A final flourish at the finish today takes the S&P500 sharply higher into the close and just a hair's breadth above the 200-day moving average. The moves in FX were all in line with the usual risk appetite correlations and JPY/US treasury correlations one would expect.
There was no real news flow during the day except for a depressing weekly claims number from the US and no signs of a resolution from the EuroZone in terms of the pressure on spreads - though at least we didn't see an acceleration today, an optimist might add. One has to wonder what factors are generating this crazy action. We suggest it is a combination of a market that has gone a bit "mental" on all of the latest volatility and perhaps more importantly an early start to end of month portfolio adjustments as many portfolios out there must be feeling their ratios of equity holdings to bond holdings are more than a bit out of whack after a crazy month that saw the US t-bond future price rise as much as 4 full figures from the April closing price while the S&P500 had fallen as much as 12% and more for the month of May heading into today. Volume was very light in the equity markets on today's enormous rally - is that cautionary?
Regardless, it feels like this market is taunting both the bulls and the bears as we head into the last trading day of the month (because of Monday's US holiday). Tomorrow is likely to be a three-ring circus as all of the end-of-month fixing flows not seen today will inevitably come into play at the same time as we just closed today's action at a key technical inflection point. Our short term crystal ball is fairly useless at present as the zany back and forth in the market has proven in recent days, but it feels like there is an awful lot of heavy lifting that must be done in risk indications before we can believe that any rally in risk will hold beyond a mere few days.
Let's see where markets settle tomorrow and how we are doing at the end of the day on Tuesday next week if we don't already get yet another reversal in the action tomorrow. Our favorite scenario from a technical perspective for tomorrow is another follow through in risk tonight and into perhaps late Europe/early US hours which is then strongly reversed in the US session - this is the "maximum pain" path - the path that will cause the most pain to the highest number of market participants. This is the path the market mistress seems to like to take in these kinds of situations. In this scenario - the bears are mercilessly squeezed a bit more and forced out of their positions while the bulls get their hopes up and put on significant new positions that are then subsequently rejected. Everyone is hurt except for the order front-running algo traders, one supposes...
USDCAD is of course also closing right on the 200-day moving average and has been a mirror image of the equity markets as we discussed this morning. Remember that next Tuesday is Bank of Canada meeting day and that everyone was expecting a hike before the latest market turmoil - whether they hike could depend on whether this rally in risk is able to hold water. Stay tuned!
Let's all stay particularly careful out there.
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