Market sentiment is defined as the net amount of any group of market player's optimism or pessimism reflected in any asset or market price at a particular time, a kind of collective emotion. The goal of understanding sentiment is to discern when a trend has reached an extreme point and is prone to reverse its direction.
Among sentiment indicators there is the VIX, the CoT Report, Put-Call Ratios, the Ted Spread, Mutual Funds statistics, Margin Balances and Investor Polls- such as FXStreet's weekly FX Forecast Poll.
Advisory Opinion, comprised of arguments and trade ideas which have been committed to publication and therefore have an influence on the trading public, are also considered sentiment indicators. Listed below you have bearish and a bullish arguments expressed by our dedicated contributors on several asset classes.
Sentiment in the Forex Market (US Dollar)
The US dollar is still the global reserve currency, so in economic uncertainties people rush to dollars in a large degree considering it a safe-heaven. The dollar can also act as a funding currency- when times were good people would sell (borrow in) dollars and invest in higher yielding assets, but when global economy starts to fall apart those dollar short positions are unwounded, and the dollar rallies.
A strong currency increases the appeal of a country's bonds and stocks for foreigners. For an American investor, a weak dollar increases the appeal of foreign bonds and stocks. Currency markets play an important role in the intermarket picture because all asset prices have to be seen in relative terms not only in absolute terms.
Bearish for the US Dollar
Eventually Trump’s focus could shift to the US dollar. If the greenback continues to strengthen then it could become a threat to US competitiveness, and the ability to sell off of the cars and other goods that will be produced on US soil during the Trump Presidency.
There may well be another factor contributing to the correction in the USD this year. In conjunction with a corrective fall in the USD so far this year, US Treasury yields have fallen significantly, Bitcoin has collapsed, CNY has been volatile, and commodity futures prices have jumped. All of these moves may relate to Chinese government efforts to clamp down on avenues for capital outflow.
Markets have high expectations about the changes in taxation, investment infrastructure and (de)regulation, but other issues like immigration and protectionism may be tackled too. Markets anticipated a much easier fiscal policy via lower taxation and higher infrastructure spending. Will Trump be able to satisfy the high expectations? If he fails to do so, there is room for some further USD correction.
The other China problem is a trade war started by Trump that leads to Chinese retaliation. This is almost certainly going to happen. Trump may practice on Mexico first but it's one of the few campaign promises we expect him to keep. The dollar is vulnerable to the very idea of a trade war and its prospects worsen as China starts talking about dumping Treasuries.
The outlook for the dollar continues to be driven by Treasury yields and with the yields dropping back the dollar is coming under corrective pressure.
The dollar doesn't need capital flows from China to contribute to its rally. It does need the second larg-est dollar reserve holder to maintain its holdings. One of those big sticks is the threat of selling a big chunk of those dollar reserves. The announcement effect would trash the dollar fast, and probably hard.
And while monetary policy divergence has lost its charm as a headline, it's still the relevant theme and the basis for forecasts of euro parity. ING, among others, says it's only a matter of time. Citibank and Deutsche Bank concur, and Goldman calls the dollar one of the top trades for 2017. Ah, but we have been here before. Just when every shoeshine boy advises you to buy, it's the right time to sell
We expect further USD strength in the short term, as markets continue to reprice and put in more risk premium into the money-market curve. However, we maintain our call for a turn higher in EUR/USD later in 2017, as the majority of the strengthening USD move tends to be up to and at the beginning of a hiking cycle. At the same time, current account flows, valuation and positioning are supportive of the euro.
Since most times cycle balances themselves out, we could be poised for the next 3 year cycle to be a stretched 3 year cycle just as the dollar is ready to begin its 15 year super cycle decline.
Bullish for the US Dollar
Investors have been betting Trump will boost public spending and spur repatriation of overseas funds by U.S. companies, policies expected to bring higher inflation and induce the Federal Reserve to raise interest rates at a steady pace.
If Trump’s measures were passed and economic growth picked up, the Fed will have few options, either tightening monetary policy more aggressively, or to fall behind the curve and let the fixed income market lead the way, but three rate hikes in 2017 is my base case. Either way the dollar is likely to remain strong as divergence in monetary policies will continue to widen.
