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When I moved to Melbourne as a 19 year old in 1989 to work in the Westpac Dealing room I spent a little bit too much time watching Top Gun late at night with my flat mate Curto. It became the theme song to my time in that great city and  “Highway to the Danger Zone“ seems and apt song to have as the theme song to this note this week as it is exactly the road we seem to be on since  the Fed opened the Pandora’s Box of volatility with its talk of taper and particularly as we head toward this week’s all important FOMC meeting. 

What will they do, what will they say and can they actually communicate their intentions without causing a market crash or perhaps worse an equity market rally back up to and through the recent highs.

It’s a fraught time for longs and shorts alike as recent price action in markets across the globe and the spectrum can attest.

This week I’ll focus on the bond bubble and hear from a few guys who have joined me in my view the Fed is worried about a bubble, we’ll take a walk with Charles Ponzi down Nanjing road and we’ll have a peak at Dollar Yen and what it means for the Nikkei and the S&P 500.

But first a recap of the week that was

The Dow has had a more than 100 point range for 10 of the past 11 sessions as markets ebb and flow between the emotions of what the Fed might and might not do and as every column inch of news from a seemingly reputable source cause buyers or sellers to gain the upper hand.

In Tokyo the Nikkei has had a shocker dropping 6.35% in one day and crashing, no understatement, back to the levels last seen in March. Abenomics is now openly questioned before it even gets going and someone on the BoJ Board is already talking about a fixed timeframe of 2 years according to minutes from the May meeting released yesterday. Unhelpful in the extreme – if the BoJ policy is going to work, and I don’t believe it will, they have to risk their credibility not seek to maintain it.

The Yen as a result closed the week at 94.06 after trading briefly above 99 at one stage and the Aussie is at 0.9566 after making a low close to 93 cents earlier in the week when the USD caught a bid which ultimately evaporated not only against the Yen and Aussie but Euro, Sterling and Swissie as well – amongst others.

So a volatile week with more to come

Blowing bond bubbles and bond bubbles blowing up

Andrew Haldane is the Bank of England’s Director of Financial Stability and I think one of, if not the, smartest global policy maker going round today. During the week in a testimony to MP’s he noted that Central Banks had intentionally “blown the biggest government bond bubble in history” noting that,

If I were to single out what for me would be biggest risk to global financial stability right now it would be a disorderly reversion in the yields of government bonds globally.

Indeed it is a theme that has been resonating with investors who have withdrawn $27 billion from US bond funds in the past two weeks ending June 14 according to BAML Chief Investment Strategist Michael Hartnett. One of these past two weeks was the biggest redemption in history for a single week.

For those of us who were around and trading interest rates in 1994 when the bond market blew up there is a real fear that the Fed might have lit a torch under the market in a similar way to what it did back then. So worried is Bill Gross the boss of the World’s largest Bond Fund Pimco that he has taken the extraordinary step of issuing his second “letter” in the month in attempt, I think, to quieten the horses.

He notes that we aren’t about to see a bear market in bonds, but rather an acceleration of the de-leveraging process in bonds which if you extend Haldane’s analogy of the biggest bond bubble in history is scary enough to cause a bear market.

Echoing my point made last week and a month ago that the Fed had recognised that the cure for the global economic malaiase should not include a new equity bubble gross says,

Central banks have reached a critical inflection point in which the negatives of their aggressive policies may be outweighing the positives and in fact hampering growth

Indeed I believe that they have reached this point but they don’t want to blow up the bond or stock market just yet – that would be like giving the turkey a reprieve on Thanksgiving just to eat him for Christmas.

So what the Fed says and how it says it is vitally important this week because if rates “normalise” on their own before the economy is on a self sustaining footing then we could see rates up by as much as 1.5% as the chart below suggests and the Fed will have shot itself, the economy and stocks in the foot.

Indeed this week noted ex-Goldmans strategist Jim O’Neill said,

A return to normality eventually implies a benchmark 10-year Treasury yield of 4 percent or more. It won’t happen all at once, but that’s where we’re heading. With yields at roughly 2.2 percent, there’s a long way to go.

We have all been warned.

The shine is off the BRICS and Charles Ponzi comes to China

Emerging markets are in back in the headlines in a way that is reminiscent of the late Nineties Asian crisis. This week we saw the Indian Ruppee under pressure and the Sensex fall, Bank Indonesia raised rates to support the Rupiah as it headed up and through 10,000, the South African Rand has been under pressure and last week the B in BRICS, came under pressure after last week’s S&P Downgrade of the  Brazil Government’s Sovereign Debt outlook from stable at BBB/A-2 to negative igniting a wave of Real selling this week and so far failed moves by the Government to support it.

BAML Chief Investment Strategist Michael Hartnett highlighted the reversal of flows to emerging markets in a note Friday saying that the $9 billion in outflows in the week ended June 12 as the third largest outflow on record as you can see in the chart below via Business Insider.

The run of cash from emerging markets is clearly a sign that risk aversion is rising across all markets as I have warned for the past few weeks but the most alarming thing potentially for me at a time when the Fed is talking about tapering and when uncertainty is rising is the problems in China.

About six weeks ago China released much better than expected import and export data – is was a boom day for markets – but anyone with more than a casual interest in China at the time questioned the data and wondered aloud on the basis of the massive spike in “imports” from Hong Kong if this wasn’t an elaborate if unsophisticated scam to get money out of mainland China. The reversal of last week’s data seemed to confirm that it was and a report in China yesterday that I picked up on Reuters seems to have proved this to be true. Reuters said that,

Fake invoicing inflated China’s official import and export totals by $75 billion in the first four months of 2013,

This means that the previously reported 17.4% export growth and 10.6% import growth in the January to April period is something closer to 7% and 6% respectively which suggests that Chinese growth is nowhere near as strong as many had thought just a few short weeks ago.

Indeed just this week noted China watcher Zhiwei Zhang who is the Chief China economist at Nomura has said that GDP growth could slide below 7% in the second half of this year on the back of tighter liquidity conditions and the benign neglect of policy makers. Zhang wrote,

Official total social financing has tumbled in recent months. We believe the series of policy tightening measures applied to the shadow banking sector in the past three months has reached a critical mass, such that deleveraging in the banking sector is happening

To put this in context a chart that Ambrose Evans Prictchard had in an article this week which he got from the latest World Bank report of the Private Domestic Debt of emerging markets is scary to say the least.

