The Macro Week Ahead: Eyes Focused On FOMC And US Growth

Looking back – we nailed it!
In last week’s The Macro Week Ahead: Get Rich Or Die Trying, Risk-On I made a bold call for a risk-on week, despite the previous weeks’ volatility, bloodletting, Ebola and growth fears, etc.
The mark-to-market last week saw US10-year yields closing at one-week highs as well as equity indices such as the S&P 500, Nasdaq & Nikkei up +4.1%, +5.3% and +5.2% respectively – I was dead right. Fortune favours the bold, and when (not if) you get it wrong – well that’s where money management keeps you in the game.
And for the record, one has to tactically pick their spots … as the saying goes, there are many bold and old traders, yet very few bold AND old traders.
Credit: US 2.27%, UK 2.23%, GE 0.89%
Yields moved out in the US, UK and Eurozone core, yet came in on the peripherals given the blowouts we had two weeks ago. The chart below on 10yr Greek bond prices and 10yr US bonds yields, captures the capitulation that we saw occur.
While the peripheral 10yr bond prices are still off their highs, they had a very healthy bounce last week.
10yr Greek bond prices vs. 10yr US yields
Peripheral govies, such as 10yr Greek debt, bounced back as people realised
the world wasn't going to end.
Source: Bloomberg
Key closes: US 10yr at 2.27% (2.19%), UK 10yr at 2.23% (2.19%) and Bunds at 0.89% (0.89%).
Equities: S&P 1965 +4.1%. EuroStoxx 3,030 +2.3%, DAX 8,988 +1.6%, Nikkei 15,292 +5.2%
Last week saw one of the strongest record-high historical weekly performances on the equity side. Put in context for the week, the S&P500 was up +4.1%, assuming 250 trading days the annualised return on the week is +205%!!! So a very big week and that’s without even mentioning the Nasdaq or Nikkei, +267% and + 261% annualised.
Equities were up across the board in the US, Europe and Asia – the only exception was Shanghai which saw a -1.7% pullback. The latter seemed tied to potential delays and/or lack of clarity on when the Shanghai/Hong Kong equities bridge would go live.
S&P 500 The S&P 500 closed at 1965 +4.1%, one of its biggest weekly gains of all time.
Source: Bloomberg
Currencies: JPY 108.16, EUR 1.2671, AUD 0.8793, NZD 0.7854, GBP 1.6090
Apart from the Loonie and Aussie dollar, it was a story of US dollar strength – particularly against USDJPY, c. 1.20% on the week. With the Federal Open Market Committee date on Wednesday, I would not step in front of the USD, even if risk is skewed to the downside.
For the past week, most crosses saw quite a lot of volatility come off.
Key FX closes for the week ending October 24:
Geopolitical Risks, Conflicts And Central Bank Review: I am probably missing something, but nothing really stuck out this week for me. Yes in the US, we got another Ebola case – this time in New York – but the fear sentiment was several tones lower than the previous week.
Obviously oil is being heavily discussed given the levels that we are at now – low $80s. What’s interesting to note is something we mentioned before on the gold front. Please check out our commodity’s specialist Ole Hansen’s piece on the first Swiss poll on the gold referendum, this potentially has huge volatility implications for CHF, gold and the Swiss National Bank's future flexibility in working its policies. The final decision is on November 30, so could see a potential lead up into that. The minutes we received last week from the Reserve Bank of Australia and the bank of England were as expected, nothing new.
In Brazil, unfortunately for Brazilian Macro, equities, credit and currencies the incumbent Dilma Rousseff was re-elected over the weekend. The Bovespa could easily see a -5 to 10% sell-off this week.
Trade/Investment Calls: I made a lot of calls last week, let's see how they played out.
“So I am looking for equities to end the week higher, with the S&P getting back over 1906 (probably 1925 to 1960 for the week) [DONE, Closed at 1965] and DAX back over the 9000 [DONE, while we closed at 8988, we broke 9000 enough times for anyone with a profit target at that level to have cashed out].
The Nasdaq which has been the leader this year has to crash through 4302 (100DMA) and could possibly breach 4400.” [DONE, Closed at 4483] .
I don’t have the real estate to touch on as much as I’d like, but a lot of key names out there not only look overextended to me, but are also sitting at very key levels. For instance the Nikkei at 14,532 and down over -6% for the week, I think has a very good probability of taking out 15,000 this week [DONE, Closed at 15,291. In fact we broke 15,000 on Monday], a +3.2% move (hedge the FX would have made another 1.2% here as the JPY depreciated against the USD for the week).
