Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Access both platforms from your single Saxo account.
FX Update: Market gyrations buffet traders. Powell on tap.
John J. Hardy
Chief Macro Strategist
Summary: Market swings are bordering on the absurd as yesterday saw a massive comeback from local lows in risk appetite, fed in part by the Fed announcing changes to its corporate credit purchase facility and possibly by an expansion of BoJ purchases overnight. The USD and JPY were lower across the board.
Yesterday saw wild gyrations across markets – save for the bond market, where the use of the word “market” perhaps doesn’t entirely apply, given the heavy hand of the central banks. US equity futures rocketed higher from an early funk in Europe to a strong close by the end of the US cash session, initially fed by no identifiable catalyst, but finding a strong one later in US trading when the fed announced changes to its corporate bond purchase facility, the clumsily named SMCCF. The announcement was not an expansion, it should be noted, but a widening of the menu of purchases to include individual bonds in the secondary market to “support market liquidity and the availability of credit for large employers.” This is as opposed to merely purchasing investment grade ETFs. No surprise to see the USD and JPY moving in synch with negative correlation to risk appetite, with the JPY weaker against even a very weak USD into this morning after the BoJ expanded its support for companies to the tune of JPY 110 Trillion (and indications of more if needed) from the former JPY 75 Trillion. Rather than taking yesterday’s move as a sign of strong market health, the volatility in our eyes look distinctly unhealthy and market action is likely to remain erratic.
Elsewhere, sterling firmed smartly yesterday, both on the enormous pivot in risk appetite, but also on positive noises in the wake of the phone call between UK Prime Minister Boris Johnson and his EU counterparts yesterday, though formal negotiations aren’t set to resume until June 29.
Looking at the price action this morning, the speed with which some of the overnight moves are unwinding suggest that two-way volatility remains the prominent risk and we could just as easily erase the move since yesterday as follow through higher – this market feels more than a bit schizophrenic.
Can’t say I am looking forward to today’s semi-annual Powell testimony before a Senate Panel today but in this very political season ahead of the November 3 election, if ever there was a chance for the Democrats to question Fed actions and politicize the Fed, this is it. Also note that the US May Retail Sales report is up later, with expectations for a rather significant rebound of a third to half of April’s record drop.
Chart: AUDUSD
AUDUSD ripped higher from the lows in obvious correlation with equity markets yesterday, but liquidity looks rather poor, given how quickly the pair was to give up a significant portion of its gains this morning. The current level is mid-range between the highs and yesterday’s lows, but across risk-correlated assets, we now have a more clearly etched pivot level to the downside – appropriately here in the 0.6750-0.6800 zone, and we’ll keep an open mind on direction, with a close below 0.6800 opening up downside potential and a close above 0.7000 keeping the chart neutral to positive.
The G-10 rundown
USD – the greenback remains the flip-side of risk appetite, only exceeded in beta terms by the JPY in this market. Reluctant to jump aboard this latest move lower in the USD as a significant one.
EUR – a bit more interested in the status of euro in the crosses than in EURUSD at the moment, as I suspect that EURAUD has more potential for a large move, for example, than the former. Note EURAUD extensive interaction with the 200-day moving average.
JPY – the BoJ announced a sizable expansion of its support for corporates overnight, but the JPY selling more linked to the general risk-on move. Some JPY crosses have rather bearish setups – (GBPJPY, EURJPY, and NZDJPY just to take a few examples besides USDJPY) if we do get another surge of safe haven seeking in bond markets and risk off that drives a bid into JPY.
GBP – sterling stepped away from the abyss yesterday, but another crazy lurch in risk appetite back the other way and too much negative rate talk from the BoE could change the direction once again. Note the 200-day moving average in GBPUSD as the significant resistance there.
CHF – latest SNB data shows ongoing intervention, but this latest surge in risk appetite offers a bit of EURCHF support – pivot zone of 1.0700-1.0650 is technical key for downside risks and EU existential theme the focus through the Friday EU Council meeting.
AUD – the squeeze higher from yesterday’s lows hit an air-pocket this morning – two-way risks abound in this frenetic market.
CAD - little differentiation with other risk-sensitive FX – and willing to bite on the long side prospects on any rally and close above the 21-day moving average from here (currently around 1.3665).
NZD – the kiwi punished overnight on a story that two ex-pats arriving from the UK were discovered to be infected with Covid19 after given dispensation to exit quarantine to go to a funeral. This after the country had been declared “Covid-free” for some 24 days. Nice line in the sand now on the AUDNZD chart at just below 1.0600 for bulls.
SEK – EURSEK reversed back lower from a local high yesterday in sympathy with risk-on rally, but the move feels like it had less conviction and plenty of room for the recent consolidation of the big move lower to continue – first major test at 200-day moving average, now at 10.665.
NOK – the problem here is differentiation with everything else that is going on with NOK and Oil both correlated with one another and with risk appetite. In any case, EURNOK bulls will be under pressure on a close above about 10.90 – but especially on any new move above 11.00.
Upcoming Economic Calendar Highlights (all times GMT)
- 1230 – US May Retail Sales
- 1315 – US May Industrial Production and Capacity Utilization
- 1400 – US Fed Chair Powell to testify before Senate Powell
- 1400 – US Jun. NAHB Housing Market Index
- 2000 – US Fed Vice Chair Clarida to speak on Economic and Policy Outlook
Latest Market Insights
Quarterly Outlook
-
-
Quarterly Outlook
Equity Outlook: Will lower rates lift all boats in equities?
Peter Garnry
Chief Investment Strategist
After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto... -
Quarterly Outlook
FX Outlook: USD in limbo amid political and policy jitters
Charu Chanana
Chief Investment Strategist
As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ... -
Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c... -
Quarterly Outlook
Commodity Outlook: Gold and silver continue to shine bright
Ole Hansen
Head of Commodity Strategy
-
Quarterly Outlook
FX: Risk-on currencies to surge against havens
Charu Chanana
Chief Investment Strategist
Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo... -
Quarterly Outlook
Equities: Are we blowing bubbles again
Peter Garnry
Chief Investment Strategist
Explore key trends and opportunities in European equities and electrification theme as market dynami... -
Quarterly Outlook
Macro: Sandcastle economics
Peter Garnry
Chief Investment Strategist
Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p... -
Quarterly Outlook
Bonds: What to do until inflation stabilises
Althea Spinozzi
Head of Fixed Income Strategy
Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ... -
Quarterly Outlook
Commodities: Energy and grains in focus as metals pause
Ole Hansen
Head of Commodity Strategy
Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)