He notes that the 160% is conservative, that Fitch reckons its 200% and that the China Securities Journal (arm of Government) yesterday said it is 221%. Most importantly, particularly in the context of what I am about to write below is the fact that Evans Pritchard notes,

China has increased credit from $9 trillion to $23 trillion since late 2008. The increase is equal to the entire US commercial banking system.

That is a lot of leverage to keep the economy floating and clearly is at risk as rate around the world start to “normalise” or at least QE stops growing at the rate it has been.

But the really scary thing about all this is another comment that Zhang from Nomura made in his aforementioned piece,

 Liquidity tightening can be very damaging to a highly leveraged economy. Many local government financing vehicles rely on new debt issuance to pay the interest on their outstanding debt because they are operating-cash-flow negative

Now the definition of a Ponzi scheme is when investors are paid returns from the proceeds received from new investors and it would appear to have some resonance here. Don’t you agree? 

So at a time when the Fed is discussing tapering and global growth is not too strong a recognition on a broader scale that China is itself uner intense pressure and the economy may slow materially in the year and years ahead could be very damaging for investors in stock markets and extremely damaging for perceptions about Australia and the Aussie Dollar – Watch this space.

FX Volatility, the Yen, stocks and the Aussie

What a wild and crazy time we are having in FX at the moment the daily ranges are getting very big and the persistence of wide ranges is getting to be at historic levels.

For most traders it is USDJPY that is top of mind as it fell from a high just above 99 this week to close the week looking incredibly weak and right on the 38.2% Fibonacci support. If this level gives way next week then the Nikkei will come under fresh pressure given the correlation but quite possibly so will the S&P 500 as you can see in the chart below where the candles represent the S&P and the Line is the Nikkei from above.

Obviously the gap has opened a bit which is encouraging but it helps explain how the easy money out of Japan on top of the easy money from the Fed is partly why I think the Fed wants to taper. We were, or are, seeing a global central banker leveraged leveraged bet.

The Fed’s word are very important this week for everyone and everywhere in markets.

Just quickly on the Aussie because I talk about it every day in my Morning Call it is worth noting that even though it was weak close into the end of the week at 0.9566 there are many out there, of which I guess I am one, who think it might bounce as high as 98-99 cents before falling again.

Be warned – pretty much everyone who reckons it might rally wants to sell it up there so it may just never get there. But if it does I will be selling plenty.

Data next week

Monday sees the Westpac Consumer survey in New Zealand, Tertiary index in Japan and a G8 meeting where I’m guessing Syria will be more the topic then markets. In Australia we have new motor vehicle sales while in Europe and specifically Italy we have Trade Balance before the Empire State Manufacturing in the US along with the NAHB.

Tuesday sees a continuation of the G8 and the release of the RBA’s minutes which will be important for the Aussie Dollar and Australia interest rates. Chinese FDI is out while the UK has a raft of inflation data before the ZEW survey in Germany and the BoE inflation letter. In the US it’s CPI, housing starts, building permits and the Redbook index.

Wednesday night’s (Asian time) highlight is going to be Fed decision by a mile but there will also be the BoE minutes out of the UK but before that we get the NZ Current Account and Japanese import and export data along with Australian leading index.

Thursday is Kiwi GDP, nice week for the NZD, and the RBA Bulletin before MArkit PMI’s in Europe and jobless claims and existing home sales in the US.

Friday is fairly quiet with the HSBC Mfg PMI the highlight.[/level-free]

Is it possible that for all the criticism that has been directed at the Fed that the nuances are actually starting to become apparent between a “taper” and a withdrawal of stimulus? I’ll have a chat about it below but as a recap stocks did really well last night, better than I would have thought and the Euro pushed further into nose bleed territory making a high of 1.34 on better than expected German data.

Bonds haven’t reacted terribly though to the stock rally which suggests a more discerning view that is being taken by global investors as we all await the FOMC announcement in about 20 hours time.

Is the market getting used to the “taper” 

My style is to combine fundamentals and technicals in differing measures depending on the time frame. Short term time frames naturally see an overweight on technicals while longer term I put more balance and sometimes weight on fundamentals. Remember though I’m talking about investment fundamentals not economic fundamentals – they are different.

Anyway I have been looking at my charts over the past week and wondering if the Fed might have achieved its goal – could it have given the market enough time and room between discussion and action that the market becomes desensitised and a bit more discerning. Of course I could be wrong but the very good thing that is happening is this discernment among asset classes.

One of the great terriblenesses of the GFC has been the correlation to one of so many markets both during the intense period of weakness and in a risk on and risk off meme since then. It is a topic that was taken up by John Plender in a great article in the FT overnight. Now of course it is a subscription service and one of only 4 I have on the planet (the others being the WSJ, A.Garry Shillings newsletter and of course MacroBusiness) so the key point he makes, among many good ones in this context is,

The good news about the new rules of the game is that markets are beginning to differentiate more carefully between countries and assets on the basis of fundamental analysis, which is a vast improvement on knee-jerk risk-on, risk-off behaviour.

This is brilliant for asset allocators and traders and investors who are actually any good at their job – it means your skill can dominate their luck but more generally for traders – and lets face it that is who this note is aimed at, it means that you need to be more discerning (there is that word again) about selling Aussie because Euro is down or buying the ASX because the Nikkei is rallying and so on.

So tho the charts and I think we can see in the S&P 500 the potential for a huge rally if the Fed gets its words right. Now of course you may find that strange given I have had a downside bias over the past few weeks but this bias has and is always tempered by the price action and the price action has not been too bad and gives a clear level to have a stop and to take longs against.

1593 – so call it 1590 – is the level of the orange line in the chart above it’s been a top and its been a base and for me it is a key level for the S&P 500 and for the outlook over the rest of the 2013 for Stocks. It seems a long way away with the S&P 500 closing at 1652 overnight but unless or until it breaks the market is in good shape. Equally though if the Fed fluffs its lines this is the level to watch.

Anyway at the close the Dow was up 138 points or 0.91%, the Nasdaq rose 0.37% and the S&P 500 was up 13 points to 1652 for a 0.79%.

In Europe the ZEW helped the Euro above 1.34 but didn’t really resonate with the DAX which only rose 0.17%, the FTSE was up 0.69%, the CAC fell a little, down 0.07%, Milan was virtually unchanged but Spain rose 0.54%.

