Yesterday we saw a huge liquidation of longs across the board in commodities, while the dollar strengthened and equities also saw a sell off. We have seen a continuation in some of these moves this morning and Non Farm Payroll release later will be keenly eyed.

Thoughts from the trading floor

So yesterday was a huge day across most of the major asset classes, but the biggest moves were felt in the commodity market. WTI Crude Light Oil futures dropped as much as $11 a barrel at one point; Gold had it’s biggest down day in 2011 and silver continued it’s steep decline after CME hiked margin requirements for the fourth time in eight sessions. Silver has now dropped over 30% in the last week alone. With the dollar strengthening across all major currencies the biggest move was seen against the Euro - a move from 1.4900 to around 1.4500 seen in the last two days. The moves we are seeing are some major risk-off trades and we have to wonder whether a bigger move is at play here. In context, equity markets managed to hold up relatively well in the madness. Though the S&P500 futures were in free fall at one point last night, falling 18 handles in just half an hour, they managed to recover half that move going into the close.

The NFP release later today could be key for the markets going forward. With risk trades firmly off the agenda currently, a weaker reader reading, especially if significantly weaker could see another sell off across the board. The numbers don’t look good either. Yesterday’s weekly initial claims number in the US showed the worst reading since August 2010. That figure does not fall in this months NFP release but the overall trend over the last month has been up in initial claims. Most data points over the last two weeks have been relatively poor out of the US and with some believing that QE2 will not be extended beyond the June expiry, this could be the start of a broader sell off in the markets that have seen the biggest gains since March 2009 - equities, commodities and currencies against the dollar.

Some of the closing levels could also give indication to some of the market moves. Crude Light Oil has dropped another $5 a barrel this morning, with lows posted at $94.63 currently. There will need to be an impressive bounce this afternoon if the negative sentiment is to be removed from the market. At the moment we are seeing large sell offs with little in the way of buyers anywhere. With such a steep sell off over the last week we may see some covering going into the weekend but this remains to be seen. The FTSE 100 futures has lagged the other major equity markets, owing mainly to the large number of financials and basic resources companies listed in the index - the markets most affected in the risk off trade this week. The S&P 500 and Dax futures though have remained relatively strong but the NFP release later will dominate the moves in these markets. Closing levels in relation to the strength or weakness of the number could be a key indicator for momentum going forward.

● Non Farm Payroll released at 13:30 BST
● Expected at 185k, Private Payrolls at 200k

Bull View
In Oil, the bulls will have to keep the June contract above $92.00 a barrel and look to build again from there. If the S&P 500 future can leave its low print of 1325.25 from yesterday in place, the bulls will look to take the market back towards the 1347.00-50.00 levels.

Bear View
The bears have well and truly taken control over the last two days, in commodities especially. A key for the Oil market would be a close below the $100.00 level but anything below $102.00 and they will remain in control. If we see a poor reading out of the NFP release later, we could see further big sell offs in equities and commodities. If they can take the S&P 500 future through yesterday’s lows with a meaningful break then 1298.00-1300.00 will be eyed next.

Futex View

We have been bullish Oil and equities for a long time now and saw significant new highs made at the beginning of last week. Since then though we have seen some major sell offs and we will look to see how this afternoon plays out after the NFP release. As mentioned before, the closing levels in some of the markets in relation to the NFP number could give us an indication of future moves.

Focus on the Risk markets (Equities, commodities & USD) and Non-Farm Payrolls.

Today sees the release of the monthly US employment situation report. The build up to the number over the last two weeks has seen a steady move lower in the USD and the continuation of this trend may be pivotal on the release of this report. The headline Non-Farm payrolls number is expected at 190K, with the unemployment rate expected to remain steady at 8.9%.

Thoughts from the trading floor

Wednesday’s strong ADP number bodes well for the Non Farm Payrolls today, with last month’s ADP numbers correctly guessing the NFP number.

Risk markets have turned strong despite recent volatility. The continued weakness observed in the USD against most of its major high yielding currency pairs over the last 2 weeks has seen this tight relationship with equities return somewhat and so today’s reaction to the numbers may have a ‘tell’. The USD against low yielders should reflect recent developments of hawkish central banks. A good number should see the USD rally against them and a bad number sell-off. Last month, equities had an inverse relationship to the Euro currency after the kneejerk.

