In my own words from the “process video” on the Aquila website, when the cacophony of news and noise is so loud, finding out what to focus on can be hard! It has felt a little like that in the past week, but this shows the power of a process that treats market price action as the BEST news we could have. Focusing on this, we continue to see an unloved rally in equities, underweight professional investors being dragged in whilst retail just buys stocks, in the knowledge that – for now – that the trend is their friend. Not only this, but the Fed continues to make it clear that they have plenty of tools in the box and will stay the course until we get back “where we started from” in terms of economic output, The comments from Fed Daly were stark yesterday making it clear that there is no “V” recovery, there may not be a recovery at all. The Fed does not, it seems, want the market to not see stronger data and think the Fed will start to step back from accommodation. As Powell said, they are ”not even thinking about thinking about raising rates”.
So we run into NFP today, with expectations all over the map. We are not going to opine on what we think the number is, merely to say that the price action over the coming days will be far more informative. Our key barometers of Copper (flying), Oil (stabilising and looking to push higher), Nasdaq to new highs, US rates stable and low, Nasdaq to new highs, DXY testing supports and a break out for a stronger MXN peso (while Latam is being hammered with Covid) give confidence to our view that our theme of risk rally resumption is underway.
Now the VIX is testing our downside pivot at 29.0. The chart below shows this clearly, as does the correlation between VIX and SP500 futures, which remains firmly negative and is becoming more so. In fact, for the sustained rally in equities to be maintained, lower VIX ( in the 20-30 range) would trigger buyers in. After all, lower vol by definition means position sizes increase to generate the same marginal returns, and so the need to add at higher prices becomes ever more important.
In the Aquila notes today, we review our dashboards, VIX, USDMXN ( bear in force), SP500 close today we consider critical but like ES1 August 3500-3600 call spreads, focus on DXY which is testing the key pivot at 96.90. We see the weakness in Fx vol, AND especially the weakness in USDCNH realised volatility, which tells us that, for right now, China does not WANT market volatility to the downside.
A key thoughts of ours remains – who wants an equity selloff within the realms of people who are controlling markets? Answer – NO ONE.