Sunday, January 27, 2019
Dear Reader,
Please find our latest Weekly Trend Update providing high-level indication of the trend status for major asset classes.
For last Friday’s Markets Snapshot, click here.
For last Friday’s Global Chartbook, click here.
For last Friday’s Global Tactical Model Portfolio Update, click here.
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Have a nice evening.
Marc
Trend Status Update:
The S&P500 slipped -0.2% (+6.3% YTD) last week despite a big squeeze on Friday which followed the announcement of the “temporary” reopening of the US government (until the next shutdown that is) without D. Trump getting the USD5.7bn he had demanded for a border wall. As always, air traffic controllers seem to have made all the difference and they could not all be fired this time.
The Dollar index dropped -0.6% last week and dumped on Friday following a WSJ article that QT had slowed down. The dollar now stands in “bear trend” albeit by only a small margin. The dollar reaction was abrupt last week considered how the euro was thrown under the bus on Thursday by unquestionably weak economic data and following a dovish ECB president press conference only to see those losses (and then some) recouped on Friday. With the US government shutdown coming to an end, we will get back speculative positioning data next Friday which will be interesting to catch up with. We sense the market remains long the dollar and around flattish on precious metals given the way both traded recently (i.e. not ready for a possible breakout).
The EM currency index stands in “bull trend” again and investment flows suggested investors are returning to EM currencies, attracted by cheap valuation and high carry at a moment when the Fed has turned dovish with no rate hike expected by the markets in 2019 anymore. The Fed meets this week and is expected to confirm its recently adopted dovish tone. ZAR and CNY were particularly strong on Friday while the rubble consolidated its recent gains.
Credit markets (HY) rallied or rather squeezed further, following equities higher. US HY dropped -10bps on Friday and the heavily shorted HYG closed with a premium to NAV of +0.4% on Friday as a result. Participants seem to be scrambling to get back (cover shorts) on high yield. We prefer seeking higher yield in EM local currency debt. The sector has turned trend bullish on Friday by breaking its 200dma on the upside and its risk/return payoff (they did not rally/squeeze as much as high yield this month) seems better at this point in our view. They present better value over the long term from a perspective of credit and potential currency appreciation in what we perceive as a vulnerable dollar and (still) credit environment.
The precious Metals Complex underwent a major improvement following last Friday’s 2 steps gap rally which brought Gold from the bottom of its Bollinger band on Thursday to breaking out of it on the upside (with a 2.9 sigma move) on Friday which qualifies as a break out. Gold also printed a Golden cross formation of its own (with the 50dma breaking the 200dma on the upside). Silver had a big day (+2.9%) on Friday as well as did GDX (+3.3%) which broke its 200dma on the upside, turning into “bull mode”. As a result, our Trend following model geared up on both silver and GDX on Friday, a move we espoused in our tactical portfolio by raising a tracking error on silver to 2%. The driver of the precious metals rally on Friday was the twin effects of dollar weakness and more importantly its reversal from Thursday’s strength coupled to the strong outperformance of China (both in equity and currency terms).
For commodities, copper which had been in the doldrums lately broke out on the upside as well with a 2.1 sigma move, still closing in “neutral” (but rapidly healing) zone as far as trend is concerned.
Next week’s highlights will be the Fed meeting, the US Q4 GDP (expected at 2.5%-2.75% from +3.4% in Q3) the next round of talks between the US and China (for which a prima facie agreement is expected), and the US January jobs (non-farm payrolls expected at +165k after 312k in December) report on Friday. ECB President M. Draghi will also speak to the parliament, to reassert his dovish outlook. This rally in risk assets seems to be all about central banks action and policy (the BoJ also revised its growth and inflation outlook last week).
Trend Score Card
US & International Equities
Govt Bonds & Credit (IG and Junk)
The Dollar
Precious Metals
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