So, the current bounce is simply something we’re playing out in the short-to-mid-term with full expectations for equity markets not to make new highs before the end of Q2, writes Ziad Jasani. 

My video commentary recorded June 1:

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This past week, Mr. Market received a gift from the Italian political crisis on Tuesday May 29: 

  • Weak-bullish hands were cleared off the slate.
  • U.S. Treasury yields were smashed down as everyone was looking to hide in fixed income.
  • These events cleared room for Equity Markets to carry forward the break-out above the S&P 500 50-day average (May 9).

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Tuesday May 29, the S&P 500 (SPX) roughly tested its 50-day average on the Italian crisis and then bounced back into the sideways range (2,743 – 2,703) we were in from May 14 – until the Tuesday, May 29, when the bottom fell out. The bullish reversal began into the close Tuesday, May 29 and carried forward on Wednesday, May 30.

Overnight, May 29 to May 30, more gifts were received:

  • Italy successfully conducted a bond auction which calmed nerves within the Eurozone equity market ahead of important measures of inflation presenting.
  • German CPI data printed hotter than consensus estimates which shored up the euro.
  • US ADP jobs data along with the second iteration of US Q1 GDP both came in cooler vs. consensus estimates, resulting in U.S. Treasury yields down, USD down and the euro up.
  • Which culminated in the strongest bullish reversal on the EUR/USD currency pair since its down-trend started and a drop in the odds of a 4th U.S. rate hike from ~50% to ~20%.
  • The S&P 500 closed above 2,723 (a key decision line) on Wednesday, May 30 confirming another macro market swing-low that our community played.
  • We took on trades in Equities supported by the swing-low formation: SPY, QQQ, DIA, XLV, XBI, XPH, XLB, XLI, XLK, IYW, XLE while being able to Hold our S&P/Toronto (TSX) positions in Financials (XFN-T, ZEB-T, ZWB-T) and nibble further on Energy (XEG-T, ZEO-T) as Oil continued to hold-up above the Feb. 14 uptrend.
  • We took on trades in Currency & Precious Metals markets: Supported by a weaker USD, stronger euro: UDN, FXE, FXY, FXF, FXC, FXB, FXA, GLD, UGLD, SLV, USLV, GDX, SIL.
  • We took on trades in beaten up markets that benefit from both the weaker USD and macro market swing-low: EEM, EPI, FXI, ERUS, EWZ, EFA, FEZ, ZWE-T, ZEM-T, XEM-T, ZID-T.
  • And we confirmed a more hawkish stance from the BOC with a potential July 2018 rate hike placed squarely on the table; which served to stabilize our big Banks (ZEB-T) as the yield curve steepened along with rising CAD (FXC). We accumulated FXC and protected our fixed income holdings (XBB-T).

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Then Thursday May 31, Deutsche-Bank (DB) started to crumble, while we awaited decisions on the Italian political front, and Trump decided to throw a wrench in the equity-bounce announcing tariffs against the EU, Canada and Mexico. 

The S&P 500 traded in the red for most of the day, despite being in positive territory ahead of the bell. Some of us got stopped out of the trades mentioned above. We received Eurozone CPI that came in hotter, counter-balanced by US Core PCE Price Index data also coming in hotter, leaving the EUR/USD in a deadlock attempting to break above its pervasive downtrend formation.

Nonetheless we still saw merit for the euro to strengthen over the short-term (days-to-a-week). The close was perplexing but our community was advised that the buyer-case was still stronger than the seller-case with the S&P 500 above the 50% retracement-line of the pre-Jan. 2018 correction highs to-Feb. 9 lows.

Friday morning June 1, we started with a weak-form risk-on sentiment with the USD ramping up ahead of the U.S. Jobs data; our expectations were for a miss on the topline and bottom-line (wages). We were wrong, Jobs came in hotter (223K vs. consensus of 189K | Wages +0.3% vs. consensus of +0.2%).

This resulted in a knee-jerk reaction up on the USD down on the euro, yen and Precious Metals, but Equities up with Emerging Markets (EEM) and the Eurozone Far East & Australasia (EFA) leading with the Dow (DIA). 

We saw this as a buying opportunity for equity traders playing out the viva-Italia macro-market-swing-low and for those playing Precious Metals, and those that were picking up currencies on the other side of the highly over-bought USD.

We anticipated a beat of the 10 am (EDT) US ISM Manufacturing Data as “the moment” where we go in to Gold, and/or pick-up Currencies on the other side of the USD, and that worked out swimmingly. 

As I pen this note (Friday June 1, 12:49 pm EDT), the S&P 500 is sitting at 2,734, up 1.1% on the day, implying continuation up towards 2,743 (the top of the mini-sideways range we’ve been in since May 14).

Oil tepidly remains above its Feb. 14 uptrend formation. The USD has calmed down from Friday morning’s US Jobs beats (UUP +0.16%), and Precious Metals are almost back up to Thursday’s closing values (Gold at $1,300, Silver at $16.45), while base metals pop (Copper +0.95%). Emerging Markets (EEM) continue to lead the macro market swing-low forward up +1.3%, while the global bond market remains at a stand-still (-0.11%). Viva-Italia!

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The week ahead June 4 – 8

We enter this week with macro market variables (Currencies, Bonds, Commodities, Equity-Inter-relations) telling us to expect the viva-Italia macro market swing-low to carry forward, with Emerging Markets (EEM), the Eurozone Far East & Australasia (EFA) and the Dow Jones Industrials (DIA) in the lead. 

We must, however, put this current macro market swing-low in context.

Our thesis on Q2 is a sideways range-bound market below the pre-Jan. 2018 correction highs, but above the Feb. 9 post-correction lows on our swing barometer the S&P 500, with the expectation for the TSX to be an under-performing index into the end of the quarter.

So, the current bounce is simply something we’re playing out in the short-to-mid-term with full expectations for equity markets not to make new highs before the end of Q2.

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