Interestingly last month, equities had a decent move lower (on the back of in line on the headline and a lower unemployment rate). A great deal of expectation had been built into the numbers at the time. However, the unemployment rate number seems to be driven by participants falling out of the labour force and thus the market may ignore it once the detailed breakdown of the report is out of the way.

We have started to see an interesting new dynamic emerge for the markets over the last 2 weeks. Increasingly hawkish FOMC voting members have started to cause broad based market reactions. There has been talk that the Fed may start to outline an exit strategy at the next FOMC meeting at the end of this month and it seems that any prospect of QE3 is quickly diminishing. Therefore a very strong number may be met with selling in equities after an initial move higher, and cause a sharp break down in bonds also. The inverse is may be true if the numbers are particularly weak.

Bull View

It is likely that the current trend higher in risk and lower in the USD will dominate markets. Perversely, a slightly weaker than expected NFP number may be required for risk bulls going into next week.

Bear View

The bears will see these moves over the last week as a potential sign markets are looking to turn and the NFP number may provide this catalyst. A weak close may signal a decent sell-off next week for equities regardless of a strong or weak number.

Futex View

We favour the bears. We see the markets primed for a short-term correction having rallied into the end of March on very thin volumes. Although we may need to wait until Monday for this to occur, especially if the numbers are particularly strong.

Focus on the Peripheral markets (debt and equities).

Yesterday saw peripheral debt markets come under pressure during the morning session. Yields on the Portuguese 10yr paper moved briefly to Euro lifetime highs and peripheral spreads across the board moved in sympathy with these moves. As a result, peripheral equity markets also moved sharply lower.

Thoughts from the trading floor

Portuguese 10yr yields moved through the 7.5% level yesterday, which roiled peripheral markets as a whole. This was the highest level since the previous Euro lifetime highs made in November last year. During that time there was a lot of talk that Portugal would need to go to the EFSF for a bailout. However, as we have seen previously, the ECB was quick to intervene in the markets by buying peripheral debt in an attempt to prevent another round of panic liquidation; moving yields back to the 7.00% mark by the end of the day. It has become clear of late that perhaps the only real buyer of peripheral debt is the ECB, and this may serve to unnerve other genuine buyers. The market may now really start to feel that the ECB’s interventions are producing a clear disconnect to reality, which may ultimately render the ECB interventions futile.

In sympathy we have seen peripheral equity markets come under pressure. The Spanish Ibex, Greek ASE and the Euro Stoxx 50 have started to trade off their recent highs. However, we have yet to see the Euro vs. the Swiss Franc reflect these macro developments. Therefore, if we continue to see deterioration in peripheral debt, we are likely to see the peripheral stock indices and Euro/CHF come under real pressure. At this point we may see the end game play out as far as Portugal is concerned.

Bull View

Bulls will hope that the ECB interventions can stabilise the markets long enough so that the comprehensive EFSF extension programme, to be announced in March, can ‘save’ the markets. As far as risk markets are concerned, bulls will look at the recent pull back in the last 2 days as a buying opportunity.

Bear View

Bears will look for the end game as far as Portugal is concerned to begin. Any correction in global risk markets may be enough to re-catalyse the European debt crises.

Futex View

We favour the bears. We feel that the Eurozone debt crises will reach its logical conclusion - peripheries needing bailouts - during the course of this year. We should see the weakest links start to go by this quarter-end.

Macro-events overview

Developments in the Eurozone debt crises this week

The latter half of this week has seen euphoria enter the markets on the back of easing fears regarding the Eurozone debt crises. Peripheral debt yields have witnessed solid retracements from their recent highs and peripheral stock indices, such as the Spanish Ibex and the DJ EuroStoxx 50, have surged higher since dipping sharply lower on Monday.

Thoughts from the trading floor

There have been several macro news factors that have hit the markets this week to help stabilise the ongoing issues in the Eurozone:

1. On Monday evening the Japanese government released a statement which reassured investors that they are looking to invest in the European Financial Stability Facility (EFSF). This helped markets stabilise after sharp risk aversion trading seen on Monday morning. The previous week also saw China making several statements to this effect.
2. There has been talk emanating from the European Commission that steps are being taken to expand the EFSF, with the Core Eurozone countries being asked to increase their contributions. However, several leading German politicians have expressed concerns over this.
3. Wednesday saw Portugal successfully sell their debt to the markets, a very positive event for the peripheral markets. Spain also managed to successfully sell its debt yesterday.

