Weekly Cross Asset Strategy (26 Mar ’17)
Equity Indexes (click here)
Global equity markets are coming under selling pressure, as political risk in both the US and the UK increases. The VlX, a measure of market volatility, is rising, suggesting investors are adopting a progressively more cautious approach.
The US S&P500 Index is showing signs of capitulation, following 4 weeks of consolidation beneath 2400. Prices are coming under selling pressure, as momentum studies continue to weaken and the Tension Indicator comes within a whisker of generating a bear signal.
We see risk of a test below 2300 as investors reduce positions and move funds into more compelling asset classes.
The UK FTSE100 is also showing increased downside risks. Momentum is also turning down, whilst the bear signal in the Tension Indicator continues to deepen. Whilst the indicators point at increased selling pressure into the coming weeks, investors will be closely monitoring market sentiment as the UK government has stated it will activate Article 50 on Wednesday 29th March.
Currently, indicators suggest the 7447, critical high of 17 March, will provide a barrier into corrective gains. However, if prices rally post-trigger, a close above here will confirm continuation of the dominant 2016 bull trend. Investors will subsequently move to an overweight stance.
Meanwhile, downside risks are increasing in both the EuroStoxx50 and German DAX Indexes. Prices remain at elevated levels, but overbought momentum studies and a weakening Tension Indicator are keeping investors cautious. Risk is for a corrective pullback.
Immediate gains are also expected to prove difficult to sustain in the Emerging Markets ETF EEM, as well as the Hong Kong Hang Seng Index and the China Composite Index.
We thus continue to maintain our cautious stance to global equities in the coming weeks. Risk of a corrective pullback is increasing. However, we are constructive in the longer term, as underlying strength suggests investors are currently maintaining a buy-into-weakness strategy.
FX (click here)
The anticipated pullback in the USD DXY Index is underway. Further weakness is highlighted in the coming weeks, as studies and sentiment remain cautious. In the coming weeks, risk remains for a break below critical support at 99.23/25. If seen, sentiment will turn outright bearish, and lead to a more significant bear trend.
Weakness in the USD is helping to keep the EUR buoyant. Prices are now pressuring strong resistance within 1.0820/30. A break will open up the 1.0870~ high of December 2016 with potential for extension to 1.1000. Meanwhile, both USD/CHF and USD/JPY are coming under selling pressure.
AUD/USD is settling back from highs. However, improvement in Gold is expected to limit downside risks and prompt investors to maintain their ‘high yield’ strategy. In fact, if Gold can maintain its current rally, AUD/USD prices could strengthen appreciably. USD/CAD, however, is in a tug-of-war with both the falling USD and weakening Oil prices. A close above 1.3600 would help to clear up the current indecision, but a strong rally in Oil would be the likely catalyst.
GBP/USD is extending gains, but remains at risk of heightened volatility. Rising momentum studies and the strengthening Tension Indicator point to a break higher in the coming weeks. However, this is countered by heightened political risk as the UK government prepares to trigger Article 50 on Wednesday 29th March. If there are no ‘surprises’ in the run up to 29th March, expectations are for Cable to break above the 1.2570/85~ barrier and focus on the 1.2775 high of December 2016. However, a close below 1.1850 would negate gains, and signal a significant period of broad GBP weakness.
This suggests further weakening of the USD in the coming weeks. Institutional investors will continue to pay attention to GBP/USD and GBP/xxx in general. Volatility will likely increase as the 29th March trigger of Article 50 approaches. There is the possibility of both a ‘relief rally’ in GBP and a sell off. (“… sell the fact”). Commodity markets will help to shape both AUD and CAD.
Commodities (click here)
Commodity markets have generally failed to take advantage of recent gains.
WTI Oil, High Grade Copper and Corn prices are consolidating their respective bounce, but downside risks are still in force
The weakening Tension Indicator suggests investors are maintaining a cautious stance, and risk in the coming weeks is for a fresh trade lower.
Oil could trade down to USD45.00, whilst High Grade Copper prices could test levels below USD2.5000. Corn prices are at risk of reaching USD345 before stabilising
However, within this uncertainty, the obvious beneficiary has been Gold.
Precious Metals are showing signs of improvement, and we expect any pullback in Gold prices to remain shallow.
A later break above the USD1263.80 high of February will confirm continuation of the December 2016 rally, and turn investors outright bullish. From a cross asset perspective, Precious Metals are also showing signs of outperformance relative to US equities, as prices show fresh outperformance relative to the benchmark S&P500 Index.
We remain long-term bullish commodities as an asset class. However, we see short-term downside risks in Oil, Copper and Corn, before prices stabilise. Meanwhile, investors are turning more constructive in Gold, and we anticipate further strength in the Precious Metals space.
We remain unchanged.
We maintain a cautious stance into further gains in global equities, and believe institutions will use rallies as opportunities to reduce equity exposure. Global focus will turn specifically to the UK markets, as the UK government prepares to trigger Article 50 on Wednesday 29th March. We see heightened volatility in GBP as UK political risk increases. The USD is expected to remain under selling pressure. The commodities space is mixed. Downside risks are increasing in Oil, Copper and Corn. However, Gold is benefiting from cross asset rotation, as US investors reduce equity exposure and move USD funds into Precious Metals.