S&P 500 Extends Longest Slide of 2018, Dollar Edges Higher
- News that the US and European trade ministers were discussing tariff exemptions offers optimism from the march towards a trade war
- The S&P 500 has dropped for four straight trading days, though it has gapped higher on the open for six consecutive sessions
- Dollar will take a defacto 'risk' currency status due to trade, but will yields force a monetary policy influence?
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Trade Wars and Political Stability
The markets are still watching the score boards for the state of global trade wars before making any serious decisions about their exposure in the markets. Unfortunately, for those looking for action and opportunity now, the resolution of an escalating or receding protectionism turn is not likely until next week. However, signs of progress are still seeping through the headlines. Arguably, the fastest track towards a full-tilt global trade war would be for the US to apply its steep steel and aluminum tariffs on the European Union. Not only is the EU the largest collective economy in the world, the two sides have already laid out their plans for retaliation - both the EU in response to the initial tariffs and President Trump's warning that the subsequent response could be a tax on European autos. That said, news that US Commerce Secretary Wilbur Ross and EU Trade Commissioner Cecilia Malmstrom spoke on the tariffs and would continue the discussion next week offered some hope that the two sides were working towards an encouraging solution. Though, a reminder that political stability is both foreign (trade) and domestic in nature; a story in the New York Times that Special Counsel Stephen Mueller subpoenaed the Trump Organization revived a degree of stability concerns - though not nearly as sharp as those seen in August.
US Indices, Dollar and 10-Year Yields
In the fundamental mix, there is a greater sense of caution than there is blind enthusiasm. That should come as little surprise given the still-extreme exposure investors have to risk benchmarks like US equities - measured in both fundamental value and general price standing. With key event risk approaching (G20 and EU summits as well as the tariff grace period closing next week), we would naturally expect a market to pull back on some of its notional and thematic leverage. It seems we have done just that on the US equity indices. The Dow has retreated to the bottom of a prominent wedge, but has not broken support. The Nasdaq has retreated off its record high but notably keeps the gap around 7,000 open. Most impressive is the S&P 500 which has slid for four straight days - matching the longest decline since the election while still managing six consecutive gaps higher on session opens. For the Dollar, range is still the prevailing course amid uncertainty with DXY and EUR/USD still settling into their congestion patterns. That said, another theme is starting to put pressure on the market: monetary policy. The FOMC rate decision Wednesday is well plotted out, but with 10-year yields carving out a head-and-shoulders pattern, there may be some competition for influence.
Swiss Franc and Canadian Dollar Run
While more dominant fundamental themes are keeping certain markets and assets in a holding pattern, there is still an impressive degree of activity for otherwise unencumbered assets. In the FX world, the Swiss Franc had the SNB to assess. Ultimately, the central bank did nothing with its policy mix as was fully expected; but they did voice concern about the level of their currency, fears over housing market stability and what would happen to the Franc should risk aversion push capital to safe havens. None of this is particularly surprising, but it postures the currency for the same slide that the market has already leaned towards with pairs like USD/CHF and CAD/CHF. For the Loonie, the data was even lighter, but the progress was registered nonetheless. Most notable was USD/CAD's break above 1.3000 which is unusual progress for a major. The Aussie Dollar would also show up on the radar with the largest loss of the majors, though the only indicator of note (consumer inflation expectations) was actually positive. These moves are not particularly robust, but they can offer short-term opportunities where most avenues spell inaction and danger.
Pressure Grows for Gold and Oil Ranges
In the market conditions we currently face, range is better to pursue compared to breakout and/or trend. Mustering serious conviction would be an anomaly until some of these key fundamental questions are answered, but why try to force low probability trades? Looking for short-term, congestion options is more appropriate for what we are currently presented with. That boosts the appeal of Gold over these past weeks. While there are many that are awaiting a big picture break to the upside amid a massive trade war, the uncertainty has offered a number of range swings in the interim. And, if the trade war risks retreat further, a bearish break can just offer some intensity into a wider range. As for oil, this is a global economy connected asset, so it cannot escape the market-wide fundamental winds. Yet, uncertainty also has produced an impressively defined wedge. At this point, the congestion is growing very tight, and a short-term break is likely. Approach crude wisely. We discuss all of this and more in today's Trading Video.
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