S&P 500 (Sept 12) INTRADAY
Review Yesterday our strategy was invalidated by the ECB President Mario Draghi as he failed to deliver the emergency measures that Amplify as well as the rest of the market was anticipating. He did not announce the restarting of their SMP bond buying programme in order to reduce borrowing pressures for Spain and Italy and therefore the markets had a steep and broad based risk off reaction that meant our long strategy was stopped out. Those that were watching his press conference Live had the chance to realise that he was not going to satisfy market expectations and therefore adapt and reverse the strategy to benefit from the large sell off.
Strategy Market participants have had the chance overnight to reflect further on Draghi’s press conference. He did not deliver the immediate crisis alleviating tool of restarting the SMP programme. However, he put across some forceful intentions to formulate a plan in the coming weeks to buy peripheral debt and targeted the short end of the curve. So whilst the 10yr yields have risen back above 7% in Spain, the 2yr yield has actually dropped. However, Draghi made it clear that there would be no EFSF bond buying until it is officially requested by the Spanish or Italian Government. Therefore, any bond buying would have to be attached to an onerous fiscal adjustment schedule policed by the Eurozone and the IMF. Perhaps, with the long term in mind, it is better this way as Spain would get their money but at the same time there would continue to be sufficient fiscal adjustment pressures to ensure economic reform efforts are maintained. So, the S&P is back to pre-conference levels and now we focus in on NFP. We have a forecast of 102k which is just above the 100k consensus. We feel a number anywhere around in-line will lead to some profit taking after this morning’s phenomenal rebound off yesterday’s lows. Therefore, we have a short strategy.
Alternative Scenario A very bullish NFP, 150k or greater, may allow a test of the high of the week at 1387.50.
Review The strategy yesterday could not have been further off the target. Our analysts predicted - in line with the market consensus - that Mario Draghi would restart the SMP and start other measures to secure that the peripheral borrowing costs would go down. The crisis contagion is still spreading, and as we saw a few weeks ago, fears of Germany’s credit worthiness even started to take hold of the markets albeit only briefly. Time to act Draghi! The strategy was invalidated by his comments early in the press conference and stopped about five minutes in to the press conference.
Strategy This morning the currency pair has surprisingly gone bid and has now retraced almost all losses from yesterday. Some of this can be attributed to a rumour that the ECB will be holding a press conference this afternoon - which the team at Amplify has little or no belief in. If this is the case then Draghi has been holding the market as a fool and playing games, unable to make up his mind. As the meaning of a well working democracy - the person who is able to act, has the responsibility to act. This afternoon the Non Farm Payrolls are on everybody's minds. The Amplify forecast is 102k, with the market consensus just under this at 100k. If we are right then we would favour the downside as we would likely see dollar strength, decrease QE expectations and profit taking from this morning’s rally.. A good number must be very good to give a boost to the markets in a risk on scenario. We are weary of the risk on/off versus the dollar strength/weakness scenario that is difficult to play on the release. After the initial movement, the risk on/off should be the dominant factor and determine direction with normal correlated moves across asset classes.
Alternative Scenario A much better than expected number may lead to an initial spike lower on dollar strength but a subsequent move up towards the 1.24 handle due to a more conventional risk-on move.
US 10Y T-Note (Sept 12) INTRADAY
Review Our long strategy yesterday was filled shortly after the publication of our report as the first few sentences of Draghi's conference encouraged risk loving traders to expect the bazooka to deliver the expected 'whatever it takes' in the following commentary. The third paragraph then diverted from the bazooka remit as Draghi put the onus once again on Eurozone politicians to create a fiscal union over a longer term process. After being filled long at 134.035 T-Notes rallied to our target one 134.280, which was the high on Tuesday, before finding resistance exactly at this level and grinding lower through the overnight session. Although the success of the strategy is clear we still believe the neutral weighting was warranted due to the uncertainty over the press conference.
Strategy Today we expect Non Farm Payrolls to dominate the market action as the expected figure of 100,000 new jobs for the month of may is due for release at 13:30 BST. Amplify's official forecast is 102K and overall after the volatility seen yesterday and the gains seen this morning we do not expect to see significant moves after the release. The question of QE or not to QE will of course pollute any clean moves across asset markets in reaction to a much worse or much better number so traders are advised not to expect a 'normal' reaction to data that comes in out of line. Our entry long remains the same as yesterday that performed so well with our first target adjusted to today's pivot at 134.155. Should this data be much below 100k then our long will perform even better as both the flight to safety and QE expectancy trades will flood into Treasuries breaking the 135 handle.
Alternative Scenario Given the risk on note of so far today if the positive sentiment continues then we may see a break of the low set on July 27th, 133.265.
Crude Oil (Sept 12) INTRADAY
Review Yesterday’s session was supposed to be a victory parade, with Mario Draghi finally bringing out the big tools and showing Europe what's in the toolbox of the ECB. He was going to restart the Securities Market Program, and there were talks of several other measures - as Draghi was prepared to do "whatever it takes to save the euro". It turned out Mario Draghi is a very fashionable Italian, and wants to do like everybody else. For that reason, he had decided that the ECB would use the next 4 weeks to think about what to do. Good Job! There was a great sell of after this, and the strategy was of course no longer valid as it was based on a pro-active central bank announcement.
Strategy This morning the commodity, and risk assets in general, have been on a resilient rebound, despite the disappointment from yesterday afternoon. The basis for the rally we have seen for about a week that was pricing in action from the central bank is no longer valid - therefore we are questioning the validity of the move higher. There have been some rumours about the ECB holding an unscheduled press conference later today, however this remains speculation and at Amplify we do not buy in to this rumour as it would be extremely out of character for Mr. Draghi to do such a thing. Further, if this is the case the central bank would yesterday have been misleading the market and there will be a loss of credibility. From the Middle East there has not been much happening relative as to market moving effects. The NFP today will be the main mover in the markets, and our expected number is 102k - and we are expecting an in line number which means it wont increase QE expectations but would still remain at lacklustre levels. We are short at 88.97 which is R1for the session.
Alternative A much better OR worse than expected number, will create an upward move in the commodity, although the worse number is likely to create an initial sell off.