Talking Points:
- The S&P 500 led a cadre of risk assets (indexes, emerging markets, high yield, etc) with a threat of technical breakdown
- Euro undaunted by ECB minutes confirming QE discussion, BoE member talks hikes, oil produces an inside day
- Risk trends are on another technical cliff and Dollar at a 30-year range midpoint as NFPs, Fed statement and G20 approach
The Dollar held a steady bear trend through the first half of 2017. What is in store for the currency heading into the third quarter? Reversal recovery or an extension of the pain? Download the 3Q USD forecast to see my views.
Traders beware: risk-sensitive benchmarks have collectively dropped back to short-term but critical support. Whether we are referencing equities, high yield, carry, emerging markets or any number of speculatively-driven assets; it is clear that expectations have stretched well beyond the fundamental bounds of economic activity and tangible returns. While a systemic rebalance is long overdue, the lassitude that results from constant vigilance is just as unproductive for our trading as complacency. That said, these markets are prone to jolts of volatility; and a collective approach to overt support levels should not go unappreciated - or potentially unutilized. The S&P 500's immediate support around 2,400 offers a good baseline for a possible tipping point for traders. However, a range of indices face similar technical bounds, the Emerging Market ETF (EEM) is at its range floor, the high yield fixed income (HYG) is leaning on trendline support and a range of Yen crosses look as if they can transition from congestion to reversal.
To see a broad breakdown in speculative assets so soon after the trough of seasonal volatility would be a boon for traders looking for more productive markets. Yet, we should make sure not to confuse our desire for active markets with genuine evidence of such a change in condition. There will be plenty of event risk through this final session that can carry the banner of a speculative bearing, but all of it faces some degree of restraint. The weekend liquidity drain is a universal factor for all assets and regions. With the numbness of systemic inaction still weighing markets, ambition to stoke a critical change in conviction just before the Friday drain is highly unlikely. For specific event risk, the G20 is the most universal in stature. This can cast a light on protectionism, geopolitical tensions, growth troubles, competitive monetary policy and more; but it is a two-day affair with a second session on Saturday. The Fed will release its semi-annual report to Congress to precede next week's testimony by Chairwoman Janet Yellen and the June NFPs are up for release. Both can tap a US-based risk vein, but the sensitivity to such event risk is likely dampened from the perceived degrees of separation between monetary policy and broad sentiment.
While risk trends may not immediately respond to the collective US labor report and central bank synopsis, the Dollar will certainly be on review. The Greenback's four-day recovery fell apart Thursday and now threatens to turn into another short-lived correction in 2017's overall bear trend. The Greenback is near the mid-point of its 30-plus year range despite a hawkish central bank that has yielded it a very unique rate advantage. Unfortunately, it is the uniqueness that counts rather than the actual yield advantage, and that is evaporating. This past session, the ECB minutes affirmed the central bank's members have discussed when the appropriate time to back off of its exceptional dovish stance is while BoE member McCafferty suggested the group could go for a number of small hikes over the next few years. A cautious eye should be kept on the Dollar, Euro and Pound as they most liquid players; but trading through the end of the week may be the most opportune with areas that are naturally adapted to short and volatile developments. Yen (USD/JPY, GBP/JPY, AUD/JPY) crosses with a risk connection present the exposure and technicals. The Kiwi (New Zealand) Dollar crosses have seen a remarkably consistent run that has started to flag. We discuss trade through key technical setups, high level event risk and transitional liquidity in today's Trading Video.
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