We have been focused on the S&P 500 as a guide for risk more broadly, but I always keep my eye on futures markets, as this is where Pepperstone derive pricing for our cash markets.
(Daily prices)
(Source: Bloomberg)  
As we can see, the green horizontal line is now absolutely key and would coincide with a break of 2817 in the S&P 500 cash index. That said, the battle lines are drawn, and a break of the red horizontal line would be the trigger for funds to part de-risk, and I’d expect implied volatility to push higher. The turn lower in stochastic momentum suggests elevated downside risks, and this is the perfect time to be patient and wait for the market to increase its probability and reveal its hand.
(Source: Bloomberg)  The question of what actually brought on the overnight sell-off in US equities has been raised. One US bank has spoken about a huge US equity sell program, and that has merit. However, I also sit in the camp that the market was priced for perfection and wanted far more clarity and meat on the bone on trade to keep pushing up risk assets. What we have heard, and the Bloomberg headline that “Trump and Xi are close to a deal, but the trade war isn’t over” is case in point, and far too vague.
Given the recent moves in equities, we need hard fact to feed the beast, and that may not come for until the end of the month. Of course, improved global economic data that suggests better times ahead will also help.
Moves in US fixed income have been in focus of late, and I have my eye on these markets, not only because the sellers failed to get excited during the recent bullish run in global equities. But also, because we have seen various FX pairs showing a higher correlation with relative yield spreads of late.
As we can from the hourly chart of the US 10-year Treasury yield, the sellers tried to test Friday’s close (the red dotted line), but the buyers stepped in, and yields have rolled over a touch. This could suggest we see yields lower from here, which would likely impact USDJPY most closely.
(Source: Bloomberg)  
It’s interesting that USDJPY has been our most actively traded FX pair of late and client activity is certainly more heavily skewed to the short side. A close through the 5-day EMA (the red line) would go some way to negating the bullish trend we can see, and a close through 111.30 (trend support) would also accelerate the selling. The 100-day MA (currently at 111.42) has acted as good support through August to December 2018, and when this was breached on 20 December, we saw a strong move lower from that point.

In this current environment I would expect buyers to step in here, but certainly, one to watch. Another consideration for the session ahead, and USDJPY and markets more broadly is the February US services ISM report (due at 0200 aest). The consensus is calling for the index to print 57.4 and therefore grow at a faster pace from January, which is marked on the Bloomberg chart. While the service sector is a huge part of the make-up of the US economy, financial markets haven’t been overly sensitive to it for some time. However, given the move lower overnight in bond yields, the S&P 500 and USDJPY, a decent miss wouldn’t be taken well. 
(Source: Bloomberg)   The clear focus through Asia has been on Aussie data and the China National People’s Conference (NPC)
AUDUSD certainly looks heavy, and as we can see on the daily timeframe resides in strong support seen between 0.7075 and 0.7050. A break here and we can start talking about a 6-handle in front of the pair. There is little doubt that the market is sensing a weak Q4 GDP print tomorrow and comfortably below the RBA’s forecasts of 0.6% QoQ. After the recent weakness in the construction data, the 0.2% decline in inventories, as well as today’s news that net exports will shave 20bp off the GDP print, I think the balance of probability is we see a quarter of growth between zero and 0.2%.
RBA meeting
We also had the small affair of the March RBA meeting. Expectations of a major deviation in the statement were sufficiently low and vols were suggesting a 38-point move on the session. The statement gave me nothing new, although one aspect that is worth exploring was the comments on credit, where the statement detailed “the demand for credit by investors in the housing market has slowed noticeably as the dynamics of the housing market have changed”. As I write the AUDUSD gained 6-pips, while 3-year bonds gained 1bp. The prospect of a rate cut over the coming 12 months now sits at 88%
China’s government work report was also keenly anticipated ahead of the NPC. As always there is much to focus within the text, although the headline writers will immediately jump to the new economic growth target of 6% to 6.5% for 2019. While this has changed from targeting ‘around 6.5%’, this was entirely expected by economists, and there is very little on first blush that will genuinely surprise.
The plan is also to target inflation of 3%, which hasn’t changed from the prior three years while targeting a fiscal deficit of 2.8% of GDP, which is slightly lower than the 3% deficit most had expected and up from 2.6% in 2018. Authorities are planning RMB2t in tax and social security fee cuts while reducing reserve ratio requirements (RRR) specifically for smaller banks.
Headlines that China aim to increase the flexibility of the yuan is interesting, as it is a condition and a focus of the trade negotiations with the Trump trade team.
In terms of market reaction, USDCNH is largely unchanged on the day. The China CN50 (A50) index has seen some flow of late from clients, predominately because of the index has traded more like a small cap mining stock as opposed to China largest 50-listed corporates. That said, the pinbar reversal makes me nervous here, and a lower low through trade and we could see profit takers push this into the 5-day EMA.

And look at the volumes:
(Source: Bloomberg)
On another note, put USDCAD on the radar. Political scandals are making life somewhat uncomfortable for Justin Trudeau and headwinds are on the rise in Canada. I am taking a small long position, with a view to add on a close through 1.3375 (24 January high), with a stop on a close through the 5-day EMA.  

Published by Chris Weston, Head of Research, Pepperstone