Weekly Cross Asset Strategy

TVC:SPX   S&P 500 Index
Another week of indecision in the global equities markets.

Holiday thinned trading in Asia saw thin trading in both China and Hong Kong. The Emerging Markets ETF EEM is extending the bounce from the December 2016 lows, but critical resistance from the same year highs is expected to provide a barrier. Meanwhile, European markets are settling into consolidation whilst the UK FTSE attempts to post a corrective bounce. Finally, the US S&P500 Index remains balanced at contract highs, despite the increased political risks.

Within this range development, the VIX is showing signs of heightened price volatility above critical multi-year supports stretching back to late 1993.

A break below the supports would be positive for global equities, whilst a bounce would add pressure to equity markets.

However, what is interesting is the ‘doji’ bar, which was posted last week. Coupled with mixed studies, we believe further downside tests in the VIX should be limited. This would suggest risk/reward turning lower within global equities. Hedge Funds, Pension Funds and other ‘big players’ will reduce their equity allocations, and excess USD funds into other asset classes.

Once again, in the coming weeks, we remain cautious of further equity gains, and anticipate a corrective pullback. However, we are constructive in the longer term, as underlying strength suggests investors are currently maintaining a buy-into-weakness strategy.

The USD DXY Index remains under pressure, although a short-term corrective bounce is possible in the coming sessions as daily studies unwind oversold areas. There is no change in the bearish weekly readings, however, and we continue to see further downside risks in the coming weeks.

We remain bullish EUR/USD whilst we expect both USD/CHF and USD/JPY to remain under pressure in the coming weeks. The commodity currencies, AUD and CAD, are moving in tandem once again, as AUD/USD extends gains and USD/CAD comes under fresh selling pressure.

GBP/USD , meanwhile, is consolidating the recent bounce from 1.2000~, but we believe any corrective pullbacks will be limited. Longer term monthly charts are showing further improvement, suggesting early signs of a significant trend reversal.

Collectively, this suggests investors will maintain a bearish USD stance, whilst sentiment in GPB/USD continues to improve.

Finally, another mixed story in the commodities space.

Gold is extending gains as investor sentiment improves. Background monthly readings are also strengthening, suggesting potential for fresh inflows of funds in the coming weeks.
Oil prices remain trapped in range, although once again, background sentiment continues to improve. Risk remains for a short-term pullback in the Energy space, however, but the dominant bull trend is intact, and we expect investors will use weakness as an opportunity to increase exposure.
Copper prices are settling lower, but downside risks are expected to remain limited as investors maintain a bullish stance. Corn prices are balanced beneath Fibonacci retracement resistance, and whilst a short-term pullback remains possible, we see further price gains in the coming weeks.

Collectively, we remain cautious of further gains in global equities, and believe institutions will use any gains as opportunities to reduce equity exposure. We continue to see risk of deeper USD reactions, whilst GBP shows further signs of improvement. The commodities space is expected to continue benefiting from cross asset rotation. Gold is the current major beneficiary, although investors will be monitoring both Copper and Corn for fresh entry opportunities. Oil will also be closely watched, as investors wait for a break above the current range highs.