Marketview: Currency Driven


The week started slow and ramped into a mini buying panic on Wednesday and then settled back in line with the default back and fill. M&A activity is back in focus as Berkshire Hathaway and 3G Capital bought $HNZ for $28 billion. Every time one of these deals gets done the headline writers herald the “RETURN OF M&A”. The truth is that M&A activity has been decent since late 2010, especially for large deals. President Obama delivered the State of the Union address mostly reiterating a focus on domestic economic issues and Initial Jobless Claims reduced by over 20k. Meanwhile, $WMT blamed terrible February sales on expiration of the payroll tax cut. $WMT has excellent visibility into mass consumer behavior and should be listened to carefully.

Sentiment seems to be self correcting as the market stays bid at these levels. The $VIX divergence we highlighted a couple weeks ago has resolved itself. The momentum slowdown we highlighted is also in the process of resolving to the upside with several of the noted sectors outperforming the benchmark. Wednesday’s lopsided market chase has created an area of resistance at $SPX 1522 – 1525, but if that area becomes accepted by the market or cleared by a gap we should have a little resistence to 1550. Support is at 1515 and 1500.

Last week European scandal and uncertainty caught my eye. This week news broke of French and German GDP dipping into negative territory. In spite of this information, sovereign yields remain unchanged or improved. My attention to these fading catalysts was clearly a mistake. The non-reaction to news flow strongly confirms what we’ve known for months: the market no longer cares about the European soap opera. This does not mean that Europe isn’t important, it does means that Europe is no longer even a fringe driver of market sentiment. The new focus is firmly on currencies and the regime of mutual assured destruction with regard to manipulation. The major currency pairs used to lead-change between leading and lagging broad equity indices while maintaining tight correlation. As correlations slack, I expect new volatility in FX markets. FX trade may retake its rightful place as the leading indicator of macro moves rather than just another risk-on risk-off vehicle. This will require retraining of many market participants (including myself). Move sovereign yield quotes to the bottom of your trading screen and replace them with currencies.

Money moved into $XLF, $XLI and $XLI while rotating out of $XLE, $XLE, and $XLB. While not ideal, the flow is more constructive to bullish sentiment than a risk-off. Most of the indicators we follow (including the MAMOx) remain biased to the long side. We do see a pronounced slowing of momentum, but this can resolve with higher prices as well as correction. The markets are a two way street and we know that they will trade lower at some point. The question is when, and from what level. A pullback should be viewed as a positive development. I doubt we’ve seen the high for the first half of the year.

Winners: $UNP, $NSC, $C, $MS, $BAC, $MON, $NWSA, $CMCSA

Losers: $QCOM, $TXN, $AAPL, $AMGN, $WMT, $TGT, $APA, $DVN

Next week will be dominated by the FOMC Minutes and the return of Chinese market participants after the Lunar New Year.


Read also: Inflection Point or Half-Way Mark?

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