FX traders are picking winners

We are not seeing a rote USD up or USD down meme in FX markets at the moment which makes them more interesting and for me more fun. It means the crosses can really get some chutzpah one way or another in the months ahead which can make for some profitable trading opportunities – or I should say some more.

Overnight as I noted above the Euro rallied from 1.3324 to 1.3415 and sits at 1.3395 – I still think it is overstretched both technically and fundamentally but I have to provide a disclaimer to the fact that I generally can’t understand why anyone would pay more than 1 US dollar for 1 Euro now or ever and I think in time EURUSD is headed back to 1.10 at a minimum. One this note Plender in the FT article above also said,

The less good news is that the eurozone still hangs like a dark cloud over the global economy, in recession with no comprehensive solution in sight to the problem of imbalances and a banking system that is undercapitalised and overloaded with sovereign debt. It is curious that the euro strengthened against the dollar in the recent turmoil. A reckoning may be around the corner.

As if to highlight the plight of European Banks yesterday Danske bank was embroiled in a punch up with the regulator over the amount of capital it holds. Now I know that Denmark is not in the Euro but it just highlights the plight of European banks in General.

The key topside level for the Euro is 1.3449 which is the 200 week moving average.

USDJPY is up 100 points from the low of yesterday to sit at 95.38 as it rallies away from the important 38.2% retracement level below 94. When I look at USDJPY and I look at the S&P and I look at the Euro and I look at the GBP I see a market set up that is very supportive of stocks and the US dollar if the Fed can get its lines right tonight. Short term target on USDJPY is 96.94, GBP is 1.5547 and then 1.5405, Euro is 1.3250/60.

Looking at the Aussie and its price action it is clear that it is falling out of favour as investors and traders globally are making the more nuanced bets that I opened this mornings note with  as they sell Aussie and buy other currencies. AUDUSD fell yesterday to a low of 0.9437 largely as a result it seems because the RBA left the door open to more cuts in the minutes released at 11.30. When I first read the minutes I thought they were very even handed and went long AUD which of course turned out as a dumb idea and after draining 20 points it was clear I was wrong so I went short and stuck with it till last night and I am short again this morning.

The 4 hour charts suggest a test back to 0.9425 and perhaps, if that gives way back to the low of around 0.9330. The dailies suggest it might be oversold but if the USD strengthens like I think it might then the Aussie will still find sellers on any rally.

Commodities

Morn signs of discerning trading in commodities with differing price moves. Nymex Crude was up 0.89% to $98.64 Bbl, Gold down 1.17% to $1367, Silver off 0.89%, Dr Copper off 1.45% (not hard to see why Aussie is pressured), Corn and wheat rose 0.67% and 0.96% respectively while soybeans were unchanged.

Data

New Zealand Current account this morning and then the Australian Leading Index from Westpac, Bank of England minutes tonight before the Fed announcement and Bernanke press conference which is so clearly the key to every thing. Lets hope they don’t fluff their lines again.

Considering that Jon Hilsenrath wrote an article almost guaranteeing the Fed taper yesterday morning and the FT followed up with a similar piece overnight stocks did pretty well all things considered. Even FX pairs were fairly quiet relative to what we have seen lately and commodities ended fairly flat.

So of the options available to markets in the lead up to the FOMC Wednesday night they choose the quiet one, which is of course great for a change.

Fed Talk intensifies

I saw the  Hilsenrath article yesterday morning Asian time just after it was released adn it was really interesting in that he uses language that suggests he truly is the “Fed Mouthpiece”. His key point was that the Fed isn’t going to be tapering this month but they are likely to continue with forecasts that suggests they will and he notes that even though most private forecasters reckon the Fed might be disappointed by the growth the metric that matters most to them, employment, is improving. He writes,

When the Fed launched its latest round of bond buying last September, it said it wanted to see substantial progress in the labor-market outlook before ending the program.

Back in September, the economists surveyed by the Journal were projecting monthly growth in jobs of 142,000 in the year ahead. In the latest survey, they projected 183,000. In other words, they have become more optimistic about job growth since the Fed’s program was launched. Meantime, their unemployment forecasts are coming down, another sign of improvement. Their forecast for the December 2014 unemployment rate was 7.1% last September and 6.7% in the latest survey. The rate was 7.6% in May.

That’s progress—and the kind that matters most to Fed officials now.

So I’m expecting talk of tapering, but no actual tapering and a focus on the improving labour market. But I am not sure how the market is going to take this message.

Last night though stocks didn’t care, well they did because they finished off their highs but on balance stocks around the world did much better.

Asia kicked off the better mood with the Nikkei up 2.73%, the Hang Seng up 1.22% and the Sensex and Straits Times up 0.77% and 0.68% respectively. This helped Europe kick off nicely with the CAC and DAX up strongly at 1.55% and 1.08% respectively. The FTSE in London was up just 0.34% while its counterpart in Milan rose 0.25%. Spanish stocks rose 0.81%.

In the US stocks also ended higher but the question is whether the strong rise in the New York Empire Manufacturing index from -1.43 last to 7.84 in June. I think it reinforces Hilsenrath’s point above that the Fed is going to taper – so it is all about their communication now isn’t it.

At the close the Dow was 0.73% higher, the Nasdaq rose 0.83% and the S&P finished at 1639 up 0.75%.

FX Markets quiet for a change

FX markets were fairly quiet for a change displaying the sort of volatility that we see in what we might call “normal” times which is of course welcome. The Euro traded a 1.3316-1.3379 range to marginally continue its rally but it is looking a bit over extended. GBP likewise was fairly quiet up just 0.14% on the day at 1.5732 and it too looks like it might roll over if it doesn’t kick on this week while the yen had a negative day but the tractor beam of the 38.2% retracement level of the big rally seems to be keeping it anchored below 95. Only a break of 93.60/70 though opens up a deeper move and if anything support is expected near term.

Unless of course the Fed walks back from tapering and then all of the above is redundant.

Looking to the Aussie I wanted to use it this morning as a lesson between what should or could happen and what does or did happen. yesterday in my CFTC Commitment of Traders Report  I talked about the fact that the big Spec traders are as short as they have ever been. That makes the Aussie vulnerable to a snap back and many twitterarti were commenting to that effect yesterday. Indeed I noted myself that the change of a rally to and through 97 is on the cards.

