Another solid session in Europe but US trade has been less convincing for risk and I’d like to say the bulls have regained some share, but without flow data, I’d argue a large degree of the move in risk is predominantly re-positioning from shorts. For those long, this is a trading rally and so many have reverted to the 2008 case study, where despite equity markets heading lower, we saw several 5%+ rallies before making a true low on 9 March 2009. 

(Daily 1-day percentage moves in the S&P500 through 2008, with S&P500 overlapped)

(Source: Bloomberg)

Participation in the S&P500 wasn’t too bad, with 72% of stocks closing higher, on reasonable turnover. I am not overly enthused by the tape, as was the case in the NASDAQ 100, with solid selling activity kicking into the last 30 minutes on headlines that CA GOV: 1 MILLION IN STATE HAVE FILED JOBLESS CLAIMS THIS MONTH – it leads us to think tonight’s national number will be far worse than the 1.5m consensus call, and it would not shock to see this north of 3m claimants. It makes today’s Asia trade interesting, and it would not shock to see traders sell into strength today in risk assets.

(Daily chart of the S&P500)

The daily of the S&P500 shows clear indecision, but it did close above the 5-day EMA which has defined the sell-off since 21 February and that suggests a more neutral stance for now. Asia could lead, but if the index can squeeze into 2650 (38.2 fibo of the sell-off) and 2641 in S&P500 futures, that would be my prefered zone for fading the move.

If I am looking at leads and how they flow through to Asia, we see:
· Aussie SPI futures up another 2.1%, Hang Seng futures +0.9%, Nikkei futures +0.1% and China A50 futures +0.3% – Underpinning this we see S&P500 futures +1.2% since the ASX 200 cash close.

Looking around the markets today I like:

• European equities look strong – especially the France CAC, which has rallied 22% off its low
• We’ve got back-to-back gains in the S&P500 – we haven’t seen that since 12 February.
• High Yield CDS index has narrowed a further 59bp to 657bp, although, it fell to 592bp and needs close attention
• A 1.5% gain in WTI crude, with crude getting a bit of a boost from US Secretary of State, Mike Pompeo, who has been talking to the Saudi’s in bid to see them reign back in its price war.
• Copper has even managed to etch out a 1.4% gain to $2.21p/lb, while iron ore futures sit +3.9% and it looks as though the Bloomberg industrial metal index is trying to find a base after a 24% decline since mid-January
• A 1.1% decline in the USD index will always be welcomed by risk markets, and we look to see if this come back to 100. Some easing of funding pressure has kicked into FX basis, with EURUSD 3m cross-currency basis swaps now into +5bp, while USDJPY has come in 24bp to 79bp.
• Emerging markets assets are working well, with the EEM ETF +3.5%, with strong buying in EM FX with solid moves in the MXN, CZK, PLN, BRL and KRW.
• We see further strong performance from the NOK (3.4%), CAD, GBP and EUR. AUDUSD hit a high of 0.6074 but has been faded all through US trade back to 0.5959 (at the time of writing)
• FX implied vols have fallen again, notably in AUDJPY (1-week IV is -5.1 vols to 23%) and GBPAUD -6.5 vols)
• Reflation has kicked in to an extent, with US 5- and 10-year breakevens (inflation expectations averaged over this period) +12bp and 10bp respectively, although we have seen limited moves in US Treasuries and subsequently real yields have moved lower, which has failed to support gold which is currently -1.3% at 1643
• Good to see gold bid-offer spreads settle again back to normal levels with a number of measures announced overnight to ease the tension in the physical gold market

(Volatility and risk reversal matrix)

What I don’t like:

• The late sell-off in US equities
• The VIX index has increased a touch to 63.95 with the VSTOXX index (EURO Stoxx implied vol) gaining 4.6 vols to 57%
• Credit agency S&P has now downgraded 565 corporates this quarter – the most in a decade
• Price action in GBPUSD – One for the brave – A punchy range of 1.1973 to 1.1650 on the day
• AUDUSD price action – traders faded this in late EU and early US trade and the daily candle needs close inspection – If this kicks lower today, I’d be joining the move 
• No real move in US Treasuries – while inflation expectations have pushed higher nominal yields have not bought into the move in equities

So, the stage is set for Asia to open on a slightly positive note and that makes life very interesting and should tell us much about psychology. It’s a coin toss and looking at the backdrop there is something for the bulls and the bears, so let price push the trade today as it’s not immediately clear.

All the best,

Chris