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Sunday, November 10, 2013
KRUGER INSIGHTS MONDAY, NOVEMBER 11, 2013
Joel Kruger
Good News Is Bad News - So why did US equities rally so hard on Friday? I stuck around to wait for the US NFP report and watched for about an hour after. I then closed up shop for the weekend and went off to enjoy the day with family. It wasn't until Saturday night that I looked to see where the market closed. Wow! What a recovery rally! Before doing analysis of my own, I couldn't help but notice, all of the major financial sites and leading publications had attributed the rise in stocks to the much better than expected employment report. But did this make any sense? For the past several months, if not years, it has been very clear that good news for the US economy is bad news for equity markets. Any signs of better than expected US economic data only reinforces the fact that the Fed is likely to reverse policy sooner than later; something the markets do not want. So how is it that all of a sudden all of the major media outlets were attributing the rally in stocks to the strong US data. It just doesn't add up. So what was the market really thinking?
Bad News Is Good News - In my view, the rally in risk assets can be reconciled by the fact that the Fed has tied policy reversal to the unemployment rate. So while the NFP print was way better than expected, the fact that unemployment ticked back up to 7.3% means the Fed is now one step further away from its reversal threshold. This is the most logical explanation for the rally in stocks. But to think stocks rallied because of the better than expected NFP print would be a serious miscalculation. Still, I do think the recovery rally was unjustified. The economy is showing signs of improvement and the Fed needs to seriously consider an initial taper. I believe markets will start to price this in more seriously in the sessions ahead, and we will once again see equity markets back under pressure. Friday price action is always nonsense, and my recommendation would be to ignore the noise of the post NFP recovery rally and focus on the likelihood of a deeper pullback in stocks over the coming days and weeks.
Understanding The Yen - Currency markets on the other hand seem to have gotten it right. The USD was stronger across the board on the day, with the FX market pricing in the sooner than later Fed taper, narrowing yield differentials back in favor of the buck. So it wasn't a better data = better USD reaction from FX markets, it was a sooner than later Fed taper = higher USD reaction. This brings me to the next major point of discussion. How can we make sense of USD/JPY? Can USD/JPY rally with falling US equity prices? This is where I think many traders might be missing the point. I do think USD/JPY can rally significantly, even with the anticipated decline in US stocks over the medium-term. This is because everything comes down to yield differentials. Going forward (as the US economy continues to recover and the Fed begins to exit), yield differentials will only widen out more decisively in favor of the US Dollar and the US Dollar will benefit greatly against the Yen. So to think that for USD/JPY to push higher, we need to see more risk on trade and more strength in US equities, would be incorrect in my view. While there might still be some attraction to Yen on misplaced flight to safety correlations that no longer apply (Yen was never a safe haven currency to begin with), ultimately, it is yield differentials that will drive USD/JPY significantly higher in the months ahead. USD/JPY therefore rallied on Friday because the Fed is closer to tapering. The rally had nothing to do with the fact that equities regained a bid tone.
Good News Is Bad News - So why did US equities rally so hard on Friday? I stuck around to wait for the US NFP report and watched for about an hour after. I then closed up shop for the weekend and went off to enjoy the day with family. It wasn't until Saturday night that I looked to see where the market closed. Wow! What a recovery rally! Before doing analysis of my own, I couldn't help but notice, all of the major financial sites and leading publications had attributed the rise in stocks to the much better than expected employment report. But did this make any sense? For the past several months, if not years, it has been very clear that good news for the US economy is bad news for equity markets. Any signs of better than expected US economic data only reinforces the fact that the Fed is likely to reverse policy sooner than later; something the markets do not want. So how is it that all of a sudden all of the major media outlets were attributing the rally in stocks to the strong US data. It just doesn't add up. So what was the market really thinking?
