Talking Points:
- Risk Trends are the key conduit next week but will trade wars provide the fuel to get the markets moving?
- In an inordinately dense docket, top event risk ahead includes: tariffs deadline, EU and G20 summits, FOMC decision
- Technicals position the Dow, EUR/USD and oil for breakouts; but will the markets find the motivation?
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Risk Trends Remain the Most Important Channel for the Markets
From equity benchmarks to liquid FX to yields and emerging market assets, the same general sentiment seems to reflect in their standing. There is a speculative reach that inspires more skepticism than opportunism. Risk appetite has driven the financial system to extremes, but so far there has been little reason to abandon the position of excess. That has left us with technical patterns like those from the S&P 500 and Dow - where recent consolidation gives away little sense of reasonable intent as it stands just off of moonshot record highs. Sentiment was in the headlines through the end of this past week. Offering a foothold for optimism, the University of Michigan's consumer sentiment survey for March hit a 14-year high with the financial progress measure hitting a series high going back nearly 70 years. Yet, in the grander scheme of things, this is little consolation to the prominent threat of trade wars that still loom over our markets.
Sorting Key Event Risk Via Trade Wars Next Week
Looking ahead, the juxtaposition between the upcoming week's event risk and that of the one we just closed out could not be any more extreme. The abundance of high profile events and themes will create a genuine risk of volatility in the markets, but developing a clear trend can prove a challenge when there are so many headlines competing for traders' attention. One of the more familiar milestones is Wednesday’s Federal Reserve Rate Decision. Not only does the market expect this meeting to result in the first rate hike of the year, but it is also the quarterly event with updated forecasts and new Chairman Jerome Powell's first press conference in his new position. This is certainly important for both capital markets in the US and the Dollar, but it does not come close to registering on the same fundamental level as the build up to a global trade war. On that front, G20 and European Union summits will focus heavily on protectionism no doubt with discussion on collective responses to the United States' taxes. With the end of the steel and aluminum tariff grace period to argue exemption on Friday, there will be a loud ticking in the back of investors' and policymakers' minds. If there isn't a clear signal on this critical theme, don't expect a clear bearing on those assets anywhere in the vicinity of this broad risks' influence.
Euro and Pound Driven, Aussie and Kiwi Just Active
Turning the dial down on fundamental influence a few notches, we may actually find progress for the Euro and Pound in their respective dockets. For the Euro, the key event is the two-day European Union leaders meeting. Topics of trade, growth and taxes are some of the high profile talking points on the agenda. The collective response to global trade pressure - be it the US, UK or Russia - will also shape the Euro's relative bearings. This EU event will also weigh in on the progress of Brexit negotiations with their British counterparts. There is no greater influence on the Sterling - whether it is driving the market or anchoring it. And while there will also be a BoE rate decision along with jobs and inflation data, these events will struggle to compete for influence. Contrast these fundamentally motivated currencies to the Australian and New Zealand Dollars. Both have seen substantial moves to end this past week and there is event risk ahead - Aussie jobs and the RBNZ rate decision - but they are hardly held out as trend defining opportunities. That unencumbered landscape may translate into better trading conditions.
Range or Break for Oil and Gold
Though volatility risks are high, major breakouts and trends will be particularly difficult to muster amid the din of fundamental noise. That generally supports markets and opportunities that are better positioned for range than attempting to mount moves that contradict broader conditions. Two particular commodities to watch in these circumstances are gold and crude oil. Gold has slipped towards the bottom of a multi-month range as the Dollar has steadied. A return to range is likely so long as trade is uncertain and even a break lower would just transition to a broader congestion pattern. As for crude, a break from a tight wedge on Wednesday simply pushed the market to a heavier resistance around 62.25/50. We discuss the active but difficult market conditions ahead in this weekend Trading Video.
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