Talking Points:
- Risk appetite lost lift as this past session progressed leaving the S&P 500 and Dow little changed and fading hope of trend
- Political risk has reared again, but this time the focus is on domestic stability versus North Korean tension
- Sharp Aussie Dollar, Crude Oil moves may not be as well-suited for trading as GBP/NZD, USD/CHF and NZD/CAD ranges
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.
Hope for a more robust risk trend for the global markets has further fallen apart this past session. Further speculative reach in the Asian and European markets turned fully inert in the US session. Equity benchmarks like the S&P 500, Dow and Nasdaq closed Wednesday little changed and still noticeably out of range of fresh record highs. The 'buy the dip' mentality is still alive and well in the markets, but the natural extension to capitalize on that mentality in order to passively carry a trend continues to evaporate. This is one of the subtle changes in market condition that often signals the erosion of trend - not necessarily a trend of direction but persistent characteristics of a market such as a comfort in complacency that overwhelms a divergence of value. In other words, these are the makings of landscape changes that can usher in reversals. The rounded tops and bottoms - versus the 'V' tops and bottoms that so many assume and pursue - which can set up systemic change on long running trends and conditions. It is important to not attempt preempting such a change as false starts can add up. Yet, it is the mark of a good trader to be ready for the occasion.
There were a few key themes contributing the loss of speculative momentum through the past trading session - and both themes will likely dog markets moving forward. The more abstract but arguably more important of these broad fundamental drivers was the growing political risk in the US. Last week, the focus was on global safety as the United States and North Korea traded increasingly belligerent language. This week, the focus is more one-sided. President Trump's statement following the violence in Charlotte, North Carolina has drawn rebuke from politicians and the media. The markets are amoral, so the practical economic implications this carries are what guide the balance of fear and greed. Two of the President's key business councils (Strategic and Policy Forum and Manufacturing Council) disbanded. This severs an important connection between the Executive Branch and Corporate America, which will cloud and slow important policy implementation even further. What's more, yet another misstep from the administration increases the risk that the US government could fall into full chaos which can bring many unforeseen complications - but can at the very least render that 20% rally from the S&P 500 since the US election an excessive speculative reach.
Another fundamental theme to disrupt risk and trip up the Dollar before it could mark a critical technical break to progress its bullish recover was the dimmed light on US monetary policy. The FOMC minutes reinforced the now familiar call to start the balance sheet reduction program at "an upcoming meeting". However, what hawkishness that would afford was undermined by the growing concern over persistently low inflation which can in turn sidelined plans for future hikes. That is a clear cap on the Dollar's ambitions as it undermines one of the most productive fundamental drivers for the Greenback these past three years. Yet, it also carries a very important global sentiment influence. The Fed has championed policy normalization which has offered investors a sense of confidence that conditions are robust enough that central banks can start to withdrawal some of the extreme efforts they have in place. Backing out of that looks like a rise in concern at the central bank level. Elsewhere, the Australian Dollar and Pound experienced substantial moves of their own but the fundamentals didn't necessarily align to the progress. Similarly, strong moves by Oil and the Canadian Dollar draw attention but traders should question the opportunities they provide ahead. We look at what is moving in the markets and where the deep trends are rooted in today's Trading Video.
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