Bad News Is Good News - In my view, the rally in risk assets can be reconciled by the fact that the Fed has tied policy reversal to the unemployment rate. So while the NFP print was way better than expected, the fact that unemployment ticked back up to 7.3% means the Fed is now one step further away from its reversal threshold. This is the most logical explanation for the rally in stocks. But to think stocks rallied because of the better than expected NFP print would be a serious miscalculation. Still, I do think the recovery rally was unjustified. The economy is showing signs of improvement and the Fed needs to seriously consider an initial taper. I believe markets will start to price this in more seriously in the sessions ahead, and we will once again see equity markets back under pressure. Friday price action is always nonsense, and my recommendation would be to ignore the noise of the post NFP recovery rally and focus on the likelihood of a deeper pullback in stocks over the coming days and weeks.
Understanding The Yen - Currency markets on the other hand seem to have gotten it right. The USD was stronger across the board on the day, with the FX market pricing in the sooner than later Fed taper, narrowing yield differentials back in favor of the buck. So it wasn't a better data = better USD reaction from FX markets, it was a sooner than later Fed taper = higher USD reaction. This brings me to the next major point of discussion. How can we make sense of USD/JPY? Can USD/JPY rally with falling US equity prices? This is where I think many traders might be missing the point. I do think USD/JPY can rally significantly, even with the anticipated decline in US stocks over the medium-term. This is because everything comes down to yield differentials. Going forward (as the US economy continues to recover and the Fed begins to exit), yield differentials will only widen out more decisively in favor of the US Dollar and the US Dollar will benefit greatly against the Yen. So to think that for USD/JPY to push higher, we need to see more risk on trade and more strength in US equities, would be incorrect in my view. While there might still be some attraction to Yen on misplaced flight to safety correlations that no longer apply (Yen was never a safe haven currency to begin with), ultimately, it is yield differentials that will drive USD/JPY significantly higher in the months ahead. USD/JPY therefore rallied on Friday because the Fed is closer to tapering. The rally had nothing to do with the fact that equities regained a bid tone.
Friday, November 8, 2013
KRUGER INSIGHTS FRIDAY, NOVEMBER 08, 2013
Joel Kruger
What Happened? - It is way too early in the game to be calling a top, but at the same time, US equities are showing the first legitimate signs of a reversal. The bearish Thursday close was impressive, after the S&P took out some key support at 1750 and finally started to show some follow through from the previous weekly close, warning of a potential top. Though not the focus of my analysis, the nasty jacknife reversal in the DAX was quite the sight and if you have some time, take a look at that daily chart. So what happened? Well - as you all know by now, the ECB caught markets off guard and cut rates, while shortly after, US GDP came out on the better side of expectation. Risk assets initially rallied on the news of the surprise rate cut, with the same free money = more incentive to buy risk mentality, fueling the gains. But once this rally had fully asserted, the stronger than expected US GDP, hinting at the potential for a sooner than later Fed taper, combined with a feel that perhaps now would be a good time to book profit on artificially supported record high stock prices, opened the door for a sizable retreat into the close.
Lottery Ticket - For quite some time I have highlighted the major disconnect between the financial markets and real economy, and perhaps on Thursday, we finally got that bearish financial markets/real economy cross. The Fed mandate of extended, emergency ultra accommodative policy has been the major driver of the rally in US equities to record highs, despite some severely contrasting fundamentals in the real economy. But the strategy has been to force the purchase of these risk assets so that ultimately, the benefits from a surging equity market will trickle down into the real economy. Yet the real economy has seen little benefit from this risk rally to this point and has been forced to go it alone. We are left with this awful feeling that the rich just get richer, while the less privileged fend for themselves. Back in 2009 the Fed handed out a lottery ticket to the wealthy, betting it would eventually rub off on the 99% that could not afford the lottery ticket. But how much has it rubbed off? Perhaps the most unsettling thing about the implementation of such policy, is that it is aimed at rewarding those responsible for perpetuating the initial crisis.
Optimistic Side - So what happens now? What happens when the market has priced in the end of the line for the Fed? Do stocks continue to rally? Probably not. At some point, these beneficiaries will look to cash in that lottery ticket, and the result will be a violent liquidation in risk assets. Everyone will be running for the exit at once and it will probably get real ugly. Who knows...maybe these profits will finally then trickle into the real economy and all will be well. But the prospect of a falling stock market and Fed exit is quite scary. If you were struggling to get by in a free money environment, what will happen when money starts to become expensive. The optimist in me believes that this will all be for the best and that just as we had this disconnect between risk assets and the real economy on the way up, we will have the same disconnect on the way back down. The real economy will continue to slowly recover as it has, while the financial markets will be forced to deal with their day of reckoning. Technically, the stock market is well overbought on the medium and longer-term charts, and even without all of this hodgepodge, a healthy pullback of 10-20% would be quite normal.
