Shift of FED rate action outlook from now to later provides relief
Post the shift of focus from China to the FED rate stance, global markets have been volatile in traction with swings in stakeholders expectation on the timing and quantum of rate hike, thus leading to wild moves since mid July 2015.
DJIA fell from set strategic resist zone of 18100-18350 (high at 18137) to value-buy zone of 14850-15350 (low of 15370) before swift recovery over intermediate zone of 16850-17100. During this period of July - October, US 10Y yield has traded back and forth at 1.95/2.0-2.30/2.35% focus zone. The end to end moves was from set up of bearish momentum on fear from September-October rate hike followed by relief from comfort that FED may stay rate-steady in 2015, while some vocal on possibility of QE4.
In the meantime, USD Index was in volatile mode at 92/93.50-97/98.50 (93.56 to 98.33 to 92.62 to 96.70) before sideways play at 93.50-95. In traction with DXY, Gold push-back from 1150-1165 resistance found support at 1100-1115 before bullish consolidation at 1150-1185.
All taken, investors (and traders) sentiment is positive from short term relief from rate-steady FED and long term risks from economic activity at sub-par level not ruling out extended rate-pause. On this outlook, risk-on assets will continue to enjoy monetary policy support (low rate - high liquidity regime) till stability of weak economic fundamentals (low growth - high unemployment rate). What Next?
Equity assets mixed between risk-on and risk-neutral mode
US is seen to be under pressure from G7 (and IMF) not to turn "black sheep" to be the "odd man out". It is also essential to protect G7 interests in the EM (and BRICS) markets. The start of rate hike cycle by the FED ahead of other G7 Central Banks is not seen favourable for developed and emerging markets. The resultant outlook shift from FED start of rate hike cycle from Q4/2015 to Q1/2016 is great relief. It is also possible that the quantum of rate hike in 2016 is restricted at 25-50 bps. This is "manna from heaven" set up for institutional investors to stay overweight on the "carry-trade" leveraged investment portfolio across developed and emerging markets. The short term outlook therefore is based on the assumption that FED rate hike is deferred to Q1/2016 with not more than 50 bps hike in 2016 to ensure that monetary dynamics stay in favour to support the growth supportive initiatives of the G7 Governments.
DJIA focus retained at 15000/15350-18000/18350 with most trades at upper-half at 16500/16650-18200/18350. There would be traders appetite at the lower end for chase into higher end for unwind. At this stage, it is seen as high risk to stay invested at 17850-18350. Believe that 2015 has already seen it's high at 18351 (in May) and low at 15370 (in August) for consolidation at 18350-18350 awaiting fresh breakout cues, mostly from the US economic data and G7 comfort on FED shift into monetary tightening mode.
US 10Y yield short term consolidation is firm at 1.90-2.40% covering 50 bps hike in 2016 with most trades at lower-half at 1.90-2.15% for rest of 2015 before shift to upper-half in Q1/2016. The strategy is to stay focused end to end of 1.90/1.95-2.10/2.15% for now.
DXY bullish momentum is diluted retaining firm undertone
DXY 2015 high of 100-100.35 (seen in March-April) is pushed out of the radar. Will the 2015 low at 90.24 be safe if rate hike expectation is deferred beyond Q1/2016? While retaining set strategic focus at 92/93.50-97/98.50, do not rule out breakdown into 90 while US Treasury yields stay down. The big-picture play is seen wide at 90/92.50-98/100.50, and good to build strategic "long" at lower end.
EUR/USD is volatile since July-August at 1.08-1.17, held firm at set 1.0850-1.10 strategic buy zone and couldn't hold on to gains above short-entry zone of 1.15-1.1650. It is tough to set bias for breakout of 1.10-1.15 zoom-in consolidation zone. The attention is on the economic data out of the US and Euro zone post the dilution of FED rate hike risk in Q4/2015. While 2015 low of 1.0456 (March) and 1.0519 (April) is seen safe, set rest of 2015 focus between 1.0808 (July low) and 1.1711 (August high) with most trades at 1.10-1.15.
USD/JPY in sideways mode of set focus range of 118-123 post the June-August swings at 115/116.50-125/126.50, seen good for 2015. For now, prefer consolidation at 116-121 and stay focused at end to end.
Commodities firm from weak USD and long term value-buy support
It is no surprise to see Brent Crude finding value-buy support at 42-45 and short-build interest at 52-55, given the short term consolidation at 45-55 with most trades around 50. There are no major triggers to review the set medium term focus at 40/42.50-52.50/55 with breakout bias into 55-70, upper-half of 40-70 big-picture focus.
Gold gained more out of the FED rate-steady outlook with solid recovery from 1100 and building steam for extension into 1200-1235 while above 1150. This would complete the full recovery of push back from below 1235 into 1070-1085 (strategic support zone) between May to July. Can the recovery get stretched beyond 1235 into 2015 high of 1306.20? It's 50:50 probability at this stage with trigger from DXY weakness beyond 90-92.50, seen as low probability event. For now, big-picture play seen restricted at 1115/1150-1200/1235.
Moses Harding
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