Yahoo Japan (4689 JP) at the 400 level [neither here nor there, hit a high of 413, closed at 401 for the week], Softbank (9984 JP) at 6828 level, etc. [DONE, closed at 7380. +8% grs / +404% ann. on the week]
And my trading call on Yahoo: “I’d look to be long either though 3-6 month call options, CFDs or equities with an entry at current $38.45-$40.50 levels (VWAP on Monday, Oct 20, was $39.28), stop $35.90 with $41.90 [DONE, at $42.42 as the open gapped through our profit target for a +8% grs / +404% ann. on the initial clip – assumes straight equity exposure, returns on calls and CFDs would have been significantly higher] and $43.90 being the profit targets for 50% of the position.
” I am liking the price action in the market and Yahoo’s chart continues to look constructive, at Friday's $43.50 close, I am fairly certain we’ll take out the balance of the position at $43.90. I would adjust the stop loss upward to $41.60.
Specific trading levels on S&P 500 "Also for those twitterhollics @KVP_Macro, I put out a second tweet on picking up the S&P's on Wednesday [Oct 15] for another 25% after we broke 1850, looking to target 1800 for the next level. Will we get back down there, now that we closed +3.7% off the week’s 1813 lows?I think the probabilities are skewed to the upside and I’d look to buy the balance once we clear 1905 if there is no further pullbacks” [DONE, with an average entry at 1891.25 we are +4% in the money].
“Long USDJPY: Entry on Monday open [Done, opened at 106.97]. Targeting 107.90 (25%) [Done] / 108.40 (25%) / 109.40 (25%) and the balance at around 110 level. I’d put stops below last week's lows at 105.10, as I still believe this 104/105 level is the floor of the new trading range as per our September bullish USDJPY call.
To be frank, 110 calls are looking interesting on an end of November to end of December timeframe, potentially to be funded with nearer term lower strike puts.” USDJPY closed the week at 108.16, its 108.35 high of the week just shy of the second profit taking level – that will most likely be taken out pre-FOMC.
“Short EURUSD: Entry on Monday open [Done, opened at 1.2760]. Targeting 1.2710 (25%) [Done] / 1.2660 (25%) [Done] / 1.2610 (25%) and the balance at around 1.2560 level. I’d put stops above last week’s highs at 1.2890.” I still like the trade, those not liking event risk can put a time stop on Wednesday pre-FOMC.
“Short EuroSterling: Entry on Monday open [Done, opened at 0.79242]. Targeting 0.7890 (50%) [Done] / 0.7855 (50%). Stop 0.8050. Again, would be great to see a few more days where GBP is showing a bit more swagger but the EUR feels a little overextended and once again fundamentals are needed here for a sustained euro rally and there is still a very long dark tunnel before we see any Eurozone fundamentals coming back.
” This is a great structural pair to be short on – the fact that 3Q UK GDP came in, in-line at 3.0% leaves me feeling confident that the UK macro picture is on track and there is still a mismatch on the monetary policy side. Look for GBP to regain its footing vs. other names, yet I’d avoid playing it vs. the USD; like it better vs the EUR or JPY.
Okay, let me stop there … I think you get the picture.
Looking ahead: Lots of key macro events
A lot less from KVP to talk about post last weekly’s monster. I continue to be constructive towards the end of the year, expecting higher US and Asian equities (Europe is more tactical), higher US 10yr yields, lower EURUSD and EURGBP as well as a higher USDJPY, i.e. overall USD strengthening.
Key macro data that I am looking at this week * (Note: dates/times are Hong Kong and Singapore based)
Central Banks: The main inflection point of the week will be surrounding the FOMC meeting on Wednesday (very early Thursday, Asia time), where once again the focus will be on language used. Particularly in regards to the tapering (which should have ended this month) and renewed market concerns on global growth (i.e. similar to rhetoric from the BoE minutes).
We also have an expected no change in decision from the Reserve Bank of New Zealand, as it is expected to hold rates at 3.50% – it should cut, but will most likely won't given that it hiked four times in a row and a cut would solidify the fact that it overtightened.
We also have the Bank of Japan, where again there are no expectations of a change.
Asia: The main focus will be China’s official manufacturing PMI for October, with the market expecting 51.1%e, it was previously 51.1%p. Do note that last week’s third-quarter gross domestic product came in better than expected and the usual monthly (FAI, RS & IP) data was also more constructive – it was the first healthy IP beat that I can remember in a while.
Japan will be out with September data covering IP, employment rate as well as inflation.
Europe: In the Eurozone, we have unemployment, consumer confidence and inflation data (0.4%e, 0.3%p).
US: ISM manufacturing, Durable goods orders, consumer spending, market flash services and composite PMIs, confidence and PCE data are on the agenda. Apart from the FOMC, the most important data point will be 3Q US GDP, with a 3.0%e from the market, following 2Q’s 4.6%.
People (especially the bears) will be looking for a "clean" quarter without the winter effects that we saw in 1Q and 2Q this year.