Talking Points:
- EUR/USD met the return of liquidity with a drop lower on headlines from Greece and Italy as well as Merkel's Trump feud
- Interest in opinion polls leading up to the UK general election is generating greater heat for the Pound
- The week's return of full liquidity saw a technical close lower for SPX which broke the longest bull run since July 2013
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The new week started in earnest Tuesday as the long holiday weekends in the US and UK passed. Yet, the return of the speculative rank couldn't reverse the systemic moderation of speculative conviction we have seen build up these past weeks and months. From the bellweather S&P 500, the first day of trading for the week ended with a modest decline through the session marking the first negative return on an eight-day trading stretch - matching the longest run since July 2013. Looking at the outcome of previously interrupted 7-day climbs in the past few years, there are no examples of dramatic reversal that bears can hang their hats on. The moderation of expectation is further defined by the level of the volatility measures. The VIX managed to move back above 10, but that is setting the bar extremely low. Further, the short-term (one-week) VXST only nudged up off a record low set Friday. The question that traders should continue to ask is whether 'this time is different.'
In the FX world, there was more remarkable turbulence - though here too it seemed fundamentals were stirring change. EUR/USD was remarkably active over the week's opening 48 hours and mostly due to the Euro. On the headlines, we heard ECB President Mario Draghi continue to back away from the language that would prompt speculation of an imminent and total change in monetary policy bearing. Though he was confident in growth, he throttled language to suggest the measures were in place to turn the corner. Meanwhile, a story that Greece would refuse its next round of debt relief support if reform plans were not more favorable (thereby reviving Grexit fears) was rumored in the German press and then refuted by the country's politicians. A third concern that Italy could be heading for a September election comes on even more uneven evidence, but the implications of an Italian withdrawal from the Euro is sufficiently troubling enough that is demands attention. On another gear for EUR/USD activity, the political head-butting at the G-7 this past weekend has lead to a very public dispute between US President Trump and German Chancellor Merkel. Global political conflict is proving one of the least accounted-for threats and the under the most change.
From GBP/USD, volatility from last week has continued up through the Asia session Wednesday. Last week the Pound dove on reports of a Yougov opinion poll that suggested UK Prime Minister May's party lead in the lead up to next week's election was significantly lower (5 percentage points) than what previous reports had put it at. That was reversed to start this week by an ICM poll that put it at a 12 percentage point advantage but quickly reversed by another Yougov poll that suggests May will fall 16 seats of a majority - which would mean the same problems persist with pushing forward the UK's negotiation position. Expect these polls to carry greater weight in Sterling volatility as they remain close and the election approaches. On more measurable track, the Emerging Markets and Dollar will meet another wave of event risk. For the former, India's 1Q GDP and Brazil's central bank rate decision (seen as a 100 bp cut) are important. From the US, Fed speak from Kaplan and the Beige Book more refocus our attention to key themes - the Fed's policy bearings with the June 14 rate decision. We discuss what the market's are reacting to and the opportunities that arise from the sentiment in today's Trading Video.
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