The dollar strengthens: Look for the greenback to rise to 120, likely by late 2017, while the euro falls to 0.85-0.88. In fact, the euro’s very existence could be threatened by default scares in Italy and the failure of Deutsche Bank.
Longer term bullish view since May remains in place as the upside pattern from the May 3rd low at 91.90 is still not "complete" (currently within wave 3), while long term technicals remain bullish (see buy mode on the weekly macd). As mentioned above, there is rising potential of a top for at least a month or 2, would likely be an extended period of sloppy ranging with good sized swings in both directions (wave 4) and with a resumption the longer term gains after
...capital outflows from the eurozone are the biggest so far this year than any other time in 14 years. The WSJ reports "Eurozone investors bought €497.5 billion ($516.5 billion) of financial assets, ...such as stocks and bonds, outside the bloc in that period. Global investors, meanwhile, sold or let mature €31.3 billion of eurozone assets during the year. Together, that adds up to a net outflow of €528.8 billion, the most since the single currency was introduced in 1999."
The world is USD dollar starved and there is a shortage of offshore dollar funding -the Eurodollar maket-, and if Trump starts protectionist policies, means less dollars flow into the global system because they are doing less trade with the US, and that means there are not enought dollars around for all those people who borrowed dollars. That in it self is an extremely positive outcome for the dollar.
The dollar is rising because there is a perceived lack of dollars in the outside system, and we have seen this in the LIBOR market rising with US interest rates also rising. But the other reason is because money is being taken out of that offshore funding market and being put onshore in the US. About a trillion dollars moved out of the traditional markets -away from money market funds- into the fed funds market.
With the FOMC seeming to be the only central bank on the path toward higher rates investors are starting to pour money back into the dollar. The new administrations plans for stimulating the US economy has provided even more fuel to the US dollar's fire which was sparked by the FOMC.
The dollar thus far appears to be doing exactly what I said it as it looks poised to break out of a two-year trading range above 101 and head up towards 120. Such a rise will only weaken gold, oil and commodities further.
While most economists are focusing on either the higher US interest rates and a likelihood of a somewhat more aggressive Fed tightening cycle, or the possibility of a dramatically more stimulative fiscal stance. We see the combination (the policy mix) as an exceptionally potent force that will continue to propel the dollar higher. Interest rate differentials provide an incentive structure for investors. Investors are paid to be long the dollar against most major currencies. This also means that for any given level of volatility, it is cheap to hedge European or Japanese exposure.
DXY is now on the verge of a massive breakout higher. More importantly to a higher DXY is the ability for currency prices to finally, after 8 years, normalize.
Sentiment in the Euro Market
Bearish for the Euro
After the Trump rally, there is a lot good USD news discounted. Interest rate differentials between the dollar and the euro remain very high, but didn’t widen anymore of late, slowing the rise of the dollar.The absolute interest rate support should provide a USD floor as long as US data remain good and as there are no profound doubts on the ability of the new government to execute its pro-growth agenda. A buy the dollar on dips strategy remains preferred.
There are two-way risks posed by the Brexit proceedings and the European elections. If you haven't reduced your [long] exposure, then look to do so below the 1.20 level. Then, you may wish to consider placing a protective stop below the 1.17 low that we saw in December.
Bullish for the Euro
I do expect the ECB to give more verbiage to the thought that bond buying will begin to be tapered starting in March, and while one would think that this would be welcome news to the euro, traders are a strange crew of thinkers, and if they think that the Eurozone economy isn't ready for a taper, then the euro will get whacked. If they think that a taper is due and needed, then the euro will benefit. It's all about sentiment these days, and not fundamentals, as I shake my head in disgust!
The fixed income trade may be overcrowded and positions overly extended, requiring a pullback, but the Big Picture is still in place. The question for us now is how strongly Draghi denies tapering intentions so that the differential can widen out decisively. Look at the 2-year differential vs. the euro/dollar. Notes were overbought/yields oversold. The correction has a way to go.
the EUR seems to be enjoying a stint of increased popularity among traders. Typically, this would be indicative of some form of corrective wave taking hold of the pair which, in this case, will likely be the depicted ABCD wave. The primary reason that we expect to see such a wave take shape is due to just how well the forecastedretracements fit with some key support and resistance levels seen during the pair’s descent.
