Weekly Cross Asset Strategy (26 Feb ’17)

Equity Indexes (click here)

US VIX continues to show signs of improvementAnother week and another new high in the US benchmark S&P500 Index. There is no change in the weekly chart pattern – momentum studies and our proprietary Tension Indicator continue to strengthen – as investors maintain a bullish stance and anticipate still further gains in the coming weeks.

However, we maintain a cautious stance at current levels. S&P500 gains in recent weeks are becoming progressively more pronounced. The bull trend is becoming steeper and steeper. This development is a warning signal of a potential ‘bubble’ forming.

Risk, therefore, is for a sharp corrective pullback, as the bubble ‘pops’, leaving unprepared investors scrabbling to cut exposure.

Another warning signal is coming from the VIX. The index is slowly trending higher. This correlates to increased investor risk and a pullback in global equities.

As this trend develops, we expect global equity markets will come under pressure. The potential for a pullback in the global equity space is increasing.

European markets – the German DAX, broader Eurostoxx50 and the UK FTSE – are balanced in range. Investors are overweight, but are cautious of increasing positions. A push higher cannot be ruled out, but gains are expected to remain limited.


There is still no change in our approach to global equities in the coming weeks. We remain cautious of further equity gains and anticipate increased risk of a corrective pullback. However, we are constructive in the longer term, as underlying strength suggests investors are currently maintaining a buy-into-weakness strategy.


FX (click here)

FX USD/JPY remains under pressureThe USD DXY Index has also reached a decision point. Prices are consolidating the rally from the 99.23 low of February. Momentum studies are pointing higher, suggesting extension towards 102.00/05 barrier, but the falling Tension Indicator highlights difficulty in maintaining any gains. We anticipate a short-term pullback in the USD, but downside tests should be limited. We also see risk of a test below 1.0500 in EUR/USD, but prices should stabilise above the 1.0340~ critical January lows.

GBP/USD is muted, trapped in range as Brexit noise increases in the UK. We see risk of a corrective pullback, but improving background studies should limit risk. Institutional names are likely to maintain a cautious stance, and stay on the sidelines until a clearer picture emerges.

The commodity currencies, AUD and CAD continue to be driven by moves in Gold and Oil respectively. We anticipate fresh gains in AUD/USD as Gold prices strengthen. USD/CAD is likely to turn lower, as the USD comes under pressure and Oil prices remains trapped in range.

USD/JPY is also poised to break lower as prices pressure 111.55~ lows from early February. We see further downside risks in USD/JPY, as momentum readings and the Tension Indicator continue to weaken


Collectively, this suggests FX investors will maintain a cautious approach. However, they will be monitoring commodity markets for potential moves in both AUD and CAD.


Commodities (click here)

Gold (XAU/USD) regaining higher levelsAnother mixed story in the commodities space.

Investors are turning more bullish in Gold, as prices break out of recent short-term consolidation. Both weekly and monthly readings continue to improve, suggesting potential for fresh inflows of funds in the coming weeks – particularly from USD based equity investors. We see further improvement in Gold prices in the coming weeks, and believe the Precious Metals space in general will benefit.

There has once again been no appreciable change in WTI Oil prices. Consolidation continues to unfold against improving background sentiment. We expect investors will use any weakness as an opportunity to increase exposure.

Finally, both Copper and Corn are posting a corrective pullback. Downside risks, however, are expected to remain limited as background studies continue to improve, and investors maintain a buy-into-weakness strategy

We remain bullish commodities as an asset class. However, we see short-term downside risks in both Copper and Corn. Precious Metals are expected to attract fresh inflows. Investors are waiting for Oil to break away from the current consolidation phase



Collectively, we maintain a cautious stance into further gains in global equities, and believe institutions will use rallies as opportunities to reduce equity exposure. We remain cautious of further USD gains, whilst GBP shows further signs of improvement. The commodities space is expected to continue benefiting from cross asset rotation. Interest is now turning to Gold, but investors are expected to use weakness in both Copper and Corn as opportunities to increase exposure in Base Metals and Agriculture, respectively. All eyes are on Oil, as prices remain trapped in consolidation. We expect a break higher in the coming weeks.

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