A week ahead for traders

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After the worst month for US equities since 2008, which culminated on Friday with a dark day for risk, the market faces the start of May with significant landmines to navigate – we look at the descending themes and the main risks to focus on.

Main general themes

  • High cross-asset volatility – we see the VIX index hitting 33.4%, indicating daily swings of 2.1% in the S&P 500. G7 FX volatility sits at 10.04% and near the highest since March 2020, with a vol AUD implicit that stands out – high volatility should be a key consideration to potentially reduce position sizes.
  • A USD position unwinds? After the USD’s biggest monthly gain in 55 years, will USD longs reduce their duration this week? The positioning of the customer suggests that retail traders strongly believe it is the risk.
  • Can USDCNH break through 6.70 and place an additional USD bid against G10 FX?
  • Extreme bearish sentiment on equities – The Citigroup S&P500 overbought/oversold gauge shows bearish sentiment at the extremes, while the bullish-bearish AAII reading is at its lowest level since 2009. However, as we navigate a multi-decade regime shift on the markets, we wonder if this time is different or is it a buying opportunity? Is it really time to go against the grain or to be cautious?
  • Will bond yields rise? Can real US 10-year yields turn positive? Will the American 2-year rise above 2.8% and the 10-year above 3%? USD, gold and global equities will once again take inspiration from the US and DM bond markets.
  • A growing risk of stagflation and/or recession? We are monitoring the data feed (listed below) and central bank narrative for information here
  • Prolonged supply chain concerns? Will we learn more about this theme in the remaining US corporate earnings numbers?
  • Given last week’s favorable narrative at the Politburo, is China’s stock market ready for a period of outperformance?

Citi Overbought and Oversold Index

(A mix of various instruments to gauge current sentiment)

Interest rate matrix

(Source: Pepperstone – Past performance is not indicative of future performance.)

The risk manager – The events that should be the focus of the coming week:

  • FOMC meeting and Chairman Jay Powell’s press conference (Thursday 4:00 a.m. and 4:30 a.m. AEST respectively) – the risk marquee event of the week
    • As we see in the rate matrix, the market is fully expecting a 50 basis point hike in this week’s meeting, so if that becomes a fact, it shouldn’t move the markets – nor should it. is expected to start trimming its balance sheet (QT) in June, which again is priced in – more importantly, traders will react to the tone of Powell’s press conference and the appetite for a 75bp hike during of the June meeting. With an additional 218 basis points of price increases throughout 2022, potentially taking the fed funds rate above the neutral rate (considered at 2.40%) by September – the USD could take inspiration from the perceived urgency of the anticipated hikes and taking the policy into restrictive territory.
  • RBA meeting (Tuesday 2:30 p.m. AEST) – Things could get very lively for the AUD this week
    • Of the 21 economists who gave rate calls, 3 see the pending cash rate at 10bp, 5 see a 50bp rise (more likely 40bp) and 13 see a 15bp rise – market prices 18 bp ups for this meeting, should we also get 15 bps, we might see a small dip in the AUD right off the bat. If rates are left at 10bps, we could see a quick 50-60 pip drop in the AUD. If we get the expected 15 bps rise, then the focus is on reading the statement against prices for the June RBA meeting (38 bps) and the 257 bps set up. at the end of 2022 – many are wondering if June prices are too aggressive, suggesting the probability distribution poses downside risk for the AUD.
  • BoE meeting (Thursday 21:00 AEST) – a 25 basis point hike is firmly discounted, so we look again at the statement against what is assessed for end-2022 – will the statement warrant six BoE hikes this year? I’m skeptical – so a preference to sell GBPUSD rallies.
  • RBA Statement on Monetary Policy (Friday 11.30am AEST) – We get fresh insights into the RBA’s thinking on the economy through a hiking cycle, with new GDP and CPI forecasts. Expect big increases in CPI forecasts from banks.
  • US Nonfarm Payrolls (Friday 10:30 p.m. AEST) – the market expects the creation of 390,000 jobs, with the US unemployment rate expected to fall to 3.5% (3.6%) with expectations of 5.5% year on year – many wonder if we are witnessing the beginning of a wage-price spiral in the United States, which again validates the need to obtain higher tariffs.
  • ISM Manufacturing (Tuesday 00:00 AEST) – the market expects US manufacturing to expand at a faster pace, with the Diffusion Index forecast at 57.5 (vs. 57.1 in March) – although This is an important data point, but if recent history is any guide, this shouldn’t be a theft event. However, given the recent decline in Q1 GDP, traders will be watching for other risks to growth.
  • Federal Speakers – On the docket after the FOMC meeting, we hear views from Fed members Williams, Bostic, Bullard, Waller & Daly – we gauge each member’s appetite for a 75bp at the June meeting.
  • ECB speakers – in the coming week we will hear from Lane, Holzman & Villeroy – as the rate matrix shows, we see 20 bps, or 80% chance of liftoff, at the July meeting – will these speakers validate this pricing? A strong preference to sell the EURUSD at 1.0650, but I wonder if this filling is not too optimistic?
  • BoE speakers (all due within days of the BoE meeting) – Mann, Pill and Tenreyo
  • Evolution of employment in Canada (Friday 10:30 p.m. AEST) – Market eyes 40,000 job creation in April, pushing U/E rate to 5.2% (from 5.3%) – Next BoC meeting won’t take place until April June 1, but expectations of a 50 basis point hike are fully priced out. USDCAD at 1.2950 looks interesting given the day’s pattern.
  • EU Manufacturer PMI Series (Monday 6:00 p.m. AEST) – while inflation, geopolitical headlines and EU natural gas movements are key, this economic measure could affect euro prices given the deafening cries of “stagflation” in the euro zone.
  • Employment in New Zealand (Wednesday 08:45 AEST) – markets see 3.1% year-on-year employment gain – with next RBNZ meeting not until May 25, unless it’s a shock it’s hard to see that this has a lasting influence on the NZD and the daily chart is akin to catching a falling knife – the NZD is clearly oversold, but 64c is the near term risk.
  • OPEC+ meeting (Thursday) – we don’t expect any changes to its plans to increase production by 400,000 barrels – geopolitical headlines remain the ongoing driver, especially with the EU set to offer to eliminate Russian oil altogether from by the end of the year – SpotBrent is holding a clear pennant consolidation pattern – if that breaks trend resistance at $111.41 then technically I would be looking for >$120.

Volatility matrix – given the event risk mentioned above, we look to the options market and assess the expected volatility and movement – projecting the implied trading range with a 68.2% and 95% confidence level. We can use for risk management or even mean reversion.

(Source: Pepperstone – Past performance is not indicative of future performance.)

So, a big week ahead, what’s your stance?

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