With the impending elections in Europe and expected volatility from EU political instability, it is important to reduce your [short] exposure. Momentum has turned lower, so consider reducing your exposure above the bottom of the recent trading range. Look to leave protective stops above the 1.20 Level.
Sentiment in the Commodities Market
A bull market in commodities normally corresponds with bull markets in other currencies than the US dollar because the dollar and commodities are expected to trend in opposite direction (note commodities are priced in USD). Nevertheless, there can be periods when the sentiment is very negative toward bonds, so that safe-heaven currencies like the USD and assets considered an hedge against political uncertainty, like gold, rise together.
Tradicionally, the sentiment towards commodities goes opposite to equities, except during late stage expansion and contraction in the business cycle.
The negative influence of rising commodities on stocks holds true during inflationary and disinflationary periods- but not necessarily during a deflation! In a deflation, rising commodity prices are generally positive for stocks.
Commodities usually trend in opposite direction of bond prices, that is, in the same direction as interest rates. when inflation is expected or experienced, sentiment in the commodity sphere becomes bullish. Positive sentiment in both markets, commodities and bonds, is also good but not for a prolonged time because it's considered inflationary.
Bearish FOR THE COMMODITIES
As I’ve said all along, the next major target in gold is its 2008 low of around $700. To get technical with Elliott Wave Theory, that would retest the 4th-wave correction before the largest 5th-wave bubble run into $1,934. I still see gold landing somewhere between $650 and $750 in the next year or so, likely by the end of 2017.
...the commodity complex, which has seen the WTI plummet due to an increase in US and Canadian drilling, offsetting the planned OPEC production taper. There was also little support for oil prices as API inventory data reported 1.5 million barrel inventory, slightly higher than the consensus of 0.9 million.
Gold falls: This is the year we’ll see gold sink to $650-$750 per ounce, likely by late 2017 or shortly there after. I still see it dropping to as low as $400 (if not lower) before this down 30-year commodity cycle is over between early 2020 and early 2023. Oil rises a bit more and then crashes again: Oil will likely rise to as high as $60 at first, and then fall back to $26 or lower by late 2017. Ultimately, I expect we’ll see oil prices between $8 and $18 a barrel by early 2020.
Oil falls to $15 per barrel: Iran and Saudi both renege on their plans to cut oil production in 2017, which in turn leads to the break down of the Opec consortium. Russia distances itself from its previous plan to cut production by 600,000 barrels, leading to a massive oil glut. President Trump steps in to protect the US’s oil and shale gas industry, as the US becomes the first oil producer to guarantee oil companies a minimum price for a barrel of oil, thus increasing the size of the US’s balance sheet even more.
A global push higher in yields, which began stateside following Trump's victory shows little signs of ending anytime soon and this makes non-yielding assets such as gold relatively less attractive.
Gold has done exactly what I said it would. It peaked shortly after my sell signal in late April 2011 and crashed after breaking major support at $1,525. It rallied to near $1,400, as I predicted it would, in late 2015 and has recently fallen $200 towards my target of $700 in the next year or so.
With further strength in equity markets and the dollar, along with continued expectations of higher interest rates, gold could have substantially further to retreat.
Back in early 2013, silver topped after [...] Moving above its 10-week moving average [...] Correcting a bit more than half of the preceding short-term downswing [...] The RSI moved a bit above the 50 level. This time, we have already seen these signals and consequently, silver appears to be ready for the next part of the pattern – a huge decline.
The gold and the stock markets have different drivers. The stock market tends to rise year after year due to population growth, technological developments, and currency inflation. The commodity markets do not benefit from all three. Thus, the stock market tends to rally and then retrace part of its prior advance such as 38% or 50% of the previous bull market. Due to the lack of support from the same drivers, commodity markets can retrace 100% of their prior advance.
Bullish FOR THE COMMODITIES
...Gold can't go broke because it has no counterparties or liabilities against it. Gold can't go broke because gold is pure wealth. Sure gold can go down in price in terms of a currency, but gold CANNOT GO BROKE. This is the crucial fact that the "dollar-bugs" fail to comprehend. This is the reason why sophisticated wealthy people own large quantities of gold. Gold represents eternal unquestioned wealth.
