Little Hope Placed On Yellen As She Testifies Today

Asian markets have fallen once again, although without quite the same ferocity we saw in yesterday’s bloodbath and there is some buying coming back into the equity markets.

US traders did act with a calmer mindset yesterday, but price action was far from convincing and that is always going to happen when we see a near-9% collapse in the price of crude! What’s more, oil fell despite the USD falling and, if we look at daily chart of the US dollar index, we can see price has now broken below the August uptrend, courtesy of a strong EUR/USD and weaker USD/JPY. The weekly chart is perhaps more interesting as the USD is right on trend support and a weekly close below 95.90 would suggest looking even more bearishly at the USD. Wait for the market to confirm the trade.

Traders and investors want clarity on the macro-economic environment and, to a degree, we hope this can come from key corporate feedback and the top-dog central bankers. Janet Yellen takes the stage in today’s US session to testify to the House Financial Services Committee (02:00 AEDT) and, while her comments will be pre-prepared, the market wants to make sense of how she sees the world. This is a chance for Janet Yellen to aggregate the widening of credit spreads, sustained volatility in equities and tightening in lending and financial conditions, as well as rationalise all that is being seen. For those hoping to see risk sentiment improve then one should focus wholeheartedly on this speech as the level of concern and stress, specifically when probed about a potential recession, will be key for traders of all asset classes.

Judging by the price action in Asian equities, there seems little conviction Mrs Yellen will smooth volatility in any shape. In fact, one can make an argument that traders feel she could confuse matters even more. In fact, there is talk that the Federal Reserve are now asking banks to test for negative rates, which will only add pressure to the banking sector. This has been seen front and centre in both the Japanese and Australian banking space where the sellers have followed on from yesterday, giving financial shares another working over.

Commonwealth Bank (CBA) has been the exception, although despite having rallied to $75.70, the market has said, ‘sure, a solid result, but it doesn’t change the fact there is a banking problem globally’ – a fate Ian Narev (the CBA CEO) has stated today is overdone. It seems having revenue and loan growth and a very compelling yield means little when there is a solvency issue in European banks and a consistent flattening of the US yield curve leading to concerns over US banks margins. The short sellers are seeing a lack of any conviction behind the buyers and finding the most favourable short opportunities they have seen since the GFC. The massive demand for protection in the shape of credit-default swaps is only exasperating the issue.

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Globally there is a hunt for return of one’s equity, not a return on equity.

What’s more, despite assurances from key German officials and talk of a multibillion bond buyback from Deutsche (the poster boy of solvency), this has done little to appease sentiment. Deutsche closed down 1% in its US listing, so that could give an indication of how it performs in European trade. But until we can see Deutsche bank’s debt (notably the ‘CoCo’ bonds) rally, and CDS spreads narrow then the equity will continue to be sold and this will put banks globally under pressure.

The S&P/ASX 200 Financial sector just looks so bearish from a technical perspective and this is killing the overall markets, although better buying has been seen into the afternoon and this could be very telling. You just know things are getting desperate when you hear calls that short selling should be banned and this rhetoric has certainly picked up. As we have seen from nearly every regulator and central bank who conducted research (and produced white papers) in the wake of the GFC, short selling bans generate significantly higher costs than benefits. Short selling is not going to be banned, in fact it should accelerate the need for traders and investors to think about their portfolio risk management. With sovereign wealth funds reducing their exposure to financials and valuations in the space still not at a discount to long-term averages, the savage selling is actually accelerating price to where the real ‘value’ is. Watch the shorts run for the hills when they sense the funds are looking to buy again.

Our European equity calls are as flat as a tack, although US futures are once again looking precarious. The FTSE 100 has outperformed of late and rightly so, but the bulls will be wanting to see 5600 hold and a cash session close through here would suggest a deeper move into the 5450 to 5400 region. The Euro Stoxx 50 is just so unloved that it’s easy to make a contrarian call on the market, but the technical breaks are so prevalent in so many markets that it’s much easier to stay short. The key trifecta of catalysts today have to come from oil, Deutsche share price and Janet Yellen’s speech.

In the FX space, EUR/GBP looks really interesting and the EUR is benefiting from the macro concerns and the Euro’s twin surpluses. If the pair can close Friday’s session above key horizontal resistance at £0.7750 then a move into the £0.8000 would be likely. The ECB will certainly make it very difficult to hold EURs ahead of the 10 March ECB meeting though, but a simple look at the German 2-Year bund (-52 basis points) tells me significant easing is already in the price.