These Factors have helped stabilise the markets this week. However, we are still far from reaching a logical conclusion to the debt crises. Almost certainly we will see peripheral markets under pressure again during this quarter. At that point, bulls will need to see China and Japan turn their rhetoric into action and come to the aid of the Europeans. However, such aid will likely be required to save Spain rather than Portugal as it seems as though the market has already entered an end game with regards to Portugal’s fate.

Bull View

The bulls will look for the markets to brush aside concerns over the next 2-3 months. With global support for the Eurozone likely, should the peripheral markets start to disintegrate again, bulls need a period of stability so that the politicians and governing bodies can work out a system for extra market support.

Bear View

The bears will remain wary of these measures being put in place to aid Europe. The fact that every time further support is provided to Europe more has to be done at some later stage reveals that the markets lack long-term confidence.

Futex View

We continue to favour the bears. We believe that the Eurozone crises will enter the start of the end-game at some point during the first half of this year.

Today may be a crucial NFP number with regards to the upcoming FOMC meeting on Tuesday. Fears of a slowdown of growth in the US have resulted in the USD selling off broadly against most major pairs, including low yielders such as the Yen, and a slide in US treasury yields. Most of these market movements have emanated from a belief that the FOMC will act to ease monetary policy further at the next meeting. This helps to explain why the equity indices have remained strong despite the disappointing data. Once again, distortion on the headline NFP number means that the private payrolls data may be the major focus of attention for the market.

Thoughts from the trading floor

As far as market reactions are concerned, the upcoming FOMC meeting throws in new variables to the tail risks associated with the number. Firstly, we would expect the bond markets and the USD to trend with the direction of the number. That is a weak number should see bond markets rally and the USD to weaken. These moves may be accentuated with Tuesday in mind. A strong number on the other hand should see an extended drop in bond prices and a strong rally in the USD as participants are forced to scale back their expectations of major Fed moves on Tuesday. These markets should see the most substantial moves. Equity indices remain tricky to call, as a weak number may lead participants to eventually buy on the back of possible Fed action. Most interestingly a strong number may then elicit a contrarian reaction, especially if it is established that the recent drive higher in equities over the last week has been mainly on hope of Fed action. However if the number is strong enough it would also mean that the economy is performing well. Thus the number to be careful about would be a number strong enough to prevent the Fed from easing policy but not strong enough to settle the debate that the economy is growing at a healthy rate, i.e. keep the Fed in a wait and see stance until the meeting after next. A number such as this may see equity markets reverse course after an initial rally.

Bull View

Equity bulls will want a significantly strong number if they are to set the market into a good short to medium term uptrend. A bad number may see equities trade higher; however this rally would be fragile and built on hope. Bond bulls will obviously be looking for a weak number. This may serve to propel the 10yr. T-notes below the 2.8% yield mark.

Bear View

Equity bears will hope that if the number is weak, the market cannot sustain the recent bid activity on the back of hope that the Fed will act, however they may get some joy out of an in between number as discussed above. Bond bears will look for a very strong number.

Futex View

The greatest impact on the market would be a very strong number as we believe that this will elicit a very strong negative reaction for bonds and positive for the USD. As far as risk/reward is concerned, we would prefer a strong number.

Gold prices have seen a remarkable run up from its 2008 lows on speculation that the loose monetary policy enacted by central banks globally and the European debt crises will debase the fiat money system leading to an erosion of trust in paper money.

Thoughts from the trading floor

Gold is considered the ultimate safe-haven of one’s wealth. Throughout history gold prices have moved reflecting the global macroeconomic trends at that time. As a result it has largely always maintained its purchasing power parity and this characteristic has established the market’s reputation as the safe haven for the rich who wish to preserve their wealth during periods of uncertainty.

The $700 lows made in 2008 reflected the global market theme during that period- market participants were deleveraging from commodity trades and most participants feared for the total collapse of the banking system. However, the key turning point for the market occurred during the 1^st half of 2009 when the stabilisation of the banking system lead participants to question the long term strategies put into place by central banks across the globe to achieve this. The key decision by the US Federal Reserve to embark on the quantitative easing policy led markets to fear the potential debasing effect this would have on the USD and the erosion of trust in fiat currencies. This set the Gold markets on a steady course higher for much of the year. This year the European debt crisis has served to accelerate the trend higher, which resulted in the market hitting all time highs around the $1260 mark.