2017 will present obstacles such as compliance and oversupply, at least in the first half but as the year rolls on should get better. Demand should exceed supply as we get into the second half of the year, this will encourage adherence to quotas as monthly cheques get fatter.
The rise in Bitcoin is attributed to several factors. The recent currency policy by India’s Modi and Venezuela’s Maduro are credited as one of the factors, as the leader of these two countries tried to replace the old currency notes. Although there are valid reasons for the policies, it creates obvious side effects with public confidence in the national currencies taking a hit. Another driver for Bitcoin is the strict capital controls in some countries like China which may drive capital into bitcoin to circumvent the control, as well as the steady devaluation of Chinese Yuan. Most bitcoin trading takes place in China so financial conditions in the country can have a huge impact on Bitcoin’s price.
Looking back to this time last year, the outlook for a US normalization was optimistic and as the Fed failed to deliver, it triggered one of the greatest first halves in 40 years. [...] the scarcity of gold is not as close as the yearly gold output accounts for less than 2% of the gold that has been ever produced which in reality implies that there is definitely room for metals to get back into the market.
Not is OPEC not dead, but Saudi Arabia's leadership is significant. Although non-OPEC members will cut 558k barrels, less than the 600k asked for, but it is still the most ever. It is also impressive, that despite Kazakhstan new large oil field coming on line, it also participated by a small cut (20k bpd). The optics are good and this will likely lift oil prices further.
Yes, we could get commodity infla-tion and slow growth at the same time. But what is the relationship to low-but-rising bond yields? We might better look to demand (and supply) of bonds themselves. Just saying.
... something that could be a real game changer for the price of Gold (and I'm sure Silver too, but as always Gold gets all the attention!), and that is the proposed change to Sharia standards (which are what many Islamic financial institutions follow in whole or in part) to allow Gold to be traded like a commodity and held as an investment.
Sentiment in the Equity Markets
The appetite for stocks is believed to manifest the people's expectations about the economy. But they can also be perceived as a good investment in a deteriorated economic environment.
Here at FXStreet, we are more concerned about the relative return of stocks, which can be positive even in a declining market in absolute terms. That is why a strong currency also increases the appeal of a country's stocks (and also bonds) to foreigners, because the relative return, when translated back to their home currencies is greater than the absolute nominal return.
The opposite is also true when a currency falls, its stock market becomes less attractive to foreigners.
In the same way, if the stock market in one country starts performing better than the stock market in another country, you should be aware that this could lead to a rise in value of the currency for the country with the stronger stock market, while the value of the currency could depreciate for the country with the weaker stock market.
Bearish FOR THE STOCK MARKETS
Here are some cautionary sentiment developments: The amount of money in inverse index funds has fallen by 75%, one of the lowest levels in 20 years. [...] The average strategist expects the S&P to end 2017 at 2356, a gain of about 4%. That would be their least-bullish outlook since 2003 [...] The latest survey of active money managers from NAAIM shows bullish sentiment with low standard deviation [...]
financial markets tend to price in events before they occur, but this time I believe investors have priced in most of the good news, and it requires very strong corporate profit growth to keep this bull market alive. Predicting the end of the bull market is a tough call, but the downside risk in 2017 is likely to be larger than the upside potential.
Tax cuts won’t get companies to expand substantially any more than did free money that largely only led to stock buybacks and mergers and acquisitions – financial engineering – not real growth. Besides, infrastructure investments take forever to get drawn up, approved and shovel ready. While the Trump rally seems to have legs, it’s not based on anything substantial or real, except perhaps some cuts in regulations. I think it’s not likely to make it into the summer of 2017. In fact, it’s just another sign of how much the stock market is in an irrational bubble!
I see stocks going as high as 22,000 on the Dow and 2,500 on the S&P 500 by mid-July or so… maybe even a bit later. After that, I expect the Russell 2000 (small caps) will lead us into the trenches. A growing divergence between large and small caps will be an important sign of such a top. Small caps have grown the most irrationally since the Trump win after lagging and could disappoint increasingly in the continued rally from here.
