26 Feb – Issue 3

February started with a big equity sell off, in fact the steepest 2 week decline in history.

Worst 2 weeks everSource: Cameron Crise/Bloomberg, posted on twitter

From the beginning (published articles on the 6th of Feb) commentators were attributing the sell-off to leveraged volatility products (SVXY and VIX) that were busted. They used to be a nice bet during 2017, while volatility was low. And volatility was low because Central Banks were intervening in all market corrections and were keeping it low. Now that Central Banks have changed mode, on the first market correction they did not provide support, volatility crossed a threshold, long volatility products were busted and the sell off became even greater due to forced liquidation. On the technical significant level of 200DayMovingAverage of S&P500, equities found support and bounced back. Now there are commentators arguing that we are back to normal. We are not back to normal. S&P500 rallied on the week 12~16Feb, reached the 50DayMovingAverage but during the last week 19~23Feb it only managed to cross the 50DayMovingAverage and 20DayMovingAverage at the last hour of Friday’s trading.

Let me clarify my self by saying that during 2018, I am a bear on equities. Back to normal does not mean that we are back to a low volatility environment safeguarded by Central Bank’s asset purchases, or that we are back to an anemic inflation – modest growth environment with very low interest rates and low bond yields. That was the environment of 2017 and in such environment long positions on equities was the only way to yield returns.

We are transitioning into a new environment. US Government Bonds are already yielding higher (due to increased supply to fund the new fiscal policy and the decrease demand from FED and China) and inflation will (I strongly believe it) grow. A worth noting remark, that was also made by Governor Lowe (Central Bank of Australia) at his 16th Feb speech, in favor of the expected rising inflation is that on the 1st of February the Preliminary release for the US Unit Labor cost was for 2.0% annualized increase versus the previews -0.2% reading.


In such a global environment JPY is usually getting stronger, and that is also happening now. On top Japan will most likely report a 1.7% GDP growth in 2017 which is huge when compared to the 0.9% growth expectations at the start of the year. I maintain my view that the strengthening will continue and any reversal happening will be short lived. Both the 16th of Feb announcement that Kuroda will serve for another 5 years and the latest strong reading of trade balance (0.37T on 19 Feb) work in favor of JPY.

I am maintaining my short bias on EURJPY but now the pair needs to cross the technical significant level of 131.00~131.20 and a short lived bounce up until 132.80 is probable.

Something to watch is Thursday’s early in the morning (03:45)10year Bond Auction and the unemployment release at 23:45. Things will only get complicated if the reading is above 0.09% which is something I do not expect. Next monetary meeting is scheduled for next Friday 9 March, and my interpretation of the BOJ’s communication is that no change is expected up until the second half of 2019.


Canada is the only major economy that experiences growth coupled with the desired level of inflation. Inflation stands at 1.9% and GDP growth is acknowledged by the Central Bank to be higher than long term average. Yet, the rosy picture seems to have already been priced in USDCAD long before February’s equity sell off, as the pair was at 1.2400 level and heading south and as the rates increased to 1.25% on17 January (as anticipated).

Since then, CAD is experiencing pressure and USDCAD pair is heading north.

Next monetary decision is scheduled for the 7th of March. During this week, I would only focus on Wednesday’s (15:30 GMT) US Crude oil inventories release, which impacts CAD, and the Thursday’s 13:30 Current Account reading.

Given that we will not experience another equity sell-off, USDCAD is finding a nice equilibrum at the current 1.2630 level. I do not expect the pair crossing north the already tested 200DayMovingAverage and I could not find a reason for the pair crossing south the 1.2480 level (so I am being long there). I believe on the continuation of a consolidation move between the 200DayMovingAverage and the 50DayMovingAverage.


Central bank ‘s interest rate is at 1.50% with no hike yet in this cycle. Inflation is at 1.9% (expected to be above 2.00% in 2018, reach 2.25% on mid 2020, target is 2.0~3.0%), GDP is expected at 3% growth, (2.8% was 2017 reading) the alarming increase of house prices of the past seems to have been contained, unemployment is 5.5% and expected to fall, and the first signs of difficulty finding qualified workers are spotted. On the other hand, Australia ‘s terms of trade expected to decline. My interpretation is that Central Bank is avoiding a hike, due to the high levels of household debt and would remain at the current 1.50% rate unless we see significant increases on wages.Next release on Australian wages expected on the 16th of May.

February’s equity sell off, found AUDUSD heading south from 0.80 all the way down to the 200 Days Moving Average. The 200MA has not been crossed or tested yet,and is behaving as support.

