After the initial move higher post the G20 weekend equities are in a small retracement mode. As we outlined yesterday, the 2800 ish area is important resistance. Best for markets is probably some sort of consolidation as investors digest global news.

There are a few areas that are actually reacting relatively badly and should be watched carefully. The JPY has once again resisted the huge 114 level. A “proper” equities rally “needs” the help of the JPY, still one of the bigger risk indicators according to us.

Why this?

When the JPY weakens, the stock market (mainly the US) tends to rise, and when the JPY strengthens, equity markets tend to fall. Why this relationship?

The JPY is a great “mood” risk indicator due to the carry trade, investors use the JPY to fund cheaply due to low rates in Japan, sell it and buy the USD, all in order to buy riskier assets such as US stocks.

Note the big candle in the JPY, trading below the 50 day here and flirting with the short-term trend line. A close below 113 is not good for the risk on equity view.

Credit has been a great indicator for pretty much all equity related moves lately. European credit, iTraxx main, takes new recent highs today, and is definitely a drag on the sentiment. Equity “people” tend to stare at equities only, but credit should not be overlooked here. Equity space will have a hard time going higher with credit space trading this “stressed”.

US credit is not as bad as European credit (Europe has Brexit, Italy, Macron, Spain etc) but is trading higher today as well. Below the CDX IG chart.

Watch JPY and credit for clues.

Source: charts by Bloomberg