Wall Street Offers A Bullish Gap and Record Highs, Pound Awaits Brexit Budget
The approach of the US holiday liquidity freeze is showing through in the financial system. However, rather than encouraging traders to cut back from their speculative excess, it seems to once again inspire a bout of 'buy the dip'.
- Holiday liquidity conditions are quickly approach, which calls into question the motivation behind Tuesday's risk charge
- US equities offered a bullish gap on the open and record high closes, the emerging markets however won for momentum on the day
- There is still event risk facing the Euro, Dollar and Pound ahead; but potential holds with the UK budget and lesser event risk
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We are fast approaching the US liquidity drain on Thursday, but that hasn't encouraged weak hands to unwind their stretched exposure and safe guard capital. No, in these times of complacency and excess, the approach of a further extreme reduction in market depth is enticing the ever-present 'buy the dip' mentality across the speculative rank. Amid that care-free attitude, we have seen the US equity market charge to yet another record high. Pacing the way yet again, the S&P 500 gapped on the open Tuesday and proceeded to reach another unprecedented intraday and close high - ending multi-week period of indecision that had produced a head-and-shoulders pattern. Not surprisingly, the VIX would take the signal to collapse below the magical 10 level again and remind us of the assumptions of an extremely inactive period ahead. While this is an extremely unrealistic backdrop, expectations of a settling heading into the US holiday drain - and yes even the dip buying that would imply - are not unreasonable.
Amid the stretch for risk, the most impressive performance was not US or global equities. Given the degree of the day's movement and the general trend it fits, the emerging markets charge was exceptional. While this was measured in the broad EEM ETF and other individual regions that comprise the larger emerging economies, China was again turning in a class-beating performance. The FXI ETF showed a strong surge higher that is a step above the already excessive market performance. More on the fundamental level, the tangible fundamentals were reserved this past session. The Euro's slip to start the week on news that coalition government discussions had fallen apart didn't earn much further trade opportunity for pairs like EUR/AUD, EUR/JPY or EURCHF. The Pound's tail wind on news that the government was ready to agree to a higher Brexit bill meanwhile flagged as BoE members supported forward guidance as a policy tool (cooling overly-aggressive hawkish views of nearby hikes) and ahead of the UK budget announcement. Chancellor of the Exchequer Philip Hammond is due to report a Brexit laden budget Wednesday; and given the sway this has held over the Pound in both restricting and promoting movement, it will carry significant weight ahead.
For the world's most liquid currency, the implications of fading liquidity are far more significant. There is event risk on the docket between durable goods orders, a more accurate consumer sentiment report (University of Michigan's) and the FOMC minutes. Of those three items, the Fed transcript taps the more important fundamental vein but the degree of confidence in a December hike means there is limited impact from a hawkish outcome and substantially more leverage in a softening tone. I am also looking at Aussie and Kiwi Dollar crosses (AUD/CAD, AUD/NZD, NZD/CAD) in the face of Australian 3Q construction work and New Zealand 3Q retail sales without the encumbrance of nebulous but overriding themes. Further showing the contrast in liquidity on traditional versus no traditional assets, commodities are seeing the retreat in tide curb potential for oil's latest attempt at reviving its trend while gold isn't even attempting to revive a breakout effort. In contrast, volatility for Bitcoin remains as headlines like Tether's $30 million hack cater to a highly speculative, disruptive and non-centralized market. We discuss trading conditions ahead in today's Trading Video.
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