Given that we will not experience a new equity sell-off, I believe that the 0.7810 level will act again as support (nice level to go long) and that we would need some more good news for the pair to cross north the 0.7950 level (nice level to exit any long positions).

I cannot mark any major macro-announcements for the coming week. Next monetary policy meeting is scheduled for the 6th of March and no rate change is expected.


US economy is growing at a healthy rate of 2.5%, unemployment is at 4.1%, the biggest tax reform is already a reality (expected to add 0.2% growth to World’s 2018 GDP according to IMF) and the tightening cycle has began with a very gradual pace of rate hikes since Dec 15. We are counting 5 hikes of 25bps so far, resulting to a current FED rate of 1.50% which Ι expect to reach the peak of 2.75% ~3.00%, the lowest level of any tightening cycle so far. Next FOMC meeting is scheduled for the 21st of March

I am maintaining my long bias on USD. Next week, focus on the second release of the annualized GDP (Wednesday 13:30GMT) expected at 2.5%, and the new FED Governor’s testimony (Tuesday 13.30 GMT).

For your archive, bellow is a snapshot of the yields of US Government bonds

Source: https://www.bloomberg.com/markets/rates-bonds/government-bonds/us

and a comparison of 2Year (blue) and 10Year(green) T-Bond yields that shows the alarming decrease of their spread (grey)

Source: https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/Historic-LongTerm-Rate-Data-Visualization.aspx


European’s Economy great 2017 run took everyone by surprise. Note that at the beginning of 2017 the consensus was for 1.3%~1.8% GDP growth and the actual number proved to be at 2.4% GDP growth. EURUSD managed to come all the way up to 1.2500 but retreated during the February’s equity sell-off and failed to cross it when it retested it.

Technically the EURUSD chart could be interpreted both ways. The bears would note down the decreased European current account, the decreased economic sentiment, the decreased PMI readings and the double top formation at the 1.2500 level. A catalyst for a big downtrend could well be the Italian elections that are expected to head for a deadlock. The bulls, on the other hand would note that the uptrend from October’s 2017 is not broken and that 1.2260 is the perfect level to enter long.

I would wait and would try to minimize my open positions on EURUSD especially at the end of the week, as we are heading to the 4th of March Italian elections. The most efficient way to spend my Friday would be to try to find current opinion polls for the elections. Italian law does not permit polls to be published during the last two weeks before elections, so the task will be tricky but rewarding.

Bellow is my old snapshot of Italian opinion polls that dates back to 14 Dec 2017.

Besides the Italian elections, I am focusing on the German, France and Italian 10year bond auctions on Wednesday and Thursday.


UK’s economy at a glance stands at 1.5% GDP growth, 4.4% unemployment and 3.00% inflation Note that UK is the only major economy that experiences higher inflation than the targeted 2%.

Having said that, the 8th of Feb monetary policy summary and minutes communication gave some worth noting insides. Both the Official bank rate and Asset Purchases remained the same at 0.50% and 435B GBP but it was signaled that a second rate hike on the 10th of May is probable.

The CPI reading released on the 13th Feb at 9:30GMT indicated that the 3.00% inflation is not declining as expected, and thus a rate hike becomes even more probable and I am becoming biased to take long positions.

I am expecting the GBPUSD to move consolidate at current levels before moving higher and I am searching to build a long position if the pair approaches the 1.3700-1.3750 territory.

Watch for the Thursday’s 9:30GMT Manufacturing PMI reading. I want to see an above 55.0 reading that would emphasize the growing economy scenario, so that I try to build the long position.

Issued by Labis Michalopoulos, CFA
This material is for Qualified Investors and Professional Clients only and should not be relied upon by any other persons.
Past performance or past accurate forecasts is not a guide to future performance and the accuracey of future forecasts and should not be the sole factor of consideration. All financial investments involve an element of risk. Therefore, the value of your investment and the income from it will vary and your initial investment amount cannot be guaranteed. Changes in the rates of exchange between currencies may cause the value of investments to go up and down. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.
This report is for information purposes only and does not constitute an offer or invitation to anyone to invest or trade and has not been prepared in connection with any such offer.
Any research in this document has acted by Labis Michalopoulos, CFA for his own purpose. The views expressed do not constitute investment or any other advice and are subject to change. They do not reflect the views of no company or any part thereof and no assurances are made as to their accuracy.
Reliance upon information in this material is at the sole discretion of the reader.

Leave a Reply

Your email address will not be published. Required fields are marked *