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EQUITIES: Stretched HSCEI optimism a risk for China vs. World Index (P1)
COMMODITY: Industrial/Precious Metals SBI points to risk of reversal (P3)
BONDS: US 5Y net shorts hit 10Y extremes; EZ spreads stretched (P9/10)
RIND reversal at odds with Metals; HSCEI a relative risk for China
A couple of weeks ago we noted that CRB BLS Raw Industrials (RIND) vs. Food had reached 13W momentum levels that were regularly followed by a fall in the relative over the next 65D. Since then the relative is down 4.8%. In the case of the RIND, its move below its 200DMA has left the index below notable chart support around 500 and 4% off its September high. A change of trend may be emerging in a grouping that reflects underlying macro activity rather than speculative flows. This appears at odds with still rising industrial metals.
A large sentiment gap has opened up between Industrial Metals versus the RIND. This chimes with the Industrial/Precious Metals SBI, which last week moved above 93: to levels that in the past 10Y have been followed by a fall in the relative over the next 30D on 77% of occasions (with an average -3.0% fall). See charts p3.
Chart of the Week: Sentiment has become stretched on several equity indices. The Hang Seng China Enterprises Index (HSCEI) SBI briefly moved above 96 last week, to levels that have in the past 10Y has been followed by a fall in the index over the next 30 days on 85% of occasions, with index down an average -3.3%. A reversal in HSCEI would be consistent with Chinese equities struggling vs. the World Index: the MSCI China/World Index ($) relative has fallen an average -3.3% in the past 10Y when similar HSCEI SBI levels have been hit (chart here).
Equity Strategy: Scope for Spanish Equities to outperform Italy
Multi-Asset: A case for selling Nikkei calls
EQUITIES: Nikkei optimism stretched; but rising volatility lends support (P3)
BONDS: Spain-Italy 10Y SBI hits stretched sentiment territory (P10)
FX: Canadian dollar net long positioning a risk vs. USD and JPY (P1 and 13)
Volatility va-va-voom for Nikkei; Positioning risk for Canadian dollar
Nikkei 225 has reached a notable technical inflection point as the index has hit a 21-year high. In the near-term, stretched sentiment may be a headwind. However, Nikkei’s recent advance has been set against a pick-up in volatility and rising appetite for call options. This combination proved supportive in late-2012 and 2014, while in the past 10 years Nikkei Vol SBI levels of below 50 have seen the Nikkei 225 index rise over the next 65D on 58% of occasions. Volatility trends suggest sentiment may prove a short term constraint on Nikkei this time around.
In terms of technical levels to watch on Nikkei 225: a confirmed break above 21000 would target a move to 23000 (22958 is a 50% retracement of 1990-2009 decline), with 26700 the next target beyond that. See charts p3.Chart of the Week: The latest CFTC COT report (as of 10th October), indicates that speculators have begun to trim their bearish positioning on the dollar, though aggregate US dollar net shorts remain notable (see p12-13). On the other side of the positioning divide, net longs in Euro and Canadian dollar remain sizeable. While CAD optimism has eased from stretched SBI levels, net long positions are large as % open interest. This leaves CAD at risk versus USD and JPY from a positional shift to a less bullish tack, especially if CAD/JPY drops below its 50-day moving average c.88.9 and Brent oil continues to weaken (see Brent/CAD chart).
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