Friday, June 3, 2016

Market price signals in flux - with major price transitions in financials and currencies

We often say that the month begins with the employment numbers. The non-farm payroll drives Fed expectations for any further policy action, and is often the benchmark for discussion of future economic announcements.  Our marketplace table looks at the price action for the last month and makes an assessment on whether the asset class will be rising, falling, or range-bound. Our assessment is based on looking at the last month and not the last day. If we see strong directional trends for the asset classes, we will expect good performance from trend-followers. We had three categories for sector price trends, green up, red down, and blue side-ways. We added two more: green down/up and red up/down. A green down/up suggests that the price data is transitioning from a down or flat trend to an up trend. The red up/down suggests that the price data is transitioning to a down trend. Given the large price change today, we think a transition category is necessary.

The weak non-farm payroll disrupted some growing trends and created the chance for new trend opportunities. Our assessment of financial markets was range-bound given the data until the non-farm payroll announcements. Now the markets are in flux. 

A dollar rally is off the table because the Fed is not going to move past on any further tightening. The rate increase embedded in short-end of the yield is also off the table. Bonds were moving sideways in May and have now strongly rallied. This is a potential break-out. Equities have more upside now although the pre-NFP trends were more sideways. Precious and base metals were down for the month, but have started to move higher on the weak employment data. Energy and commodities had strong trends in May that show sense of continuation. 

We are in a new world with the Fed likely on hold. Price data and trends are reflecting that view.

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