MrTopStep’s Index Futures Recap

MrTopStep’s Index Futures Recap – Tuesday January 5th

Last night on the globex open, the S&P futures opened at 2009.00 and bid higher early in the session trading up to 2017.00 early in the first part of the Asian session before rolling over into the Asian close and again after the Euro open, making its session low of 1992.25 just after 4:15 am CT before rallying nearly 20 handles into the cash open.

At the US regular trading hours open, the S&P opened at 2009.00 and buy programs attempted to take the equity markets to an early high but ran out of fuel early on the the ESH6 sold 18 handles from the cash high into the mid-day session and found low of 1995.25 before rallying back near the high’s before the final hour.

As the markets entered 2:00 CT the MiM was showing over $350 million to buy early and the futures began to rally before falling short into the close on a MOC of $340 million to buy.

Heard across the news wires today was relatively little after yesterday’s eventful day as the S&P 500 made a higher low on a technical inside day signalling a new “jump ball” between bears and bulls. Tonight’s calendar is fairly quiet but some key economic indicators from the U.S. tomorrow combined with the technical position the global markets are in should offer some amount of decent trade.

‘From Nomura

FOMC minutes are out on Wednesday for its December meeting, and Nomura expects them to give us better insight into the FOMC’s plan for future hikes.

“We are also focused on identifying further discussions about the “neutral” interest rate,” Nomura adds.

For the US jobs report on Friday, Nomura expects a steady pace of job gains again in December, and forecasts total NFP will gain 220k jobs.

“We expect the unemployment rate to remain unchanged and average hourly earnings to grow by a solid 0.28% m-o-m (2.8% y-o-y) as the labor market continues to tighten,” Nomura projects.

From Bank of America

Although investors typically see risks for the Fed policy skewed to the hawkish side in early stages of hiking cycles, this time the market is pricing more symmetric risks for the Fed.

The Chart of the day shows the probability distribution of Fed hikes in 2016 implied from Eurodollar options. The chart shows options assign about the same (and, in fact, slightly greater) odds to more dovish (relative to forwards) scenarios than to more hawkish outcomes. For example, the perceived odds of four hikes in 2016 (base-case scenario for a median FOMC participant) are about the same as the odds of only one hike (the Chart of the Day).

From a technical standpoint, these implied probabilities of Fed hikes reflect the shape of the skew surface in US rates options, which has flattened dramatically since December FOMC, with high-strike options cheapening to low strikes, and is currently flat or slightly inverted in both OTC and exchange-traded options markets.

Fade the flat skew:

Although we forecasted some skew flattening in After the hike 12 November 2015, at the current levels of the skew we believe the market may have moved too far. In our view, the balance of risks for the Fed policy is still skewed to a hawkish side, given front-end rates valuation, asymmetric risks to wage inflation, and monetary policy inertia.

Investors looking to position for a hawkish Fed surprise may consider buying payers or Eurodollar puts vs receivers or Eurodollar calls as an alternative to outright selling of the front end.

From Goldman Sachs:

“As recent days have shown, a key uncertainty for the year ahead is the degree to which the RMB will weaken. As we start 2016, non-deliverable forwards – hardly the best gauge of market expectations – are pricing a 5.5 percent depreciation of the RMB versus the Dollar for the year ahead, while our conversations with clients put consensus nearer 10 percent. ‘

We examine the RMB through the lens of China’s balance of payments (BoP), where we see two main drivers.

First, falling oil prices are a positive terms of trade shock, which is boosting the current account surplus, exerting appreciation pressure.

‘Second, the potential for further capital outflows is clearly large, especially if RMB devaluation continues apace. We use the BoP to assess these offsetting forces. With oil prices near present levels, the current account surplus could near $400bn this year (from likely above $300bn last year and $220bn in 2014), even allowing for a continued widening in the services trade deficit. This provides additional “space” in the balance of payments to absorb capital outflows, raising the threshold above which reserve accumulation turns negative.

We estimate that threshold in the -$350bn to -$450bn range, beyond which reserve losses – and depreciation pressure – would be sizeable. This BoP perspective is of course distinct from policy makers’ reaction function, where recent days may point to a greater willingness (or even desire) to weaken the RMB.

The bottom line is that China’s BoP is quite healthy, such that outflows have to be very large to create depreciation pressure on the RMB. The “room for gloom” on the RMB is therefore, at least from a BoP perspective, quite limited.”

Robin Brooks, George Cole and Michael Cahill – Goldman Sachs
Edward Jones — Concerns About China Knock Stocks Lower. What Does This Mean for the U.S.? While the sharp U.S. market reaction is a surprise, slower Chinese growth has been an ongoing concern for investors. Similar fears in August 2015 prompted the first stock market correction in almost four years. In our view, stocks could drop further, but long-term investors should consider adding quality investments at lower prices. And bond prices have been rising as stocks fell, helping to stabilize portfolio values. China matters more than in the past because it’s the world’s second-largest economy. But China is only part of the global picture, so keep in mind the following: U.S. economic growth is expected to continue near 2.5%, even if China slows further. In our view, the fundamentals, including earnings growth, support rising stock prices over time. Europe’s manufacturing sector expanded in December, a positive sign for better economic and earnings growth overseas in 2016. Oil prices were flat as heightened tensions between Saudi Arabia and Iran offset the impacts of still-sluggish demand and high production. China’s economy isn’t contracting – but it’s growing more slowly. China’s stock market is speculative, and its decline doesn’t reflect economic activity. And remember, Chinese policymakers have indicated they will take actions to keep economic growth around 7%. Don’t be surprised by more volatility in 2016. There are many sources of uncertainty that may prompt sharp market moves. Be prepared so you aren’t caught off guard.

MrTopStep Radio

Danny Riley of MrTopStep has been asked to make an appearance on the radio at 7:55 a.m. CST and 11:55 a.m. CST tomorrow at www.rmastars.com. Danny is hoping that all of his followers will come out and listen to him as he discusses relevant market news and timely commentary on the S&P 500 and all tradeable markets.