But that is not the way I traded it – I traded the market in front of me yesterday and I went to bed short AUDUSD. Certainly I didn’t capture all of the move as I wasn’t expecting a move back to 0.9507 but rather into the 0.9550′s but as you can see in the chart above the AUD traded nicely from a techincal perspective after breaking the hourly uptrend it ran to the 200 hour moving average before rallying. It really was a beautiful technical move and reinforces that my “system” works as well on hourly charts as it does on the Dailies, Weeklies and Monthly charts – that is why I say my process is time invariant. It doesn’t always work of course we all have trades that simply don’t work but it does set up high probability trades.

And it is a lesson in the difference between trading and rhetoric – there was every reason based on market positioning to think the rally from yesterday’s lows had further legs but like I suggested there are lots of sellers around and in the end I traded the market not the rhetoric and my account benefitted from it.

Please note for all the trading I am doing I am holding a core small short Aussie position and will do for the next little while.

Commodities

All boring on the commodity front with markets seemingly becalmed as we run up to the FOMC. Of course this was one of two scenarios we might have seen and both come about because of a lack of players. Sometimes as people pull out of the market we see wild volatility, like the Aussie, while at others we see tighter ranges because the catalysts are lacking.

So at the close Nymex Crude was 0.02% higher at $97.87, Gold was -0.28% at $1383 and Dr Copper was -0.22%,

Data

The release of the RBA’s minutes will be important for the Aussie Dollar and Australia interest rates. Chinese FDI is out while the UK has a raft of inflation data before the ZEW survey in Germany and the BoE inflation letter. In the US it’s CPI, housing starts, building permits and the Redbook index.

Summary:

There is no holding back the Aussie Dollar bears who have stepped it up a notch with more than 63,000 contracts now short a new record. The big questions is does this presage the same sort of carnage that Euro shorts have just encountered with a big fall in shorts as Euro rallied up and through 1.33 and if I was a GBP bear I’d be a bit worried – the market is a bit short for the rally not to knock some out very soon. 

Australian Dollar

Nothing like Aussie bears when they get going. The persistence above 1.00 for the past few years has lulled people into thinking that the Aussie was a safe haven and something that could be bought on dips. But lurking in the background were the old traders who know the Aussie generally falls down the elevator shaft when it falls. 

I’m one of those and I still have a lifestyle short – I could end up 400 points wrong first because this positioning is extreme at the biggest short I’ve seen and certainly in my records which stretch back to 2000 but ultimately I think the AUD is headed over a waterfall sometime in the next 6 months.

EURO

Ouch, ouch ouch – Euro shorts have been spanked on the run up and through 1.33 with positioning dropping from -51261 last week to just -7533 as at Tuesday last. That is a much more balanced level and highlights that this week’s FOMC meeting has put enough volatility in the market to knock a few players out but also that the fall in negativity toward the single currency has rearmed the bears if the USD strengthens and the Euro is sold.

Personally I think Euro is about to turn lower again – but we’ll see. Positioning is no impediment.

Yen

The market is still short Yen and still comfortable being short Yen it would seem even though shorts dropped a little under 10000 last week to -72906.

If USDJPY gets down and through 93.60/70 watch out there is going to be a lot of Yen short covering me thinks.

GBP

I reckon GBP bears are the grumpiest and most persitant bears in the market. Sure the Yen bears are huge but GBP bears are hanging on even as the Pound rises. 

Positioning did take a big wack with 24000 short contracts cut – but isn’t it about time? Sterling has rallied 9 big figures from the low at the end of May and it was only last week that shorts were at their biggest for the past 6 and 12 month time frames. Amazing!

NZD

Rightyo our friends across the Tasman, or at least traders of the Kiwi, are at their least bullish in 6 months. The RBNZ is waving its feather duster and threatening to hit the market with both dollars in reserves and traders are listening.

It all depends on the FOMC this week though as to the next move for the NZD.

CAD

CAD shorts aren’t extreme like the Aussie but nor is the market still long as they are in the Kiwi. Which of course suggests there is some good trading in the Dollar Bloc crosses both now and into the divergent future for these three currencies.

Looking specifically at the CAD thought shorts fell marginally from 39776 to 35907 which is still reasonable extreme for the CAD. A backtrack from tapering might drive USDCAD lower, much lower

WHY WE LOOK AT CFTC COMMITMENT OF TRADERS POSITIONING

FX markets are made up of many different players. One of the most influential are traders and speculators but because of the OTC nature of FX markets it is difficult to get a good read on exactly what the “speculators” are doing in the market.

But we can do that by proxy using the CFTC’s Commitment of Traders report that they release at 3.30 pm each Friday afternoon.

Certainly Futures traders are but a tiny part of the almost 5 trillion dollars of FX turnover each day but they remain a very good bellwether for what positioning might look like in some currency pairs. In some pairs like the EURUSD watching the large speculators is a very good proxy for the underlying EUR rate – while in others the relationship is less strong.

What we know though is that watching this sector of the market is an important part of any traders toolkit of indicators for assessing the direction of a pair both short and long term.

Stocks in the US ended the week under pressure  as the Yen surged again and people reacquianted themselves with the relationship between USDJPY and the S&P 500. Data in the US was weaker than expected and the weekend just bought us a couple of days closer to the most important Fed meeting, probably announcement, of the Year this week.

The pressure remains on markets as we await Helicopter Ben

Since May markets have been under pressure as the Fed has signalled that it is actively contemplating when it will taper and when Bernanke and others added that it could be as soon as the next few meetings.

My sense is and has been that the Fed has figured out that the rally in stocks over the first 4 or 5 months of the year in the US and elsewhere threatened to blow an ugly asset bubble that could make the cure for the economic malaise worse than the disease. So this week is going to be very interesting and the language is terribly important for both bulls and bears.

The market shouldn’t fear tapering, is is just a slowing of the rate of bond buying not the halting and certainly not an increase in interest rates and I guess this is the message I expect the Fed and Bernanke in the press conference after to try to get across. But the market does fear tapering and as a behavioural finance/economics guy that’s what I am watching – I see this week’s meeting as a digital option. the market is going to ignite one way or the other depending on what the FOMC does and says.

So it is a very cautious time particulalry in this early week vacuum.

FX Volatility continues

USDJPY is at 94.22 this morning after making a high above 99 at one stage early last week. Even given the incredible volatility of the recent past this move on the week was phenomenal. Indeed the 20 day ATR is on a steady climb toward 200 points which is double what we saw in Feb-April and almost 4 times a big a daily range as we saw in the back end of last year.

