Are U.S. Financials a further sign of a market top?

  • Many argue that the global economy is in a period of synchronized growth and that higher rates will positively impact financials (overweight cyclicals vs defensives)
  • However, the market is showing a different picture, in particular the FINANCIAL SELECT SECTOR SPDR ETF (XLF US Equity – see above) which broke major support levels and reached YTD lows
  • The price discovery process is always leading any economic changes, and thus, this development does not fit the global growth narrative and is a sign of further market weakness
  • This development is especially threatening for European banks (EURO STOXX Banks Price EUR – see below) as they are still hovering around alltime lows and do not have a cushion for weathering a crisis
  • Trade idea: Reduce global exposure to banking stocks and in case of a more risk-seeking approach, build small short position

NOKCHF technical setup looks increasingly bearish

  • The global risk-off sentiment should lead to further CHF strength
  • The probability of higher oil prices seems also limited amid global growth concerns and in light of increased daily output. Thus, as high beta currency, NOK should subsequently weaken over the coming days
  • Trade idea: The technical setup with a strong resistance at 12.11 and the overall macro outlook point to an attractive risk/reward for shorting NOKCHF at current levels (SL above 12.20)

S&P500 Equal Weighted ETF shows signs of broad equity weakness

  • The equally weighted S&P500 ETF (RSP US Equity) has broken its 2-year trendline which suggests that the broad market has started to feel some pain
  • Trade idea: It’s time to buy downside protection, liquidate the longs or even start increasing short exposure in US equities

Semiconductor Index is adding further pressure to the overall market sentiment

  • The Philadelphia Stock Exchange Semiconductor Index (see above) broke out of its 2018 wedge and is at risk of moving lower
  • This bearish technical view is further supported by the growing US-China trade tensions with an ever stronger focus on tech
  • Trade idea: Short ISHARES PHLX SEMICONDUCTOR ETF (SOXX US Equity) with a stop above USD 180

Are US Homebuilders pointing to further downside risks?

  • The US Homebuilders ETF (XHB US Equity) has broken a major trendline from 2016 lows
  • In light of rising US rates, a weaker housing market and overall US equity weakness, the US Homebuilders ETF seems ripe for lower levels
  • Trade idea: Short XHB US Equity with a target range between 35 – 36 USD

Is it time for defensive stocks?

  • The recent economic strength in the U.S., particularly after the elections and driven by tax cuts and fiscal stimulus, has led to a strong out-performance of cyclical stocks versus defensive stocks (the above charts shows the relative performance of cyclicals vs defensives)
  • However, it has to be assumed that these economic measures will only provide a short-term boost to the U.S. economy and therefore the optimism about the growth outlook has to be evaluated critically
  • In this regard, an ongoing out-performance of the U.S. cyclical vs defensive sector seems fragile, especially compared to its historical level
  • Strategy: Based on this view it seems reasonable to start over-weighting defensive stocks versus cyclicals, and thus, to take profit on this relative out-performance of more than 20%
  • Nevertheless, a significant break and stabilization of the U.S. 10y yield above 3% could be a risk for this strategy

Has the US Dollar formed a bottom?

  • The US Dollar has started the 2nd quarter as one of the strongest FX performers after weakening for five consecutive months, represented by the US Dollar Index which broke above its  2017 trendline. But the current USD strength was initiated mostly due to bad news elsewhere relative to the US, and thus, a further US Dollar appreciation depends on:
    • The ECB holds a policy meeting tomorrow amid some weaknesses in the economy. While those setbacks might not alter the central bank’s rate path at this point, the euro will be vulnerable to dovish comments or any signs that suggest the soft patches were not all about an unusually cold winter
    • The BOJ publishes its new growth and inflation forecasts at its meeting on Friday, and speculation in the market is that it may have to once again push back expectations on when price growth will reach its target
    • Sterling has wilted, having touched a post-Brexit-vote high on April 17, after BOE Governor Mark Carney hinted a rate increase next month is not a done deal. He acknowledged recent soft economic numbers, which may not be just fallout from storms and snow
    • Australia’s inflation rose less than forecasts in 1Q and stayed below target, according to data today, defying upward pressures from a softer Aussie dollar and higher commodity prices. Traders are pricing in just a one-in-three chance of a rate hike this year (Bloomberg)

The Daily View – 25. April 2018

  • Overnight, the US Dollar traded mostly stronger against its G10 peers, particularly against AUD and NZD
  • 10y UST yields bounced off of 3% on Tuesday but came back and was pretty much at 3% at the close in the US
  • Oil prices on Wednesday fell back from more than three-year highs, after the API reported that inventories rose by 1.099 mn barrels last week, compared to expectations for a 2.648 mn barrel decline
  • The Dow Jones declined quite sharply on Tuesday as a warning from Caterpillar and higher US bond yields weighed on the market. Caterpillar warned that margins may have peaked in the first quarter due to rising manufacturing costs. Not surprisingly, Asian stock markets have also been trading on the weak side
  • US President Donald Trump said on Tuesday that talks on a revised Nafta deal are “doing very nicely” as ministers from the US, Mexico and Canada meet in Washington to try to push for an agreement by early May