims in 42 years won't be enough to sway the opinion of Fed members to vote for a rate hike until other economic gauges show improvements. It's safe to say that markets will be focusing back on the greenback this week.
We did it. Our public call was once again vindicated by Mr. Market itself. No amount of shenanigans and hot talk rivals being right on a market call, and of course profiting from our correct call. We were right both on direction and timing. It doesn't get much better than this.
We're not boasting, we're merely proving the point that with a well thought out process correctly applied in the financial markets, most systems will almost surely work in the long run. Many traders fail to grasp this because they lack the patience, or worse still, approach this entirely wrongly.
If you've been regularly following our content on social media, you would have caught our cue more than 2 weeks ago on 4th March (see our Facebook post here). We mentioned in our post that we sensed weakness in the dollar index (DXY) despite it trading inside technical support areas and rhetoric on the street calling for the opposite.
We hope you didn't. Because WTI and Brent are up some 42% and 48% from their January lows, respectively. We can only imagine the multitudes of traders shorting crude all the way up from $25 to the current $40 on Brent. It must have been painful, utterly jaw grindingly painful. We feel for you, because we were once part of group. A group which had collectively been betrayed by those oh-so-smart pundits calling for $20 oil, pundits with absolutely no track record, casually appearing on financial TV advising everyone and their pet dogs to short oil because the "fundamentals have never been more bearish".
You've been trolled big time, and the market doesn't even care. Ain't that going to make you mad?