This is one of the reasons the levered bets have been coming off the table. If we assume, as would be fair, that investors sold Yen and Bought dollars as the Yen selloff became obvious and then invested those proceeds into the US stock market and or emerging markets and maybe some Aussie dollars then we get a leveraged levered bet on purely Central Bank actions by the Fed and BoJ.

But when the Yen reverses the easy money isn’t as easy and positions get closed which is what we have seen over the past few weeks.

The chart above is USDJPY on the dailies and you can see it has pulled up at the 38.2% Fibo retracement support, or just above it. A break of this 94.60 level would open a move toward 90-91.

The Aussie Dollar is front and centre to any debate about free money, global growth, the outlook for the Australian economy and of course any growing fear of uncertainty and risk off move in markets.

The market, as you will see in my CFTC report later this morning is as short as it has been at least since 2000 and probably ever given the increased volume over that time and it closed the week under acute pressure dropping to 0.9566 at the New York close from a high only a few hours previous at 0.9664.

This morning in early Asian trade Reuters reports it has slipped a little further to 0.9553 bid.

It remains under pressure but as I noted in my free weekly newsletter on Saturday there are many, including Vincent Cignarella at the Wall Street Journal who thing that the Aussie might just have one more rally in it before it falls into the 80′s. Cignarella writes,

 I like the Aussie dollar to bounce in the near term up to as high as perhaps $0.9875, a level that would complete the fourth wave of the current Elliott Wave cycle, longer term the U.S. dollar will prevail. So don’t get married to the trade.

By year end the Australian dollar should settle around $0.8500 but not before exploding one last time toward even with the dollar.

Now I have some sympathy with the idea that the Aussie might have another bounce higher but this is a bear market so I would rather sell the rally than get long in the hope of same. The reason I say this is that Cignarella’s comment echoes something I have seen so many times in so many markets over the past 25 years and that is people want the market to reverse from the current trend so they can get back on the trade – in this case a rally to sell into. Experience has taught me though that if a lot of people are looking for that it just might never happen.

As you can see in the weekly chart above there is support for the Aussie here and the dailies are still suggesting a bounce but my JimmyR trend indicator is in a bear market on both time frames. 0.9741 should be very large resistance at present.

Stocks under pressure 

The relationship between the Nikkei and the USDJPY is obvious, the relationship betwween the S&P 500 less so. But many were focussed on this on Friday as US stocks were let down by no growth in industrial production, capacity utilisation that came in at 77.6% and a fall in the University of Michigan Consumer confidence index from 84.5 to 82.7.

So with weaker data but fears of taper the early morning strength of US stocks evaporated into the afternoon and the Dow closed down 106 points or 0.70% at 15070, the Nasdaq was off 0.62% and the S&P 500 was 0.57% lower at 1627.

In Europe the FTSE closed up 0.05%, the DAX rose 0.40%, the CAC was 0.18% higher while in Milan stocks were 0.23% higher and stocks in Madrid were flat.

Note though that the good news from the weaker data in the US is the rally in US 10 years which are back at 2.14% from above 2.20% earlier in the week.

Commodities

Crude is apparently up on the back of the tensions in Syria which do appear to be taking on a more global and regional significance as the big powers square off and take sides. Russia in particular is very bellicose about army rebels with President Putin posing the question at G8 over the weekend of whether you want to arm people who not only kill their enemies but open them up and eat their body parts – gruesome but the video exists and with news that the Iran revolutionary guard are now in Syria fighting for Assad as well things are getting interesting in Syria and crude prces are watching. 

At the close Crude was up 1.20% or $1.16 to $97.89 after earlier trading at the highest level since January this year. Gold was up 0.70% to $1389 and silver rose 1.72%, Dr Copper was 0.61% higher.

Data

Westpac Consumer survey in New Zealand, Tertiary index in Japan and a G8 meeting where I’m guessing Syria will be more the topic than markets.

In Australia we have new motor vehicle sales while in Europe and specifically Italy we have Trade Balance before the Empire State Manufacturing in the US along with the NAHB.

I have been involved in Financial markets since I was 18 years old and was lucky enough to score a gig on the Retail Money Market Desk at Westpac in Sydney back in 1988. In that time I have met a lot of interesting and very good traders but the twitterverse has introduced to me to a much wider audience and I am the richer for it. 

One of those traders who I like to read and tweet is Jessica Peletier – who uses the twitter handle RogueTraderette and she posted a really cool thought about the efficacy of traders and the rules they break and know they are breaking – YES YOU DO, I KNOW YOU DO. 

Over to the RogueTraderette

——— 

I read a great post by Stephen Burns (@SJosephBurns) That outlined the 7 Habits of Highly Effective Traders.  It was a good list, and well worth reading.

I’ve been quiet with my blogging recently, but I have been stalking you all nonetheless, and in my recent stalker-observations I’ve noticed two of these habits are being blatantly ignored by a large amount of traders – both newbies and professionals alike.

In his post, Stephen lists the following two habits, or rules (italics mine)

1. Being reactive to actual price action instead of predictive of what price action will be is a winning principle I have seen in many rich traders. Letting price action give you signals is trading reality, trading your beliefs about what price ‘should be’ is wishful thinking.

2. Great traders are bullish in bull markets and bearish in bear markets, until the end when the trend bends.

These two rules or habits simply aren’t being utilised, either because people don’t know them, or think they’re better than them.

Let me tell you this – no-one is better than the rules.  And the traders that have been ignoring them are feeling this right now where it hurts.

I know of professionals who are quitting over what the market has been doing recently.  I know of professionals who are at breaking point – literally a nervous wreck because they cannot fathom that the market will go higher….and yet it does.

If you don’t follow these two of Stephens rules, you will never flow with the market.  You will constantly be in conflict; constantly fighting and stubbornly protecting your ‘rightness’, and you will never be in tune with what the market is saying.

These two rules can be neatly summed up in one sentence.

Shut Up and Listen.

Stop talking.  Stop thinking.  Just listen to what the market is telling you.

——-

Me again – Listen to the market. 

This is about the only think the EMH aficionados good right, well sort of they meant something else, 4 simple words but oh so powerful if you have the ability to understand them and absorb the message.

You would have been forgiven after seeing the massive 6% drop in the Nikkei yesterday to expect to walk in today after a night of equity market carnage and it might have gone that way but for an unexpected dip in jobless claims and much better than expected retail sales in the US.