A Better Example - One final insight for today - Keep an eye on EUR/CHF. This cross rate has historically been very well correlated with risk. The most fascinating and potentially disturbing thing about this correlation is that the cross has failed to benefit from the rally in broader risk assets in recent years despite its shared association. Maybe if we really think about the markets over the past several years, EUR/CHF is the perfect reflection of how things should be. If you were struggling out there and someone came to help you out, you would expect them to help support you, but you wouldn't then go and try and take everything you could get from the person trying to help you. This seems like the more appropriate reaction to me and exactly how EUR/CHF has behaved. EUR/CHF has been supported in recent years, but at the same time, has not exploded to the upside like other risk assets. So if these spoiled risk assets do in fact start to come back under intense pressure, what then happens to EUR/CHF and that critical SNB barrier at 1.2000. If this barrier is in fact threatened and broken, it could then send a message to markets that as much as artificial intervention might be effective for a period of time, at some point, we need to learn again how to stand on our own two feet and feel good about going it alone. It may be scary at first, but ultimately, this is where the real rewards are.
Thursday, November 7, 2013
Wednesday, November 6, 2013
KRUGER INSIGHTS THURSDAY, NOVEMBER 7, 2013
By: Joel Kruger
INTRA-WEEK DOLDRUMS
Striking Oil - The economic calendar is stacked on Thursday and there is no shortage of volatility inspiring events. The standouts come in the form of ECB and BOE rate decisions (ECB carries the heavier market moving influence), and US GDP data. So far this week, there hasn't been a whole lot to get excited about. The Euro has been consolidating recent declines, the Yen still doesn't want to break from its multi-month triangle, GOLD can't commit one way or the other, while US equities have retained the usual unwavering bid tone. Yawn. But there has been one glimmer of light this week. As per my recommendation in previous commentary, I did manage to pick up some OIL on the recent dip into the $93s. I am now long from $93.50 and will be looking for a more significant recovery over the coming days. Still, I am not looking to take on any added risk here and have moved my stop-loss to cost to eliminate the potential for loss. Wednesday's bullish reversal day looks encouraging and the 93.50 stop-loss is in a good position below Wednesday's low.
Wait For It - As you all well know by now, for me, the key market remains the US equity market. Until we see some kind of capitulation, I am not too sure we can expect to see any pickup in broader market volatility. The ability for US equities to retain such a strong bid tone has been incredible, and with each passing day it seems there are fewer and fewer who actually believe this market will ever go down again. Perhaps at this point, I am the only one. I am still not sure what the catalyst will be that sends this market lower in the coming days, though I have already proposed that it may just be something as simple as good old fashioned profit taking. For now, we just have to sit back and wait for it. The key level to watch below comes in at 1740 on the S&P, and this is the level that will need to be broken to get the ball rolling and open the highly anticipated and necessary healthy corrective pullback. Once this reversal gets started, look out below. Should we take out 1740, I am projecting additional declines of 10-20% into year end.
Wait For It - As you all well know by now, for me, the key market remains the US equity market. Until we see some kind of capitulation, I am not too sure we can expect to see any pickup in broader market volatility. The ability for US equities to retain such a strong bid tone has been incredible, and with each passing day it seems there are fewer and fewer who actually believe this market will ever go down again. Perhaps at this point, I am the only one. I am still not sure what the catalyst will be that sends this market lower in the coming days, though I have already proposed that it may just be something as simple as good old fashioned profit taking. For now, we just have to sit back and wait for it. The key level to watch below comes in at 1740 on the S&P, and this is the level that will need to be broken to get the ball rolling and open the highly anticipated and necessary healthy corrective pullback. Once this reversal gets started, look out below. Should we take out 1740, I am projecting additional declines of 10-20% into year end.
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