...many more of these tweets against America’s biggest businesses and markets could start to question whether Trump has a pro-business agenda. Mr Trump’s tweet attacking GM comes after earlier claiming he prevented rival Ford from moving its Lincoln plant to Mexico. If the hope that trade policy wouldn’t play as big of a role as Trump’s business-friendly plans for tax and deregulation is misplaced, Dow 20k may not last long.
we mentioned that if cycles have anything to say about the direction of the market for the next few months, the decline which is starting now could last until April-May. But cycles are not reliable enough as a forecasting tool and they must be confirmed through other technical means. The weekly trend may be in the process of topping. If SPX drops to the low 2200s, the weekly indicators will shift to a sell mode and this will be one of the requirements needed to suggest that we have started an intermediate correction.
Considering the fact that the mkt has had such an explosive move since the election - pricing in perfection on so many levels - this indicator is only telling us that the mkt is currently overvalued and the risk of a correction is high vs. not. It is sending a warning signal about what could come in the new year.....and with the FED suggesting multiple rate hikes in 2017, 2018 & 2019.....it does make some sense that a 're-pricing' is in the cards if 'perfection' is not achieved...
Essentially a rising dollar and rising US Treasury yields are also bad news for US stocks, but the market is not concentrating on that right now.
The momentum oscillators are in an uptrend, but the A/D has been trending down for the past two days against a strong price move. This is negative divergence in market breadth at the daily level -- another warning that a top is in the offing.
Sectors in U.S. equity markets diverged substantially. Financials and industrials continued to lead, sending the Dow Jones to a new record high while the technology sector was left behind weighing on heavy tech Nasdaq index. If the divergence continues within these major sectors it could send a warning signs to investors that the rally is not sustainable, especially sincelong term fixed income maturities have started to lookattractive.
...after Trump won, we started to see aggressive US Dollar buying accompanied by a rally in stocks. I have said I thought the rally in stocks made little sense given the fact that the prospect for a more hawkish Fed was a disincentive to be long risk.
Coeure said the ECB was far from having to contemplate buying stocks and had never discussed such option, which has been adopted by the Bank of Japan.
Bullish FOR THE STOCK MARKETS
For the timeframes we trade, the % of stocks above the 50-day MA is most relevant. Taking a step back, the fact that nearly 80% of S&P 500 stocks are trading in an "uptrend" (above their 50-day MA) is still a bullish signal.
Earnings are expected to grow at 11% in the 1st qtr, 11% in the 2nd qtr, 9% in the 3rd qtr and 14% in the 4th qtr! And that my friends is where the rubber hits the road....[...] this EXPECTATION is what is now driving stock prices [...] if earnings can grow at this exponential rate in 2017 - then maybe stocks are not as expensive as they appear...........we know that Trump will not get 100% of what he wants - but the mkt does expect that he gets 50 - 60% of what he campaigned on...and if that is the case then it's all good....
After the inauguration, what will be the nature of the next year? Disruption. Sometimes markets like disruption when it takes the form of change that benefits the bot-tom line. Most folks think rising US inflation—from a skilled labor shortage, oil or Trumpian fiscal boosts—will drive the Fed to faster hikes, if not more hikes. At some point equities won't like it, but that's for later in the year.
The macro forces we identified, reflation and nationalism that were expressed most clearly in the US election, but were evident before too, is spurring a dramatic shift in asset preferences. The dollar, core equities, and financials are broadly in favor. Bonds, emerging markets, gold, have broadly fallen out of favor.
I am still confident that equities will remain buoyant at least for the time being and from here US equities will likely consolidate around all-time highs. Underpinning my view in the equity space is the belief that if the US economy performs the way Yellen intends then the underlying fundamentals warrant a continued move higher, but if the worst materialises and populist movements continue to gain traction, Brexit negotiations break down, China has a hard landing etc… I think that the central banks will simply turn on the taps and do “whatever it takes” to counteract any impending downturn.
The magnitude of the US stimulus the investors seem to be assuming will pass a Republican-controlled Congress has spurred a shift out of bonds, emerging markets, and gold.
Three of my [...] research studies show that the recent uptick in volatility is a GOOD thing for stock prices. The statistics suggest we should see outsized stock gains in the months ahead [...] Following a one-day sell-off worse than 2.5% [...] Following a VIX spike of 50% or more [...] More than 80% of stocks are below their 10-day moving average [...] For now, the dominant trend in a majority of stocks is bullish… and so that’s where our bias remains.
