Proxy dollar strength driving oil lower

Last week’s market action

Yesterday’s session again saw the Bund track sharply lower to rack up even more losses for the week. Last week saw German 10yr yields reach a record low of 0.05% with everyone assuming a negative yield was inevitable. However, yesterday’s session saw the yield hit 0.37% with reduced Grexit risk as well as a very weak Bobl auction on Wednesday driving the move. With regards to equities, ironically yesterday finally some better than expected US economic data but the S&P had its worst day for the week. Initial Jobless Claims and Continuing Claims hit 15 year lows and Chicago PMI marginally beat expectations as well. However, sentiment it king and the negative hangover from Wednesday's GDP disappointment, along with a growing sense that this weakness will extend into Q2, saw the S&P 500 break to the downside in the latter p[art of the session to close more than 1% down. T-Notes came under further pressure yesterday mainly thanks to the Bund further huge downside, but US debt bounced into the close as equities sold off. EURUSD completed its 7 out at 1.1275, which was key support back in February. Yesterday’s move was perhaps more Euro strength rather than US dollar weakness as the fears of an imminent Greek default subside. Crude oil also extended it strong run of form falling just short of the key psychological $60 handle. From the March low at $42 per barrel this makes it a remarkable 42% rally in six weeks.

Today’s View

Mainland Europe is closed today for the May Day bank holiday so this morning session has been quiet. The main event was a notably worse than expected UK Manufacturing PMI figure that dropped from 54.4 to 51.9. This has driven some Sterling weakness with a break below yesterday’s low making it a more than 100 pip move off the morning’s highs. This proxy dollar strength has perhaps been the force that has driven oil lower to test key support at $59.40. Outside of this news flow has been quiet and we await the economic data releases from the US this afternoon. US Manufacturing PMI, ISM Manufacturing and Uni of Michigan Consumer Sentiment completes the week’s data releases this afternoon. Today’s strategy sees us make the unusual move of shorting all four asset classes. The S&P short seems safe enough given negative sentiment and a solid downtrend for the week. Short T-Notes also makes sense looking at the week’s trend but short EURUSD and Crude are risky calls. We feel $60 is important as a resistance and given the scale of the recent rally we now expect some exhaustion to set in. For the EURUSD it’s a similar thought process as the pair has had its biggest up week in percentage terms since 2009. With Europe closed and after this morning’s pop higher we now expect a pull back.