We had been waiting to buy on dips (read our previous articles) – lo and behold – the opportunity appeared on Thursday, just after FOMC. Fed sounded hawkish and US 10yr rate immediately jumped 3-5 bps. Hence the drop in stock market was a natural effect on that day, only to jump higher the next day after the non-farm employment change.
The numbers came out at 263K far exceeding the expectation and unemployment dropped to 3.6% the lowest rate since 1969. This gives confidence to the market that Fed has been rather hawkish for a legitimate reason, i.e. softness in inflation is probably a transitory state (we will see US CPI numbers next week). Stock market has been higher again for this week, showing that positioning wise, it hasn’t saturated yet. This is in a stark contrast with FX market where we saw USD sell-off after the NFP data, which implies more crowded positioning in the long dollar, and some fast money has decided to take money off the table when it’s still there.
USDINR in particular, is one different animal this week as it has dropped more than 1% since last week defying the trend of other Asian EM which has been weaker (against dollar). Well, a closer look will reveal RBI (Indian Central Bank) open market operation, weaker oil price, and fund in-flow (Bharti Airtel), but still, expect what is not expected – no wonder Paul Tudor Jones told us to play defensive on the market all the time.
But as if market is not random enough, Conservatives and Labour Parties have suffered a setback while Liberal Democrat (the pro-EU camp) has gained more seats, sending GBPUSD soaring to the sky at 1.3173 level.
Meanwhile, on the side of the world, North Korea has done another missile test and we’ll see how Trump further responds to this. China PMI, RBA rate decision, and US CPI are some of the macro highlights next week.
No obvious reason to liquidate any long position in stocks yet, but buying short duration bonds is perhaps a better hedge if precaution to be taken (as we might also see the curve steepens further if the good US data keep rolling in).
AlgoMerchant Bulletin 