Sentiment in the Bond Markets
It is important to note that bond yields and bond prices go opposite. Furthermore, bonds have several maturities ranging from very short-term 1 week up to 30 years or even more. These two opposite ends of the yield curve may see different supply-demand imbalances, but general sentiment towards government bonds will provide the trader or investor with a general sense for the appetite for that particular asset class. Bonds are the focal point of the intermarket chain and the deepest market compared to equities and commodities.
Any capital flows out of the bond market, is prone to create a sharp move in other asset classes. Market participants are therefore sensitive to changing inter-market relationships involving bonds. Bonds are traditionally considered risk-free investments but demand for government bonds from the public can dry up if other assets are perceived as carrying lesser risk of default. Also central banks can reduce or increase their holdings of domestic or foreign bonds.
Bearish for the Bond Markets
There is still more reason for bond yields to be rising rather than falling. [...] Market-based measures of inflation expectations have been rising globally, consistent with stronger global growth indicators and stronger commodity prices in recent months. These factors are likely to reassert upward pressure on global bond yields, and rising relative real interest rates in the USA, where rate hikes are more likely to be implemented, supporting the USD.
Bill Gross grabbed headlines Tuesday by casting aside all other markets and economic indicators and saying the future of global markets hinges on one chart – the 10-year yield. The T-note yield has been trending down for 30 years but is testing the upper limit of that channel. Gross says a break above 2.60% would signal a new paradigm of growth and inflation that would be the start of a bear market in bonds. He didn't predict it was coming but said it would have to come with 3% real growth. Gross' rival for the bond crown – Jeff Gundlach had a similar take but with 10-year yields at 2.37%, he allows for more leeway before declaring a new paradigm. He said it won't be a bear market in bonds until 3% yields.
The rise in US yields since the election is not so much an increase inflation expectations but real yields. An increase in real yields could be a reflection of an increase in the demand for capital (which could come from the private and/or public sector). It could reflect anticipated changes to supply-side factors (tax cuts and regulation) that boost profitability.
Medium term, we expect US markets to further align with the Fed’s scenario of 3 rate hikes this year. We hold our negative bias for US Treasuries with entry levels around 125-09 (tested after payrolls).
The global reflation theme continues to be the driving force of markets, pushing up equity markets and bond yields. Over the past few weeks, global stocks have broken out of the muddling through state and broken on the upside not least due to a jump higher in European stocks, while US 10-year yields edged higher again leading to a cumulative increase of 100bp over the past three months. We continue to see this theme playing out over the coming months and look for further upside in equities and bond yields.
In the 10-year Treasury note futures, speculators tried picking a bottom (top in yields) with a significant move. [...] We suspect some of the late longs are in weak hands.
China is the second-largest holder of Treasuries after Japan but at the moment someone is clearly selling. Perhaps it's one of the Asian powers? We won't find out for months but Treasury-holdings data in the months ahead is must-watch economic news.
... regulations combined with reductions in the trading desks at the banks have greatly reduced the volume of bonds that can be liquidated quickly and easily. The entrance was large but the exit has been shrunk. Thus, the bond market appears very risky from a longer-term perspective.
Despite significant purchases by the ECB and the BOJ, bond yields appear to have bottomed. Deflationary forces in most countries have been arrested. Bond yields have been falling since the early-1980s. This trend may be over. That is what is at stake. We may have entered a new paradigm.
Bullish for the Bond Markets
10-Year Treasurys could rise to near 3.0% before reversing down on falling inflation and slowing economic trends again. Once they’ve started to fall, they could go as low as 1.0%, or lower, and then stay near there for years, creating the fixed income opportunity of the decade for buying 30-year Treasurys and 20-year AAA corporate bonds.
The rally in yields has been breathtaking in its ferocity and with the end of the year approaching, some of the shorts may begin taking their profits. Therefore it is not unreasonable for the 10 year yield to slide back towards the 2.50% level which was former resistance and will now become support. That in turn means that USD/JPY could see a correction as well towards the 115.00 figure over the next several days.
