Good morning,

Last afternoon, the US CPI (Consumer Price Index) for April was released and it will be followed today by the Producer Price Index. Data showed what somebody could have expected: a subdued demand quitting pressure on inflation dynamics, despite the continuous monetary stimulus; actually the M/M variation in Core Prices (ex food and energy) has been the worst print (once again) in decades. INFLATION is appearing only in ASSETS, more specifically in FINANCIAL assets as other classes like real estate are starting to show cracking signals, from US to UK.

Equity markets fell sharply during yesterday’s last 2 trading hours: should be clear to almost everybody that indices have been pricing in the most favourable scenario during this month long rally. However, concerns are growing that the US economy could not re-open so fast as anticipated (California will probably extend the “stay-at-home order” till July) and that the so-called contagion-curve is not flattening as fast as expected. Besides, there are warning signs from several countries around the world (from China, to Korea and Germany) about the latent risk that a new phase involves.

Nasdaq has been outperforming SP500, that has been outperforming DJ30. Some days ago, I went through a very nice chart showing the divergence among the FAAMG stocks (Facebook, Amazon, Apple, Microsoft and Google) -which weights over NDQ have never been so great and approach now a 20-25% of the total capitalization- and the rest of the market: without the outperformance of these cool names -to be seen if justified- markets returns would have been much lower. I will look back into my files if I will be able to provide you this chart next.

There’s a nice way of trading highly correlated assets (statistically they should be co-integrated) like -for example- the US indices: this is SPREAD TRADING. Spread trading involves going long one asset and short another one at the same time and weighting it for managing your residual risk. Actually if you are long 10k NDQ and short 10K SP500 your exposure is 0 and so your risk: your gains will come from a difference in the performance of the 2 underlying. This could be also combined with timing management, unwinding one of the 2 legs of the trade in a specific moment. Your choice to see if -at this point- it could be interesting to apply this technique on US indices.

We will just take advantage of the daily news flows to give you another implementation idea. Last night, RBNZ decision on rates was expected and the Kiwi Central Bank has not surprised. leaving rates unchanged at 0.25% and boosting its Assets Purchase Program by 60 billions: NZDUSD has been sold on this, losing about 75 pips while I’m writing.

New Zealand and Australian economies are correlated and so are their currencies: if you observe the movements of both of them you will many times find a similar pattern. But once again, AUD had been outperforming NZD during the last weeks and could have been an ideal long against short the kiwi. Your choice to understand if this kind of trade could be played alson into the next weeks.

Trade Safe

Marco Turatti
Technical Analyst

TIO Staff

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