House View: Risk-off move boosts JPY, CHF

Forex: USD focus yielding to JPY focus as risk appetite deteriorates, yields drop.
 
• USD: less focus on the rally as JPY and CHF safe havens take over, but firm against EM, riskies.
• USD: if risk appetite continues to deteriorate, we see a conflicting signal as lower yields remain bearish and USD liquidity supportive.
• JPY: EM woes are supportive, and rally goes into hyperdrive if risk appetite weakens further and yields/oil prices drop.
• CHF: finding its old safe haven bid in line with developments in Italian yield spreads with core EU bonds. 
• CAD: watching closely for major deterioration if oil prices correct. Risks to CA economy from macro-pru policy shifts.
• GBP: ongoing Brexit woes and slightly inflation miss keep pressure up on sterling. 1.3450-1.3500 key pivot area broken. 1.30-1.29 potential.
• EM: most emerging markets are weaker but not disorderly so as major equity indices have held up well until very recently. Risk is high, however.
• TRY: the weakest link among the more liquid EM currencies and the move has gotten disorderly; we see contagion risk.
• CAD, AUD, NZD: the commodity dollars were resilient until risk appetite weakness came into focus; this is a big downside risk for all three if risk conditions worsen.

Tech levels on watch for developments

• EURUSD: 1.1710 area last notable support ahead of full range low toward 1.1555 and then the old 1.1500 line.
• USDJPY: 110.00-25 was a key focus on the way and now acts as the downside pivot.
• EURCHF: 200-day moving average (now 1.1650) has often been influential; we have traded below this week on Italy concerns.

Trade themes

• USDCAD upside: On a close above 1.2900 after this week's FOMC minutes, and assuming oil prices capped, looking for 1.30-1.31 break.
• EURJPY lower: If risk appetite weakness continues and US yields drop further, a break of 129.25 could lead to 126 or lower.
• GBPUSD downside: bears may stay short on the 1.3450-1.3500 break for a test toward 1.3200 or lower.

Equities: Global stocks fail to break above March highs

Countries

• Switching to negative from neutral on US equities as USD is strengthening and risk is coming off in EM.
• Switching to negative from positive on EM equities as strong USD and rising rates are opening cracks across EM credit and equities.
• Switching to negative from neutral on UK equities as the drivers (oil, weaker GBP and M&A) behind the recent rally are exhausted.
• Switching to neutral from positive on European equities as a weaker EUR provides a tailwind and the macro surprise cycle can only surprise to the upside.
• Remain positive on Hong Kong equities as long as Hang Seng stays above 29,000; potential upside catalyst is China stimulus and A-shares inclusion.
• Switching to neutral from positive on Japanese equities as momentum is likely to end on stronger JPY in risk-off scenario.

Industries / factors

• Best factor strategy in 2018 has been long least-leveraged companies and short most-leveraged companies.
• Preferred industries: semiconductor, retailing, software, apparel, automobiles.
• Least preferred industries: media, telecom, beverage & tobacco, biotechnology, household products.
• We are still overweight automation, battery, miners with exposure to lithium and nickel.

Themes

• The US 10-year interest rate is above 3% and with a strong USD, the EM segment is under pressure.
• Increasing stress is witnessed in EM countries such as Turkey, Argentina, and Pakistan.
• Italy's new populist government has pushed the Italy-Germany 10-year yield spread up by 75 bps.
• Brent crude at $80/barrel is a headwind for growth and increases living expenses dramatically in EM, on top of the strong USD.
• US/China trade relationship remains volatile with no conclusion yet; North Korea summit in June is likely to fail.

Commodities: Brent range raised to between $71 and $82/barrel

Energy

• An ongoing and future threat to supplies from Venezuela and Iran has shifted Brent's trading range sharply higher .
• Buying fatigue emerging above $80/b with funds cutting bullish bets to five-month low.
• Opec and Russia seem ready to increase production to meet the shortfall from Venezuela.
• Sanctions and tariffs together with rising fuel prices may eventually lower outlook for global growth and demand.
• Bias: Failure to extend beyond $80/b has raised the short-termrisk of a correction to $75/b.

Metals

• Gold finding support at $1,285 but needs to break back above $1,305/oz before attracting renewed fund interest.
• Hedge funds have cut their net-long to a 10-month low and are unprepared for an upside break.
• Bias: Bullish above $1,305 and neutral below $1,262/oz.
• Silver continues to find relative strength against gold with demand seen above a gold/silver ratio of 80.
• Copper: Rangebound between $2.95/lb and $3.3/lb with focus on global trade tensions, EM slowdown and the stronger dollar.

Agriculture

• We maintain a bullish outlook for grains as the outlook improves.
• Unfavourable weather potentially impacting global stocks while intrinsic demand continues to rise.