The reason for the wild jump in yields is the expectation of more fiscal stimulus and rising inflation in the US that will bleed over to other countries. It is a classic case of "Sell on the rumor." [...] For European yields to rise because the US elect-ed Trump is more than silly. It's unsustainable and dangerous. Yields are supposed to respond to hard domestic economic data, right? Like actual inflation.
..my sense is that a counter-trend rally in TBT (upmove in YIELD) is nearing exhaustion [and] that the U.S. economy is increasingly vulnerable to a recession, and/or a flight to safety into, and immediately after, the election...
Global core bonds profited from deteriorating risk sentiment on European stock markets, declining oil prices, and central banks’ “lower for longer” attitude...
Sentiment in Emerging Markets
Emerging markets reflect foreign currency exposure, which could explain correlations between EMs and Dollar Index. It's also important to know that many EM countries depend on commodity exports. For example, a side effect of a rising dollar and thereby weakening commodity prices, is that EM currencies such as the Brazilian Real and Russian Rubble suffer. That's important because weaker EM currencies have a negative impact on EM stocks making these look less attractive for global investors.
Also rising Treasury yields (often associated with a stronger dollar) also reduce the appeal of higher yielding (and riskier) EM assets.
Inversely, they do better when yields are dropping along with the dollar. Look above to the sentiment in the US dollar as it is is part of the reason for money flows into and out emerging assets.
When considering a particular asset class or financial market, instead of versus analyzing the subject in isolation, intermarket analysis includes all related asset classes. It is important to remember that these relationships are dynamic which makes trading applications even more difficult. This page's contents try to go beyond traditional historical intermarket relationships, and to be representative of the current relationships.
Bearish FOR EMERGING MARKETS
The 6-month EUR/CZK forward is pricing in a 256 point drop, one of the largest declines since the financial crisis. This suggests that the market believes that there is a very real possibility that the Czech authorities will disband with the peg in the first half of this year.
...we expect the market to win out, and the [Turkish] central bank to embark on more forceful measures such as a large one off interest rate rise, which could cause a sharp reversal in Turkey’s fortunes in the short-term. The risk of a rate hike is growing, especially if we see a series of consecutive sell offs in the TRY this week. Back in 2013 and 2014, Russia’s currency also came under pressure and the central bank embarked on a series of unscheduled rate hikes, eventually pushing interest rates up to more than 14%.
... we expect China to continue tightening capital controls gradually because if the PBoC continues to dissipate its FX reserves, this may enhance downside pressure on the yuan.
Longer-term outlooks will not change due to the short squeeze [in the Yuan]. More powerful fundamental drivers include the broader trajectory of the dollar and interest rate differentials. Still, capital controls and the willingness of officials to facilitate such a powerful squeeze demonstrates their resolve and ability to manage the challenges.
a change in the calculating factors for the Yuan. As we reported last week the calculation continues to move away from the expensive US Dollar and will now be measured against an increased basket of currencies. This move has the potential to make Chinese exports cheaper and imports more expensive. However, the obvious impact will weaken the currency core and therefore be supportive for the Shanghai index which will be helpful as money leaves the country seeking a safe-haven
A wide range of analysts follow the gloomy forecast for the Mexican economy at large, with a correspondingly grim set of expectations for the Peso's future value.SocieteGenerale expect the Peso to sink further, to a level of 23 to the Dollar, U.S. rate rises in 2017 are expected to bring further bad news, and James Barrineau, co-head of emergent market debt at Schroders, notes of his company: 'we don't own any Pesos.' Further to this, a Nomura Securities survey suggests that the USDMXN rate will hit 26 Pesos to the Dollar by the end of 2017, on the assumption of capital flight, and competitive devaluations. Less alarmist, but still bad news if you have a position on the Peso, is longforecast.com's prediction of an near the end of 2017 exchange rate of between 21.42 and 22.40 Pesos to the Dollar.
Of course, supporting the rotating carousel of real estate, commodity, and stock bubbles, while also trying to stem bond defaults, comes at a cost. All of that debt and money creation usually results in a decimated currency. However, China uses its currency reserves (held mostly in dollar denominated Treasuries) to keep the value of the yuan from falling too quickly. But what had once been China’s get out of financial crisis free card--their immense foreign exchange reserves--is dwindling at an alarming rate.
