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Trading last week was dominated by the pullback in yields, despite strong US data. The pullback in yields allowed for strong gains in global equities, and weakness in the Greenback. Some analysts have suggested that price action in the past week has been influenced by the Archegos fallout, with forced liquidation of profitable positions in order to cover losses.
In the coming week, focus will remain on yields and risk appetite (especially as Vix declines towards complacency levels). Earnings season will also continue, with the first FAANG stock (Netflix) reporting. The Bank of Canada and the ECB will meet, and the Flash PMIs for Europe will finish things off.
Themes for the Week
- Yields: the Archegos fallout may be temporarily affecting flows, but the correlation between movements in yields, USD and stocks remains strong.
- Earnings: Netflix will be closely watched (Tuesday) as will the other FAANGs in the coming weeks.
- Central Banks: the ECB will probably remain on hold this week and not offer much in terms of volatility; instead, the Bank of Canada could potentially discuss taper plans, which would make it one of the more hawkish central banks in G10 space.
- PMIs: the sentiment indicators for Europe will be closely watched and could be more market-moving than the ECB this week.
Data in the Week Ahead:
• UK Employment Change (Tue) Should come in stronger due to strong PMI employment components
• NZ CPI Q/Q (Wed) Food priced were lower in Q1 so it might disappoint.
• AU Retail Sales (Wed) Based on PMIs and Employment, we should get a strong print.
• UK CPI (Wed) PMIs report price increases.
• BOE’s Bailey Speech (Wed)
• CAD CPI (Wed) Might come in weaker as IVEY PMI Price Component was lower recently.
• Bank of Canada Decision & Presser (Wed)
• ECB Decision & Presser (Thur)
• EU Flash PMIs (Fri) In Europe the PMIs might come in weaker with ongoing restrictions and vaccine issues.
• UK Flash PMI (Fri) should come in stronger .
• UK Retail Sales (Fri) should come in stronger.
Correlation Report:
Comment: Yields continue to be the main driver of asset prices as highlighted by the high correlation between bond movements, commodities, risk FX, global equities.
On the Radar:
The Archegos fallout has apparently been affecting flows in the past week, which would explain the inconsistent behaviour in risk assets, yields and fundamental output. So keep this in mind, as markets might revert to normal when these flows end.
But until things change, we need to trade what we see and as such, here are the best trending instruments going into the week.
Equities take the podium, so buying on dips remains the play for the time being.
Instead, in FX space, there are some signs of exhaustion in the weak-USD dynamic, but it’s still early to call a change in the trend. Cautious USD shorts remain in play.
The Pound advanced on Friday, so EURGBP seems to be reverting back to the broader downtrend.
It’s decision time for EURJPY, which has been consolidating for the past week near recent highs.
Finally a new entry: Bitcoin. There has been a steep decline over the weekend, potentially due to the Coinbase IPO and insider selling. To note, our favorite sentiment indicator (Net Unrealised P/L) was reaching extreme bullish levels, and has been “overbought” since December 2020 based on this measure.
Source: TradingView
Source: lookintobitcoin.com