I have been sitting on the sidelines with regards to markets for the last week or so hoping to get an idea of what is going on as I am getting different signals from different areas.
Commodities started rolling a few days back and this has had me twitching to try the short side of risk in general, but the grind higher in US markets over quarter end and into the start of April had me wary. So let me try and break down the inputs.
Oil - Definitely on a roll lower and being so momentum driven by models within about a $15 range of true physical supply and demand, I can imagine it picking up speed. Let us not forget that there is still a glut, and on that basis, the trend should be lower until something physical happens. Russia is pumping more than ever, and Iran is not going to stop until it gets up to the speed it was at pre-sanctions. More importantly, the oil story noise has gone pretty quiet recently. Nothing like a good dose of being wrong to shut people up but they are still there.
Copper - It was a key indicator on the way up, and yet over the last couple of weeks has managed to unwind all of its gains since breaking resistance and is back at that break level. I was wondering yesterday if I was brave enough to buy the old support, but having seen it lose all its gains, it's looking as though it is more likely to lead stocks lower rather than suddenly put in a sudden bounce. Having said that, I wake up this morning and see it has done just that. Bounced off the support line. Hmmm.
High grade copper
USD/JPY - Two stories in one and it is worth remembering it is USD AND JPY, so often people like to think it is only one - (GBP/USD is a fine example where commentators flavour there own story bigotry by claiming any falls are due to Brexit and any rallies on a falling USD). The JPY component of USD/JPY, as expressed through risk and carry, has been a two-way street. Carry and risk on saw better measures such as AUD/JPY creeping up as the USD was falling post Yellen. This saw USD/JPY pretty stable. But AUD/JPY cracked.
Probably helped by the commodity turn, seeing USD/JPY then play a massive catch up. If it is only a catch up, is it important? Yes, because people look at it and believe it leads other risk markets and will act accordingly and being at a round number of 110.00, "bigfiguritis" is going to kick in and grab the headlines. Nikkei always correlates to USD/JPY so noise from there will probably pick up too. So mark JPY action as a negative in the carry call and negative upcoming shouty commentary noise.
Fed Watch - Sounds like a UK nature program where they would put small cameras in the nest boxes of small birds to 'ooh and aaah' over their every move. Indeed very similar, as that's exactly what happens when analysing the Fed. The pattern would appear to be FOMC or Yellen causing a massive dove spike, then a slow leakage of much smaller odd comments from other members sprinkling hawkish dust on expectation. It's a ratchet. Dovish spike vs. hawkish creep, but with us still so close to the last dove spike, I am expecting hawkish tone to contaminate the market's dove joy further.
Deutsche Bank (NYSE:DB) shares - It looks as though the patient is in relapse. The last couple of weeks have seen DB's recovery give nearly everything back to not far off February's lows.
Whoops. Standing by for this to become a quoted theme again even if it won't actually blow up completely.
China - Looking pretty good relative to the doom called in January. Equities are up, stable PMIs are perkier than called and the region is looking as though it is turning better. I wouldn't be selling global risk on the China picture.
Positioning - Much flatter in equities than it has been for a while so no huge drag either way.
US Buybacks - Mentioned before, "'tis the season not to buy back, tra lalalalaaaa lala la la"
Commentary noise - The bears have gone pretty quiet having been quelled by CB policy bazookas and the bulls have seen momentum wane. No clue there.
The Conspiracy Theory - Many folks have speculated that G20 in Shanghai brought agreement on rates policy. A few folks thought it was more focused on weakening the dollar. Yet I think it was neither. If there was a tacit agreement, then it was to STABILISE the dollar. If this is indeed the case, then EM markets should do pretty well going forward as FX volatility retreats and carry risk-reward increases. Overall, a stable dollar is risk asset supportive.
Brexit - Yada yada yada. I've said enough and still expect it to be really close. But buying EUR/GBP is not the cleverest hedge. It won't be long before falls in Europe are pinned on Brexit induced instability to the whole region.
The Now - European open and things are looking mighty shaky for risk assets.
The Call - Putting it all together the plan is this. Run the sneaky shorts I put on in FTSE and DAX before commencing this post, expecting a sort of mini panic as equities tip sharply lower and the old bear toys are brought out of the cupboard such as commodities, a swing away from uber-dove Fed expectations, the Deutsche Bank stories and central banks running out of ammo. The usual stuff. But keep a very close eye on commodities as they have actually stopped falling, with oil being pretty stable today and copper a bit higher against that important old support. China isn't in on this sell game either, growth is still actually OK in DM, and corporate earnings are not looking as bad as many expected. There is a strong chance that this is a fake dump and not the real thing. There is too much underlying improvement in growth and stability to see this going all 'February' on us again. For those prospecting for a market crash, this is probably only iron pyrites.
I am therefore going to start buying copper again, and if that starts to perform, roll back into AUD/JPY and then cover DM equity shorts to go long again. If copper doesn't perform, then I will no doubt be stopped out but still be running my equity shorts to survive.