Of late we have started to see a worrying trend develop in the macroeconomic data across most developed countries. The removal of small amounts of fiscal stimuli has steadily led to a worsening of macroeconomic data, raising fears that the developing economies are heading towards a deflationary environment. Going back to the fact that gold maintains its purchasing power parity with goods across the economy, a gradual fall in those prices should lead to a gradual trend lower of the gold market. This would be contrary to the forces that have led the market higher since 2009, where participants feared that the erosion of trust in fiat currencies would lead to runaway inflation over the next several years. Thus most participants long of the market currently are looking for the price of gold to continue to trend higher. This is how they are positioned and leveraged. If the realisation that the developed economies are heading towards deflation hits home, we would expect the market to sell-off as only the investors looking to preserve their wealth look to hold gold bullion as a wealth preserver, as opposed to leveraged longs looking for rising gold prices to create wealth. This may lead a dramatic market correction that sees gold back to the sub $800 mark.

Bull View

The bulls will hope that the current market trend continues. Historically periods of deflation have been rare and Bernanke himself believes that the ability to continually print more money means that periods of deflation under a fiat money system should not occur theoretically. Bulls will hope that global central banks will continue to “print money” and thus further debase the fiat money system, leading to higher gold prices.

Bear View

Futex View

We believe that the contrarian bearish gold scenario is a lower probability but very high impact trade. In order to express this view, we would favour either looking for extreme exhaustion points on up-side move to sell into or using the options markets (buying put options).

Macro-Commodity Overview

Focus on COMEX Copper futures (Mar’10)

The last week has seen the copper futures fall from their recent high prints. This has been the case for most industrial metals as jitters from China weigh on these major commodity markets.

Thoughts from the trading floor

The technical outlook for the market has now become evenly poised. Having broken through the 61.8% retracement level of the 2008/9 bear market, the copper futures stalled shy of the 75% retracement level. The market is now currently sitting just above a major daily trend-line taken from its March lows. This lies at the $325.55 level. A break below here may then signal a good 10-20% correction of prices.

Copper, as with other commodity markets, has a very strong negative correlation with the USD. As the USD seems to have turned in the short-term we would expect the copper to also break lower. Also, industrial metals have been rallying as speculation of a stellar economic recovery in China spurs participants to keep buying industrial metals despite the excess short-term supply in the market. What has also been noticeable is the strong positive correlation between industrial commodities and loan growth in China. This has convinced some participants to believe that the commodities are in a ‘bubble’ state. There is belief that market participants had been gaming ‘cheap money’ to speculate on these commodities. Thus the sell-off in commodities over the last week has coincided with a tightening in lending conditions in China. Last month, the Chinese instructed one of their major state banks to stop issuing new loans. With Chinese GDP and asset price growth now approaching levels where the Chinese government have become concerned over the possibility of a ‘bubble’, rumours have surfaced that the Chinese are on the verge of tightening their lending rates. This has significantly impacted Chinese equity markets, with the Hang Seng now breaking major daily supports. Also, we have started to hear rumours that Australia is considering imposing a tax levy on the profits made by their major commodity exporters. This may also drive bearish sentiment in industrial commodity markets.

Bull View

The bulls will be hoping that this over-optimism (or ‘bubble’) can continue. For this to happen, Chinese markets must remain strong and the USD must continue to weaken. They, therefore, hope that neither the Chinese nor the Fed remove excess liquidity support from the markets. If conditions stay as they are now, the commodity markets may continue spiralling up-wards. They will be keen to hold major daily up-trend support at $325.55

Bear View

The bears will see the current trend of re-emerging strength in the USD as a sign that commodity markets are due for a major correction. They will look to force a break of daily trend support, aiming for at least the retest of October ’09 lows around the $264.00 handle.

Futex View

We continue to back the bubble hypothesis. Globally markets seem to be going through this positive feedback loop created with cheap liquidity. We will look for a break of the daily trend support and back the market to test the $264.00 handle. Should sentiment in equity markets turn strongly bearish, the possibility of a double dip becomes increasingly likely. On the basis of value, we believe commodities have over extended.