On FX markets the data helped the US dollar claw back some ground against the Yen but it was the Aussie dollar that was the key mover rallying more than 2 cents off the low of yesterday.

Commodity markets were mixed and US 10 year bonds rallied 5 basis points which makes no sense given the data.

Aussie dollar roars

I made the easiest 50+ points I’ve probably ever made in the Aussie Dollars rally up to 0.9520ish after the slightly better than forecast employment report yesterday as I sold and then it dropped back into the 0.9430 region. But once again as Europe entered the fray the buyers re-emerged and it currently sits at 0.9617 as I write early doors Friday.

What was different last night and what suggests that the Aussie might have a significant further upmove after a consolidation in Asia today is that the sellers didn’t knock it back when the Euro came under pressure last night nor have the knocked it back yet.  It speaks of a market that might be, we know the specs are, a little or a lot short on a daily time frame and suggests a market that now needs reasons to sell as opposed to reasons to buy which has been the modis operandi for the past 3 weeks.

One thing I will say and that I find very interesting about the price action, or at least the persistent buying since the low earlier this week is that I may need to reconsider whether if markets go pear shaped, especially if emerging markets are or have joined the rout, whether the Aussies recent safe haven status doesn’t by default come back.

It’s worth thinking about even if it would be very counter-intuitive in a market rout usually.

Anyway to the charts and just like gold before its big crash the Aussie may be mapping out a long term decline for the moment and may have found support at the bottom of what is becoming the channel as you can see in the weekly chart above. If we assume this is the case and if we look at the Dailies (chart here) then there is now a fair chance of a further rally using my usual process with a target of 0.9752 with an outside chance of 0.9885. On the day moves back to 0.9557 are likely to be supported.

Yen roars and Euro recovers from early weakness

With the Nikkei down more than 6% it makes no legitimate reason for the Yen to be stronger and at some point this relationship will break down as the market figures out that the Nikkei and Japan are mere shadows of their former self. But for the moment the Yen’s strength is probably the key reason that the Nikkei is under pressure along with questions about the efficacy of Abenomics. It’s a messy time and a very uncertain one in the lead up to the FOMC and BoJ Governor Kuroda’s comments yesterday that “Markets will gradually calm down” was hardly encouraging for Japanese investors.

So to see USDJPY down at 94.84 and to see it there after making a low overnight of 93.78 after a high of 96.08 yesterday is interesting an another example that Mandelbrot was right and volatility clusters.

As you can see in the chart above the USDJPY sell off has now satisfied, or within 20 pts anyway, what I consider to be a “Usual” or normal retracement of 38.2% which is of course a key Fibonacci level. We could be in for a big rebound but it is too early to tell and a move through last nights low of 93.78 and the “actual” level at 93.60 would be a sign of a deeper move. I don’t expect this level to break at present.

The Euro had an interesting night trading from a high yesterday afternoon around 1.3390 to a low of 1.3278 and it finds itself back at 1.3373 this morning essentially unchanged on the day and looking very strong. The pound was stronger trading ONLY (note irony) 90 point range for a gain and it sits at 1.5691.

Nikkei’s weakness fades as Stocks like the US data

Gee whiz it looked like it might be an ugly night in late Asian trade as the Nikkei was down 6.35%, Hang Seng off 2.19%, Shanghai of 2.84% and Europe walking in weaker down more than 2% in many markets. But the better than expected jobless claims which dropped 11,000 from expectations printing 334,000 and the big rise of 0.6% in Retail sales for May against expectations of 0.4% saw stocks rally all day dragging Europe out of the Doldrums.

So at the close the FTSE was up 0.09%, the DAX down 0.59%, the CAC up 0.11%, the FTSE in Milan up 0.57% but stocks in Madrid fell 0.64%.

In the US the Dow closed up 181 points or 1.21% at 15176, the Nasdaq up 1.31% and the S&P 500 rose 23 points or more than 1.4% to 1636.

The chart above of the S&P 500 daily shows that it penetrated but rallied back above important support as shown by the trendline (if you would like to see how it looked yesterday afternoon in Asia the link is here). What you can also see is the low of 1597 (VantageFX MT 4 pricing) was also the low last week so a break of the line and 1595 would be a big move if it comes now.

Commodities

Nymex crude up again rising 0.89% to $96.73 bbl but Gold, silver, and Dr copper were all lower falling 0.35%, 0.98% and 1.24% respectively.

Data 

In New Zealand PMI and Food Price Index are released before inflation and employment data for the Eurozone as a whole. PPI is due out in the States and then industrial production and capacity utilisation.

So an interesting slide into home plate for the week over the next 24 hours without any real macro catalyst which implies last nights moves might continues.

More concern over the past 24 hours about the path of Fed policy when the FOMC meets next week which caused more selling in stocks, bonds and FX markets and a generalised increase in volatility coming from fear of the unknown or should I say fear of the unknown market outcomes if the Fed tap is turned off.

Asian markets remain under pressure in a clear sign that capital is returning to the safety of home currencies which is helping the Yen, Euro and Pound but strangely putting the US dollar under a little pressure. Bonds remain under selling pressure too with the US 10 year at another 1 year high overnight.

It is another week before the FOMC meeting and it could be fraught with danger and uncertainty.

Stocks sell off again

Journo’s, pundits and blokes like myself are great for gather useless, but somewhat interesting markets stats sometimes and I picked up a cracker in a Reuters story this morning,

The Dow on Wednesday swung more than 200 points for the seventh time in the past 15 trading days, going back to Ben Bernanke’s latest Congressional testimony on May 22.

Yep, its all about the Fed and its all about the drugs that the stock market is on and knows is the only thing keeping the market up. As you can see in this chart below which I used in my Free Weekly Newsletter first a month ago and then again on the weekend saying,

What is clear is the relationship between the Fed buying bonds and the cash finding its way into stock prices.

As momentum built in April and May and as Abenomics was flooding the global economy with more cheap money the Fed has clearly made the decision that enough is enough and the cure of the GFC economic weakness disease should not include a new stock market bubble.

We’ll know more next week but in the mean time we have a bit of a vacuum where fear is trumping hope and stocks are under pressure.

Last night stocks were down from the get go in the US and just kept heading south. At the close the Dow was down 127 points and back below 15,000 at 14995. The Nasdaq was 1.08% lower and the S&P is once again closing in on critical support falling 13 points or 0.81% to 1613.

