Talking Points:
- Despite the uneven conviction in risk assets, US equity indices closed at fresh record highs - even with VIX ominously elevated
- The Dollar's multi-year technical break has yet to convert into a bear trend, and now the Greenback is returned to the breakpoint
- As expected the BoC hiked rates but the Canadian Dollar was reserved, Watch the Aussie Dollar amid jobs figures and China GDP
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As uneven as conviction is behind the stretch in risk sensitive assets, the banner bearing US equity indices seem to experience no second guessing in their remarkable push to new heights. Looking across the markets for an assessment of general sentiment, most markets were at best uncommitted. From the DAX to the FTSE 100 to junk bonds, we saw limited progress much less the universal charge forward that seems to be championed by US stock benchmarks. Given the lack of a common thread for speculative bulls to tie into, it is instead up to momentum to carry the day. That is arguable the strongest motivation overcoming the drudge of complacency and subsequently fueling the S&P 500, Dow and Nasdaq to their repeated all-time highs. All three measures indeed hit new records crossing yet new rounds of psychologically-important levels (2,800, 26,000 and 6,800 respectively) this past session after recovering from an early morning slip. If we are to break this spell, we need something tangible to materialize - like the onus of a US government shutdown as early as the end of this week. There is perhaps a degree of concern over that or some other hitch awaiting us ahead if the VIX is to still be considered a viable measure. The volatility measure so comfortable below 10 has slowly but prominently risen despite equities. Highly unusual.
The antithesis of the persistence in US equities is the lack of follow through from the US Dollar. Where we long ago ran out of technical accelerants for the indices, the Dollar Index (DXY) and some of its most prominent crosses just this week achieved a critical break against the Greenback. If speculative interests were looking for any meaningful cue to crowd an opportunity, this would be it. And yet, just on the other side of its well-publicized break, the conviction for a new trend seems to have abandoned the bears. A bounce for the DXY back up to its former support level finds similar response from EUR/USD falling back to 1.2150 and USD/JPY bouncing from the low end of a channel. The Greenback has lost considerable ground this past year and yet its fundamental backdrop hasn't diminished on economic potential or yield forecast. Perhaps we have met fundamental equilibrium between the Dollar and its peers. If so, that would be very inopportune timing against the technical backdrop.
In other liquid currencies, the fundamental landscape is more fluid. The Euro has slipped with the excitement of the ECB's minutes and tentative German coalition news fading while the Pound nudged just a little further with the Brexit plan moving through the House of Commons and onto the House of Lords later this month. More charged was the Bank of Canada (BoC) rate decision Wednesday which met expectations for a 25 basis point hike to 1.25 percent, but that hawkish development rendered limited enthusiasm for the Loonie. That too seemed expected as we discussed yesterday as a more than 80 percent probability was built into this outcome, and yet the currency was sliding in the lead up to its release. When a cautious tone was dealt by the Governor, it was enough to curb any meaningful hawkish ambitions. Ahead, we will have much of the important event risk scheduled through the Asia session. Australia's employment statistics are always good for generating volatility from the Aussie, but it is the inflation expectations which can hit a deeper nerve in tentative RBA expectations. For the Aussie, Yuan and rest of the world; Chinese 4Q GDP is top event risk. However, the markets have grown skeptical of what the data actually reflects amid skepticism of its authenticity with remarkably consistent prints.
In other asset classes, commodities are facing their own technical boundaries; and there seems more reverence for their strength. Gold stalled at 1,345 earlier this week and subsequently put in for its worst single-day loss since December 7th Wednesday. This conspicuously happened at the top end of a very overt technical wedge that has built up over the past few years. Oil has shown a curb in momentum for the US-based WTI standard, while the European-favorite Brent has actually offered struggle at $70 with a retreat this past session. And, ever the oasis of volatility, cryptocurrencies continue to generate massive intraday swings. Bitcoin, Ethereum, Litecoin, Ripple and more started the past session with a clear slide deeper into their retracements (Bitcoin had passed its 50 percent retreat from all-time high mark), but the intensity of the charge that preceded this period of indecision will not allow for easy capitulation. There is certainly more overall progress lower than we have seen in years, but what we should take from this is dynamic shift that will arise from this rather than anticipation of a clear trend itself. We discuss all of this in today's Trading Video.
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