“So goes January, so goes the rest of the year?” Not quite if last year’s January runaway rally and December abysmal performance are any guide. “So goes Apple, so goes the rest of the market?”. Not quite either, judging by Friday’s rally that did its best to turn around sentiment in the important first week of the year. The trend for international and US equities is still improving but remained down as per yesterday’s close. Last week saw not only a total suppression of Fed hike expectations but Fed Chair saying he is flexible to also reconsider QT. Perception on global liquidity conditions improved significantly, supported by the PBOC cutting reserve requirements on Friday, a better job report (which should always be taken with a grain of salt), a Fed’s perceived U turn and hopes for a Sino/US trade negotiation round next week.
The dollar uptrend is being questioned. On Thursday by a panic bid in JPY (USDJPY flash crashed in illiquidity holiday thinned conditions) and more generally by USD reversing earlier gains vs. G7 counterparts. The dollar fell sharply vs. EM currencies on Friday (with gains of 1.5% to 3%) on cancelled tightening expectations, healing risk appetite, improving commodity prices, the need for carry and some notable technical improvements. Two major EM currencies broke above their Bollinger band (BRL and ZAR). The EM FX index is -0.3% off its 200d Ma. We are expecting the important breach to materialize and lead to more EM FX buying. The USD futures positioning is fairly long (especially on USDJPY), also short EURUSD with positioning light on soaring MXN and EM currencies in general (which bodes well from a contrarian stance for non-USD currencies).
Gold and Silver ebbed back on Friday with the entire precious metals complex still likely to gain from reduced Fed hike expectations and light positioning. Silver improved last week, relatively speaking vs. gold, broke above its 200d ma and above its Bollinger band on Thursday. Platinum, the laggard of all metals had a major break out on Friday (with 5.6 standard deviation move vs. 20dma) despite most metals trading with a consolidation bias.
The US bond (IEF) markets (and Bunds!) rallied for most of the week on changed Fed expectations and jittery equity markets with an acceleration on Thursday after Chinese data disappointed and Apple sank 10%. The 2/10 yield curve spread further flattened last week suggesting heightened recession risks 12 months forward. JNK (high yield) recovered along with every risk asset on Friday, supported by hopes that the Fed will now reverse course on QT as well. Positioning is fairly short on credit in general which the management of expectations might help squeeze a little further on a “fabulous” job report despite a government shutdown and rising odds of a Presidential impeachment for 2019 upon findings of the Mueller report later this year. Sentiment remains versatile, equally split between fears of Armageddon and the “cheapness” of everything that went down last year.
Commodities also rallied 1.5% to 3% on Friday. Base metals rallied with copper adding +2%, aluminium +1.4%.
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