... the Chinese authorities have not made much of an attempt to halt the post-election decline in the YUAN, as if to say to Trump that his ascendancy has triggered a natural reaction in the currency markets, a far different situation than orchestrated currency management.
My view is that China’s US bond dump is about demand for US Dollars, which highlights growing concerns about financial stability in the mainland, amidst inflating asset bubbles and burdening bad loan provision.
Right now, the decline in the renminbi is also a reflection of a strong dollar. Since we still see the dollar as the dominant force in the FX world in the coming months, this pair may climb further into record territory. The world may have to get used to a weaker renminbi,
...onshore to offshore flows do not appear be causing severe liquidity problems for Chinese capital markets or wider global risk aversion, but they do point to underlying weakness in Chinese economic confidence and may be contributing to strength in the USD against other currencies.
Bullish FOR EMERGING MARKETS
I am actually short the US Dollar against the Turkish Lira, looking for this market to reverse course after racing to record highs, going parabolic and tracking in violently overbought territory across the daily, weekly and monthly timeframes. I can remember in January 2015 when USDRUB made a similar move before pulling back, and I can remember in January 2016 when USDZAR and USDCAD did the same. My hope is that this pattern plays out yet again with USDTRY in January 2017.
The relatively high interest rates offered in Russia have attracted investors, and firmer oil prices have helped to stabilize the Russian economy. Now speculators have really started to move into the rouble as they make bets on the possibility of the end of sanctions.
Taper Tantrum, these yield curve dynamics remain negative for EM bonds and EM FX. EM equities are a different matter, supported in part by the continued post-election rally in DM equity markets. Higher commodity should also help insulate some EM countries from the selling pressure.
Once the Yuan stabilises against the U.S. currency, there is an argument for a measured investment, banking on the longer-term strength of the Chinese currency. [...] Will we see a true level of support for the currency, or will the Chinese Central Bank step in to prop up its currency [...]?[...] Should the Chinese step in to support the currency before markets feel its price has been fully corrected, a mid-term rally is unlikely to be in the offing. Market sentiment may, however, be influenced by this and the PBOC may find that its intervention point mirrors expected base-levels of support.
Sentiment concerning Volatility
Bearish FOR VOLATILITY
...what is an exchange rate, what is DXY and EUR/USD. Both are interest rates transformed to an exchange rate. Exchange rate and interest rate are synonomous terms. Fed Funds rates are contained therefore DXY is restricted from movements. Fed Funds is not only the supreme USD interest and overnight rate but regulate Fed Funds is to stifle all USD interest rate movements. To understand this concept is to conquer perfect market knowledge, become a currency trader rather than a person who trades currencies and realization the amount of pablum written is astounding.
Bullish FOR VOLATILITY
The markets will ultimately reflect the President. [...] That kind of personality can only add to volatility in the four years ahead and risk assets prefer less-stormy seas. [...] his volatility personality won't change.
...at least another few months of these wide swings [in Oil] are favored (as wedges break down into 5 legs) before finally rolling over, and "fits" of the nearer term view of an important topping.
...there is a very real possibility that the Czech authorities will disband with the peg in the first half of this year. Due to this, if you trade EUR/CZK, watch out for heightened levels of volatility in the coming days and weeks.
With the inaugurationof Donald Trump as President of the United States just over 2 weeks away, we may see some volatility in the gold price on the back of some of his remarks and election promises, and if he will in fact, follow through on them.
This year is going to be the biggest year for geopolitical surprises since the Iraq war, and even that could be seen from far off. [...] the stock market is way ahead of itself and making too big a bet on reflation (and against Congressional gridlock). In practice, uncertainty (and volatility) will be high next year.
The Forex Forecast Poll
The Forex Forecast is a currency sentiment tool that highlights our selected experts' near and medium term mood and calculates trends according to Friday's 15:00 GMT price. The #FXpoll is not to be taken as signal or as final target, but as an exchange rates heat map of where sentiment and expectations are going.
The CoT Report
The COT provides up-to-date information about the trend and the strength of the commitment traders have towards that trend by detailing the positioning of speculative and commercial traders in the various futures markets. The Commodity Futures Trading Commission (CFTC) releases a new COT report each Friday.