The trendline comes in tonight at 1607 in terms of the pricing on my VantageFX MT4 platform which is the level to watch. Notwithstanding the fact I respect trendlines until they break my process suggests a break of the line.

In Europe it was the weakness in the US that dragged stocks lower with the FTSE down 0.65%, the DAX off 0.97%, the CAC off 0.43% and stocks in Milan off 1.61%. Somehow stocks in Spain rose 0.43%.

FX markets still don’t like the US dollar

The US dollar was stronger until last week on talk of the Fed taper but now it seems that the resonance that this delivered for the Buck has faded since then as markets have become more unstable and stocks in the US have come under pressure. The Yen’s resurgence makes sense from where I sit both fundamentally and technically but the Euro’s rally is harder to fathom but it just keeps on keeping on trading up to a high of 1.3359 overnight and it sits at 1.3338 as I write. GBP was also a little higher at 1.5678 and USDJPY continues to sell off within a wild range trading 95.13-97.02 in the past 24 hours and rests at 95.93 this morning.

The Aussie Dollar had a wild ride as well trading down to 0.9413 yesterday around lunch time before rallying strongly as Europe entered the fray yesterday afternoon/evening before making a high of 0.9563 before the sellers entered driving it back to 0.9470 this morning. The Aussie is trying to base but remains under pressure.

Commodities

Interesting night and I confess to not really being able to put the moves in context except to say that they were a result of a weaker US dollar. Indeed there was a huge and unexpected build in crude stocks in the US overnight but Nymex crude still managed to finish up 0.40% to $95.76 a Bbl. Gold was up 1.07% at $1388 Oz, Silver was up 0.70% and Dr Copper was 1% higher.

Interesting night.

Data

The US finally joins the fray tonight with jobless claims, retail sales, business inventories and export and import prices. But before that we see the release of the extremely volatile employment data in Australia with the punditry expecting a rise of 10,000 but the NAB business survey amongst others suggesting that the number might be undershot.

As if we need any fresh reminders that the Markets are on life support from central banks stocks were hammered yesterday in Tokyo and then overnight  and the Yen strengthened after the BoJ left things as they are – which is to say no less but no more stimulus.

In a worrying sign emerging markets have joined the rout recently with the Indian Rupee at all time lows and its counterpart in Indonesia under so much pressure that Bank Indonesia lifted rates 25 basis points last night to support the Rupiah.

Stocks in the US sold off, rallied and sold off and as I have been talking about again and again in the Free Weekly over the past month stability leads to instability and volatility clusters. Seems both Mandlebrot and Minsky are right.

But if you want a clear signal that last night’s moves were about fear then the emerging market and bond selloff is not the only pointer because we also saw commodity prices fall on a weaker US dollar. This could get ugly.

Increased Volatility puts Stocks under pressure

It’s been a theme for a few weeks now, longer actually, that I believe we were in a volatility transition from low to something more high given the Fed’s moves to taper and the general lack of volatility and the complacency that it brings with markets.

The BoJ’s actions yesterday which are entirely consistent with their overall plans but, and I know this is a crude analogy, like a junkie building up a tolerance to heroin the market just needs more and more and more of a hit to sustain itself. So the Nikkei was off 1.45%, the Hang Seng fell 1.20%, Shanghai was 1.39% and the Sensex in India was 1.53% lower.

This set a bad tone for Europe but so too did the unedifying spectacle of Joerg Asmussen arguing for the ECB’s OMT bond program which helped stabilise yields in the EU last year against his colleague on the ECB Board and doctrinaire Bundesbank President Jens Weidmann who was arguing against it in a German court overnight.

At the close the FTSE was down 0.94%, the DAX was 1.03% lower, CAC was down 1.38% while the periphery – reflecting increased risk aversion – of Spain and Italy were down 1.63% and 1.68% respectively.

In the US the S&P 500 traded down to 1623, up to 1640 and then closed at 1626 for a loss of 17 points or 1.02%. The Dow closed down 117 points or 0.77% and the Nasdaq was 1.06% lower.

Could the increased volatility stop the Fed from signalling a taper next week? Of course but equally the Fed might be about to stage its very own central banker style intervention for the junkie that markets have become.

Global FX markets messy

Given the BoJ was the catalyst for, or at least got the blame, for the stock shenanigans its no surprise that the USDJPY was the big mover overnight trading down from 99.04 yesterday morning to 96.03 as I write. Yesterday I wrote in the wake of the rally and as a result both of my fundamental and technical view said,

 It would be my proposition that while below the 99.90/100 level USDJPY has more downside ahead of it.

Which is what we have seen as you can see in the chart below.

We now have a big old range range between 99 and last weeks low at 94.93 a break of which would open a move down toward 92.37.

For the Aussie it has been a huge 24 hours with a test and rejection of my 93.77 level initially with a low at 80 before a solid 60 point rally which saw sellers come in and hit the Aussie hard. I had a short term trade on the way up for a recovery with a stop at 77 but that was taken out for a 35 point loss as the Aussie fell to a low of 0.9324 before recovering with the broad based US dollar weakness to sit at 0.9435 as I write this morning.

Thankfully my process suggested USDJPY was going to fall as I noted yesterday morning and I was short USDJPY for 100 odd points once the previous days low went so it ended up a good day all things considered.

I have targetted a move below 94 cents for a while now, or at least a test of support at this level, as a signal of the Aussie Dollar long terms outlook and I believe that even though a recovery of some sort is likely in the days ahead the very long term charts are warning of a cascading cliff – think waterfall – that the Aussie may fall off in the month/months ahead.

For the moment though yesterday’s sell off and rebound could be a good place from which the Aussie can recover – but remember its still a bear market and I can not see a situation where the instability is spreading to emerging markets in the manner that it is which is good for the Aussie. I going to buy some 3 month puts.

The Euro was higher taking out the previous high we talked about yesterday and the single currency strangely looks good techincally sitting at 1.3313 this morning – but I am not playing because I don’t trust it and know that I can’t separate my rhetoric from this pair so best I take it out of the quiver. Sterling also did better but not quite so technically and sits at 1.5646 up 0.48% to the Euro’s 0.43%. In a sign that these moves were about the US dollar the USDCHF rate is down 0.93% at 0.9244

Commodities

As noted in the Recap “global” commodities fell even though the US dollar was weaker which I take as a sure sign that things are getting messy in markets which are starting to correlate to one as they do when fear rises.

