Talking Points:
- The S&P 500 and Nasdaq both advanced Tuesday to critical highs (multi-month and record), yet both drew skepticism
- No news on trade wars nowadays is good news, but that didn't curb the Dollar's development of a reversal pattern
- Both the Aussie and Canadian Dollars remain fundamentally engaged with 1Q GDP and April trade figures ahead respectively
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As Lacking in Enthusiasm as New Highs Can Be
Technically speaking, the S&P 500 and Nasdaq 100 posted new highs Tuesday. For the broad-based index, the third consecutive gap higher on the open was unmistakably weaker. Furthermore, the rest of the session completely lacked for follow through leaving behind a telltale doji, undercutting the speculative intrigue that may have arose from the benchmark index posting its highest close in months - an uninspiring higher high following February's explosive volatility event. The contrast was even more dramatic for the Nasdaq 100 which earned its second consecutive record high close, but did so with the same insipid sentiment that makes even the died-in-the-wool bulls question the next move. The US stock indices are not alone in this deflated advance. It is a familiar site across risk oriented assets from emerging markets to US Treasury yields. However, the US pacesetters are more recognizable and have so much more to lose, which earns the harsher evaluation. In this environment, technical developments and milestones are not the motivation that they have been in previous speculative phases. An absence of troubling news in escalating trade wars may not have tipped further deleveraging in risk assets this past session, but the uncertainty it maintains has no doubt restrained progress on other themes. Expect this to remain the case unless trade completely takes over or is magically resolved.
Dollar Solidifying a Technical Threat
Though I always incorporate technicals into my trade assessments, rarely do I consider appealing chart developments true opportunities unless they are backed by a fundamental wind that can turn speculative spark into a fully-formed trend. That is just as true for the Dollar as any other currency or asset. Nevertheless, the pieces are starting to come together for bears to take back the yoke following a six-week bull trend for the DXY Dollar Index. Tuesday's session offered another restricted range which fit nicely into the 'right shoulder' of a head-and-shoulders pattern that has formed these past few weeks. This typical reversal pattern can prove a trade in its own right if properly motivated, but it also serves as a barometer for fallout from the US-driven trade war. There is a speculative reach from a segment of the market that assumes a bullish tailwind for the US markets and economy by pursuing tariffs aimed at correcting perceived in equities in global trade. Yet, there is a grander risk in the country's effort to penalize competitor and ally alike. That risk is a collaborative response that passively but concertedly diversifies investment and capital flows away from the US. Normally, such systemic with long-term implications are ignored by the markets in favor of more simple to translate headline fodder; but this theme seems to be receiving the same attention and forward speculation that US interest rates drew in 2014. Beware the Dollar reversal pattern that is readily showing through on key pairs like EUR/USD and USD/JPY.
The Fundamental Pistons Continue to Fire for the Aussie and Canadian Dollars
While we deal with the progress and restraint in abstract themes like global trade wars, there are more defined fundamental events to keep tabs on through the upcoming session. The Dollar has its own scheduled event risk in the form of the April trade report. As crucial as trade is at the moment, this indicator is backwards looking and will not alter the course of the President in his policy setting. Further, the lack of response to the ISM service sector report from either US equities or the currency shows what driver matters. In contrast, we have distinct volatility following the Australian Dollar's two days of heavy event risk. Monday's round of 1Q corporate profit, retail sales and inflation all registered better-than-expected readings that leveraged a strong AUD rally. This past session's RBA rate decision however drained all enthusiasm in the charge. The group kept its cautious path and optimistic view for the economy, walking the line exactly between the RBNZ's dovish shift and BoC's hawkish. Ahead, we have 1Q Australian GDP which is more than capable of generating volatility with a surprise. For the Canadian Dollar, the attention is on event risk that speaks to an effective trend: trade. The April trade report will be evaluated against the new US metal tariffs, the retaliatory duties and growing concerns over NAFTA negotiations. Pound for pound, the employment data on Friday is more market moving, but there will certainly be weight behind this report.
Keeping Tabs on the Euro, Pound and Oil Through an Uneasy Calm
There has been an impressive amount of progress via trend for a range of currencies and assets recently, though these moves aren't unfolding in a straight line. From the Euro, the retreat from a year-long trend is still marking progress through concern over the path Italian political pressures are adding to the European Union and Monetary Union. That said, building speculation around the ECB's policy path is working to counterbalance the bearishness. ECB President Draghi didn't give any insight ahead of the next official meeting which is considered the 'quarterly' event with updates on forecasts and an expected change from passive dove to long road into normalization. For the Pound, the slide in recognition of Brexit trouble has recently stabilized; while the news that the government will push 12 crunch votes on June 15th has traders weighing whether the pressure will result in any tangible change to the uncertainty still weighing on the currency. Then there is oil. Following Monday's critical break of a trend channel support lasting months and the 100-day moving average, this past session's performance was modest bullish one that checked fear of a break that turned into a cliff dive. In the meantime, the enormous spread between US-based WTI and European-standard Brent marked a sharp reduction with the former's bounce and latter's slide. We discuss all of this and more in today's Trading Video.
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