Central banks are back in focus this week. Last night the BOJ increased purchases of corporate debt and removed caps on sovereign debt. The ECB and FED meet this week as well where further implications of ‘whatever it takes’ is expected. The positive start to equities follows more signs the global economy is set to gradually reopen over the coming weeks and months. Earnings get more active tomorrow with MMM, CAT, and GOOG with key companies every day thereafter. Volatility suppression is the real winner of late despite overnight volatility (overnight e-Mini range smallest since the crisis began). The S&P 500 is up 10% this month, however, most of the action occurred at night. Month-to-date, we’ve had just one day that traded more than 10 basis points on either side of unchanged and Friday was yet another gap that remained on that side of unchanged for the day.
Energy headlines the overnight mover board with Crude, Nat Gas, and Palm Oil on the downside while Aussie and BTPs(Italian Bonds) are the leading gainers. The former remains a storage issue for the remainder of Q2 and the latter posted an NR7 (narrowest range in 7 sessions) week with at least the potential to continue higher. The antipodeans (Australia & New Zealand) seem to have the virus contained and look to be the trading partners to open borders for travel. In theory, the overnight move in Crude would suggest further AUDCAD upside but I’ll admit CAD’s been a tricky trade off Crude.
Strategy and Levels
Despite the elevated realized volatility, we ended last week with a slew of consolidation patterns that ‘generally’ lead to expansion. Back-to-back NR7 weeks in the eMini with similar patterns in Silver and Emerging Market equities on the daily. Until we take out Friday’s low, I’ll defer to the upside in global equities and Aussie--looking to go long Silver on a move through Friday’s high (were it to occur). A close here or higher in the S&P 500 would mark the first ‘material’ close over the 50 day moving average since the crisis began and may well target a VIX suppression trade toward the 200-day MA closer to 3000. Such a level seems improbable given the economic impact of the virus but it’s the byproduct of Central Bank stimulus and the continued disconnect between asset prices and mainstream reality.
Information provided by John Netto