Nymex crude fell 0.90%, Gold was 0.66% lower, Silver down 1.26%and Dr Copper down 1.42%. The more specific commodities of the American mid-west however recovered the losses of the previous night with corn up 1.23%m wheat up 0.93% and soybeans up a whopping 1.87%

Data

Electronic retail sales in NZ, MAchinery orders in Japan and Westpac Consumer confidence in Australia and then the Japanese Economic indicator.

In Europe it is a bunch of CPI’s together with French and UK unemployment and EU IP and the BoE quarterly bulletin. In the US it is another quiet night on the data front.

Stocks had a messy night as the competing forces of rising US bond yields, a Greek miss and weaker than expected Chinese data over the weekend competed with the S&P decision to take the US Governments Sovereign debt rating off negative watch and place it back to stable.

On FX markets regardless of the better Japanese data yesterday the Yen sold off again as we await the BoJ and the Aussie rallied off a low yesterday while I was at the beach of 0.9390

US Stocks watching the Fed

Looking back to Friday night the  non-farm payrolls were slightly better than expected at +175,000 but with the unemployment rate rising to 7.6% so we ended up with a Goldilocks number and a stock rally. But I I noted in our Free Weekly Newsletter on Saturday the Stock markets ability to hold up is directly related to and conditional on the Fed Balance sheet continuing to grow – so the Fed’s actions and tapering are of vital import to the stock market outlook.

So it’s no surprise that after Jon Hilsenrath has hit stocks with two subtly aggressive notes over the weekend about the chances of Tapering that US stocks ignored the big 4.94% bounce in the Nikkei yesterday in Asia closing either side of flat. The Dow was down 0.06%, the S&P 500 down 0.02% and the Nasdaq up 0.14%.

The key for me is the Hilsenrath articles and while I’m not sure many people would pick this nuance up or even interpret it the way I do but he wrote a couple of interesting articles after non-farm payrolls saying the Fed will both signal the “Taper” but then also noted in a separate note that the Fed hated Taper because it’s not aggressive enough – Ouch.

In the Wall Street Journal after the jobs data last night he said,

A good-but-not-great jobs report Friday ensured officials wouldn’t want to act right away and would instead want to see more data before taking a delicate step toward winding down the program. But they could point at their next meeting to improvement they’re seeing in the economy, a prerequisite to reducing the so-called quantitative-easing program.

And then followed up with,

The hangup for Fed officials is the word “tapering” suggests a slow, steady and predictable reduction from the current level of $85 billion a month at a succession of Fed meetings, say to $65 billion per month, then to $45 billion and so on. And that’s not necessarily what Fed officials envision.

Ouch – watch out we may be in for a bit of a shock as soon as the next weeks FOMC meeting.

Certainly the message might have got through to US bond traders as both the 30 year and 10 year were higher with the former at its highest since April 2012 and the 10 year closing at 2.21%.

This and the Fed is becoming a threat to the Stock market rally and a very real threat.

In Europe Germany continues to be a law unto itself with the DAX rising 0.65% but the rest of the market was under pressure. The FTSE was down 0.19%, the CAC down 0.22%, Milan fell 0.81% and in Madrid Spanish stocks fell 0.48%. BUt the real action was in Greece with the Athenian stock market fell 5.8% after the news that one of the cornerstone revenue raises for the Greek Rescue package, the sale of DEPA the Greek natural gas firm – failed to attract a bid. This makes it harder for Greece to hit its targets agreed with the Troka but it is worth noting that globally almost everyone except the Germans are acting more conciliatory for countries in strife at the moment.

US dollar stronger against the Yen as market awaits BoJ, Aussie struggles

Nothing matters in Asia today except the BoJ decision this afternoon but I would struggle to see how they might be more accommodative given they seem to be gaining traction as we saw in yesterday’s GDP data with a 1% growth rate QoQ and 4.1% annualized both better than expected. But USDJPY rose and I saw some reports that it was because of these data which makes no sense, none at all. What might make sense though is that the GDP deflator which fell 1.1% much worse than the -0.8% expected.

So Japan and the BoJ still has a deflation problem not the 2% inflation they are aiming at – so I guess the BoJ might pull a rabbit out of the hat today.

Looking at the chart above you can see the important juncture that the USDJPY is at presently. Having broken the 99.90 level and the 6 month+ uptrend USDJPY fell out of bed with a huge move last week into the 94′s before rallying hard for a retest yesterday of the uptrend line. It would be my proposition that while below the 99.90/100 level USDJPY has more downside ahead of it.

The Euro had a big week last week too but even with a strong  rally yesterday it has to break the 1.3300/20 region to kick on. Sterling looks exactly like Euro over the past few days and needs to take out 1.5680/1.57 which is last week’s high and the 200 week moving average.

The Australian dollar is struggling hard and I’m not sure whether the signals suggest that I should be very bullish or very bearish. Yesterday it got knocked under 94 cents on the back of the weaker than expected Chinese trade data that looked to me like authorities had cracked down on the “invoicing” racket with Hong Kong which is really just a way to get money off the mainland. But the Aussie did find support and rallied with the EUR and GBP overnight to a high of 0.9480 off a 0.9390 low.

The bullish signal is the fact that the CFTC COT report released Saturday morning showed a net short position in the Aussie dollar of m0re than 58,000 which looks like an all-time net high for shorts. The bearish signal is that the Aussie continues to make 52 week lows as it did again yesterday and with Friday nights close.

My sense is that I need to see 0.9377 trade as a clear signal that the support zone has broken otherwise I am going to treat it as intact and indeed I bought yesterday in the mid teens after the low and sold last night at 0.9477 last night just below the high of 0.9480. BoJ today is going to be important as is the home loan data and NAB Buisness Survey – the most important economic stat in Australia each month.

Commodities

It’s all a bit boring on Commodity markets, or at least the ones we watch, at the moment. Nymex crude was down 0.31% to $98.73, Gold rose 0.23% to $1386 and Silver was 0.85% higher at $21.78. Dr Copper fell 0.83% and Corn, Wheat and Soybeans were under intense pressure falling 2.14%, 1.04% and 0.93% respectively.

Data

Big day today with the BoJ interest rate decision and the Australian NAB business survey and home loan data.

In Europe tonight we have industrial production and the German Constitutional court ruling on the OTM bond buying program.

The US is quiet.