Talking Points:
- Hostility between North Korea and the US remains unresolved, but the pace of escalating fear eased with the VIX dropping
- Rather than highlighting the importance of North Korea, the markets move forward with a sense of market instability
- Fundamental themes for the Dollar, Pound and Yuan failed to mark pace; but the Aussie Dollar, Bitcoin and Oil compensated
Are retail traders positioning for true reversals from EUR/USD, the S&P 500 and Gold? See the IG positioning data on the DailyFX Sentiment page.
There are many markets and barometers that responded to the fear centered on the North Korea-US tensions this past week, but no measure more poignantly spoke to both the catalyst and underlying conditions than the VIX volatility index. The attention that benchmark drew for its surge this past Thursday paced the speculative rank's slow rebound in confidence Monday. Alongside the 'Fear Index's' retreat to 12, we were met with a rebound in the S&P 500 and European equity indexes, emerging market assets, junk bonds and high profile carry pairs like the Yen crosses. While this is a noteworthy rebound, it hardly speaks of conviction. So far, we have yet to retake all the ground lost last week much less forge new highs for the various benchmarks pacing these different asset classes. It is important to appreciate the lasting sense of uncertainty that remains with the market. The jolt of volatility experienced witnessed last week is the equivalent to seeing a panicked response to a loud news. It bodes poorly should friction between the aspirant nuclear power and the rest of the world be revived; but more broadly, it likely reflects a concern that exists independent of the catalyst.
As we wait to see whether a major fundamental theme (security risk, political scandal, monetary policy influence, protectionism) takes up the cause of dictating the next overwhelming market trend, there are more measured events and themes at play. Top scheduled event risk would go to the round of China economic data for July. Retail sales, industrial production and fixed asset growth all slowed last month. We happened to see a rise in USD/CNH but there is certainly skepticism surrounding this impact-response relationship. Chinese shares didn't share the same negative reaction. On the other hand, the Australian Dollar sunk despite the rebound in risk trends. AUD/USD is back at 0.7850 - a level that proved critical as resistance for a long time before it was broken last week. On the Aussie docket, the RBA's Kent poured further cold water on rate hike expectations which no doubt had an impact. This policy official's suggestion though that the local currency's rally is more a reflection of the Dollar's drop as the 'Trump Rally' unwinds is somewhat ironic. If that were indeed the case, US shares would likely respond in kind. Moreover, a Fed official just this past week suggested the Dollar's tumble was the byproduct of the Euro's rally through 2017. It seems relative monetary policy campaigning has taken a new tack. With the market pushing out its expectation for the next Fed hike to June 2018, we'll see if this theme has any greater merit as import inflation and capital flows (TIC) data cross the wires Tuesday while FOMC minutes are in the wings for Wednesday.
Another split in market motivation rests with the Pound. The Sterling has marked little pace to open the new trading week despite Norway Prime Minister Soldberg suggesting an option to avoid a cliff on a 'hard Brexit' by seeking membership in the European Free Trade Association (EFTA) was an unlikely solution. With the UK Parliament's options whittling down and negotiation on their own side on pause, it seems the markets are pacing their response. We will put to the test the influence of BoE rate speculation in the meantime. The UK CPI and wider inflation figures for July are due today, but hopes of a hike in the next 12 months have already suffered these past week. With far less fundamental drive but greater market progress, both US crude oil and Bitcoin have won impressive moves at the start of the week. For the commodity, a flash of volatility has led to a significant technical wedge break but a penchant for quick moderation in pace leaves traders dubious. Meanwhile, the popular cryptocurrency extended its rally over the weekend and the opening charge of the new week. In a market of restraint, the volatility this market is generating is drawing a remarkable amount of speculative interest that can cause problems should uncertainty arise. We look at what markets are moving and which (suspiciously) are not in today's Trading Video.
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