On the theme of volatility (vols), we see a calm has descended with implied volatility in FX, and equity markets coming off sharply – we see G10 FX implied vols at the lows of their 12-month range and the VIX index into 17%.
Clearly, the close-to-close moves in broad markets are coming in lower and that is affecting the pricing and expectations of future movement. That said, the intra-day trading ranges are still offering enough for the day traders to work with, and that has implications for how much risk traders take on (i.e. distance to stop) and position size.
There is a fair conviction in the volatility markets to suggest this week’s known event risk will not create explosive moves, but it is also reflective that both the market and G10 central banks are moving into the pause phase of the cycle and are fully data dependant – we need new trends in the data to push interest rate pricing around, which would subsequently cause volatility to pick up.
The USD gets centre stage this week. While the US data flow is low-key, we’re in an environment where the market could pick and choose what it wants to react to – I suspect it will be the news flow from the US banks that could influence the USD, where good news could see rate cuts being priced out for 2023 and the USD rallies.
(DXY daily)
I question whether the bullish USD flow we saw on Friday can extend through this week. There is divergence playing out on the daily, and a break of the bear channel (in the DXY) could see USD shorts cover hard. The USD bulls can see there is real work needed to get this pumping, but the risk-to-reward trade-off is shifting it seems. A higher USD would certainly weigh on gold and be a headwind for equity markets too as we look more intently at US earnings.
Keeping an eye on 4150 in the US500, as a closing breakout here would get a lot of attention, and longs remain the pain trade. It's hard to short at present but the USD could play an influence this week.
(US500 daily)
Marquee data to drive markets
US
UK
EU
China
Australia
Canada
New Zealand
Central Bank line-up
Fed – Bowman (19/4 at 03:00 AEST), Goolsbee (20/4 at 07:30), Williams (20/4 at 09;00), Waller (21/4), Mester (21/4), Bowman (21/4), Bostic (21/4 at 07:00 AEST), Harker (21/4 09:45 AEST), Cook (22/4 09:35)
BoE – Cuncliffe (17/4 23:00), Mann (20/4 02:30), Tenreyro (21/4 01:30)
ECB speakers – 14 ECB speeches – see the line-up here https://twitter.com/ChrisWeston_PS/status/1647491798187778053?s=20
Marquee US corporate earnings
Charles Schwab – Monday (before market) – implied move on the day of earnings (derived from options pricing) – 8.7%
Bank of America – Tuesday (before market) - implied move – 6.5%
Goldman Sachs – Tuesday (before market) – 3.4%
Netflix – Tuesday (after market) – implied move 8.1%
Tesla – Wed (after market) – implied move 6.5%
IBM - Wed (after market) – implied move 4.1%
AMEX – Thursday (before market) – implied move 3.7%
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