Daily Note – Jittery markets result in trading opportunities

Bazzar 7 MaySummary

Jittery Markets: We are trading away in this volatility

United Kingdom: The UK is flying, rates to move sooner not later.

Russia: Not cheap enough to buy yet.

United States: Trade balance improves, but $ moribund

Australia: Wobbly Wallabies

Eurozone: German factory orders slump

Good afternoon,

Everyone is now officially freaked out about Ukraine which we have taken as a signal to trade jittery markets a bit more actively and we will tell you about these moves in this morning’s note.

European equities are weaker again this morning. Yesterday only Oil & Gas were up +0.17%, but all other SPX sectors are in the red. The DOW closed down 129 to 16401 (-0.78%). SPX closed down 17 to 1867 (-0.90%). NASDAQ down 57 to 4080 (-1.38%). We took profits on our long US equity market volatility position and we intend to buy back on any dip in coming days.

The USD was also weak across the board and the Aussie dollar was the main outperformer, up +0.85% after the RBA rate decision was unchanged. The EURO also traded stronger after industrial confidence bounced in Spain and Italy. We reacted to yesterday’s move to add to our Euro position ahead of the ECB tomorrow. Sterling also rallied to $ 1.7000

Speaking of Sterling, let’s start today in the UK, where things are looking up yet again.

United Kingdom: Business sentiment improves in April

Table 1 7 MayThe UK services sector PMI rose from 57.6 to 58.7 in April, a larger rise than was expected (Cons: 57.8). With all the data now in for the total PMI, we see that confidence in the UK is still on the up having moved from 57.2 to 58.3.  Such levels of confidence are consistent with a bumper +4.9% annualised growth in April – by far the most stellar performer of the developed world economies.

Yesterday’s move higher in the PMI would suggest an increase in UK 10 year yields from here.

Figure 1: United Kingdom Services vs UK 10 Year Gilt %

Chart 1 7 May

We believe there will be a move by the Bank of England ahead of most economic forecasters, late this year versus mid next year.

Figure 2: United Kingdom Rate Expectations

Chart 2 7 May

The GBP is now close to the key  $1.70 level. As is the case with  Euro/USD exchange rate, the primary driver is the short term money market rates.

Figure 3: Spread between UK & US 3mth Cash Rate + FX

Chart 3 7 May

Russia: Headline inflation continues to move higher

Table 2 7 May

Headline and core inflation in Russia continued to rise sharply in April because of the weaker Rouble and the spike in food prices caused by the Ukrainian crisis. Ukraine is the region’s bread basket, still.

The Russian central bank is trying to stem capital outflows with higher interest rates – this never works.

Figure 4: Russian CPI YoY % vs Base Rate

Chart 4 7 May

We remain cautious on Russia, while the Ukraine situation has such volatility associated with it. Elections in Ukraine are supposed to happen in the coming days, but they will be meaningless in terms of changing the political dynamic.

United States: Trade balance improves further

Table 3 7 May

The US March trade deficit narrowed to $40.4bn (vs. consensus -$40.0bn), from a revised $41.9bn in February.

Both imports and exports were higher than the Commerce Department assumed in their initial estimate for Q1 GDP growth.

Taking a bit of altitude, you can see from the chart below that the long term improvement in the US trade balance has not resulted in an improvement in the USD, we expect this to change in coming months.

Figure 5: US Trade Balance vs USD Index

Chart 5

With a light day of data in the US today, we are watching for comments from Fed Chair Yellen at 3pm.

Australia: Weakness in Retail Sales

Table 4 7 May

Retail sales growth surprised on the downside in the month of March, and for the quarter as a whole. More importantly, the trajectory of sales looks to have weakened through the course of the quarter. As we talked about yesterday, we like longer dated Australian bonds which we hope to buy if prices fall from here.

Eurozone: German factory orders slump

Table 5 7 MayNo one in Europe likes to see German factory orders decline sharply, but that’s what happened yesterday.

We have thought for a while now that the German economy could slow in Q2 from Q1. Other data has slowed too suggesting the beginning of a trend.

Having liquidated some positions in recent days, we took yesterday’s rise in the Euro above 1.39 as an opportunity to add to our core short. Unlike the market, we think there is a good chance of some further action (if only small) from the ECB tomorrow.

Portfolio: Getting active ahead of key invent risk

Table 6 7 may


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