KRUGER INSIGHTS FRIDAY, FEBRUARY 14, 2014

By: Joel Kruger

Caught Off Guard - Markets definitely caught me off guard on Thursday. I was looking for good follow through from some initial risk off trade, but as the day progressed, everything played out to the other side. Risk assets were broadly bid, led by a surge in US equities to fresh weekly highs. The move did nothing to help my open positions short S&P and Kiwi, and the price action was somewhat concerning. Overall, the bias from my side has been for medium-term risk off trade, with equity markets and risk correlated currencies expected to underperform in the first half of 2014 as Fed policy reversal is slowly priced in. I had thought that the recovery we had seen on Wednesday was the final straw in an impressive February relief rally for risk assets, before we once again rolled back over, and yet, Thursday was disheartening, with the S&P breaking to fresh monthly highs and threatening a potential retest of the January record peak. I haven't found any fundamental catalyst that would change my view, and if anything, the recent retail sales data out of the US, should do nothing to make anyone want to be buying into risk. This should also do nothing to change the Fed's mandate. So I don't see any motivation to be buying risk on that front either. Perhaps it was the better than expected business inventories? I'm kidding. While the data was positive, this is hardly a market mover of the magnitude seen on Thursday, and again, if anything, stronger data would just reenforce prospects for less accommodative policy. Perhaps it was a squeeze. Right now, this latest rally has left me unsettled, but at the same time, as uncomfortable as the price action is at the moment, there is still no reason to stand aside. In fact, there have been some very encouraging developments this week, that have helped me to feel better about my views.

Shining Light of Pessimism - The shining light (for me - ironic because my views are bearish risk) this week has been the behavior in risk currencies like USD/JPY and EUR/CHF. Despite the rush into equities over the past few days, the normally well correlated USD/JPY and EUR/CHF markets have failed to share the same enthusiasm. In fact, we have actually seen some inverse correlations here, with the major risk currencies moving lower, while equities have pushed higher. USD/JPY looks like it is in the process of carving a lower top below 103.50, ahead of the next major downside extension below 100.75 and towards the psychological barrier at 100.00. Meanwhile, EUR/CHF has been well offered on rallies, and is considering another dip back below 1.2200 and towards its key support at 1.2165. I can't really put a handle on the divergence between currencies and equities, but will follow the lead of the currency market here and discount this latest surge in equity markets. But we have definitely reached a kind of short-term inflection point here, and will need to see this equity rally stall out, to feel better about the medium-term outlook. Friday's are never good days for getting a read on markets in my view, and this point is further emphasized on this Friday, ahead of the long holiday weekend in the US. As far as EUR/USD and GBP/USD are concerned, although both of these markets have been very well bid in recent trade, both markets show a lot of good resistance just ahead. The Euro has still been well offered since the end of December, and there is a good deal of sell interest in the 1.3700's. Cable is also looking overdone at current levels and is near the top of multi-month range resistance that would suggest another topside failure around the corner. I would love to see broad based USD demand and a resurgence in risk off trade on Friday, but we may just have to wait until next Tuesday when markets return to full form. Have a good weekend!