Talking Points:
- What was an uneven day for sentiment swung to the bulls in the New York session, lead by a 1.4 percent Dow rally
- Despite the reach for yield and capital gains, the headlines Wednesday were dominated by trade wars and forecast for the G-7
- Gains for the Euro, Pound and Aussie Dollar come with differing degrees scrutiny given their mixed backdrops
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You Couldn't Tell Concern Over Trade Wars was Growing
There was a definitive, bullish bearing behind the speculative markets this past session - a remarkable feat given the tenor of headlines surrounding a favorite theme of late: trade wars. Looking at the relative performance across different asset classes, it was clear that there was a change in sentiment not along the lines of market type but rather time frame. In contrast to the restrained performance offered up by European indices Wednesday, the US benchmarks offered a more heady charge. Starting from a more material discount, the key stock leaders produced impressive gains paced by the Dow's 1.4 percent rally. Both the blue chip index and the S&P 500 produced technical breakouts from multi-month ranges. Yet, for perspective, this progress is still well within the wide trading spans carved out following February's dramatic tumble from record highs. From the Nasdaq Composite and the Russell 2000, the day earned a fresh record high, but tempo was far more restrained. To balance the assumption that this was just an equities performance, we would also see impressive gains for the EEM Emerging Market ETF, the HYG junk bond ETF, Treasury yields and Yen crosses. The question is not whether there was a 'risk' fluctuation but rather will it last.
The Headlines Reflect Retaliations and Warnings in Trade Wars ahead of G-7
Gains in speculative appetite is not particularly extraordinary, but it is unusual when the headlines behind dominant fundamental themes add weight to persistent fears. Trade wars have earned remarkable trend and volatility from the currency and capital markets these past weeks and months, so we know there is considerable weight behind the systemic risk. And, we were not light for headlines on this particular topic Wednesday. Mexico announced it was imposing $3 billion in tariffs on US imports in response to the latter's triggering the metals' duty this past Thursday. The European Union was also reportedly preparing additional tariffs on American goods to start in July. Looking to deflect anger, President Trump's top economic advisor, Larry Kudlow, gave a press conference in which he suggested global trade was broken and their aim was fair, robust growth for the US and world economies. The reassurances rung hollow to its trade partners, and that will no doubt be stated at the upcoming G-7 leaders’ summit Friday and Saturday. Removing the sovereign perspective of the trade wars, the World Bank warned the recent wave of tariffs could lead to an economic and financial future akin to what we faced in 2008. Also related, the United Nations updated its global foreign direct investment figure for 2017 with a troubling downward revision to a 23 percent drop for the year. Considering this happened before the recent troubles for global trade, it is clear what that the future does not look particularly encouraging.
Euro and Pound Shift Priority to Support Advances
Another remarkable sign of speculative reach was the fact that European indices managed the performance they did against growing anticipation for the European Central Bank (ECB) to spell out its retreat from extreme easing. There is a clear link between unprecedented easing (zero benchmark rates and unorthodox QE) and the exceptional performance of financial markets. It only stands to reason that removing this pillar of speculation will promote its ultimate collapse. That said, there is a near-term positive connotation in such a change in tack for the currency. The ECB's chief economist, Peter Praet, Wednesday further fueled expectation that the group would signal the end of stimulus next week. With that lever, the euro posted a notable advance that earned EURUSD the break of its inverted head-and-shoulders pattern. For the Pound, the focus has moved away from the motivation for the Bank of England (BoE) to Brexit. That said, the headlines related to the UK's divorce from the EU have not been particularly promising. Reports that Brexit Minister David Davis was adding pressure on the Prime Minister as she struggles to set a clear course in negotiations. Despite these concerns and the forthcoming crunch votes, the Sterling still marked an advance on the day - with notable hold for EURGBP and GBPUSD starting to threaten a meaningful turn.
Data Keeps the Aussie Dollar Tempo, Feeds Loonie Uncertainty
The Aussie Dollar faced yet another day of fundamental charge. This time around, the compass setting was again set to bullish. Following Monday's wave of bullish data and the neutral RBA, 1Q GDP for Australia beat expectations by posting 1.0 percent growth that beat expectations and doubled the previous quarter's growth. AUDUSD has added yet another technical break to its belt while AUDJPY is in the middle of posting a break through zone resistance at 84.50/00. The question is whether we have seen enough of a push to transition break into trend. The Canadian Dollar received the opposite motivation. While the trade report for April offered an improvement to help tamp down the concern over the growing tension with the United States, the Ivey manufacturing survey for May made it clear that there were clear costs to sentiment. The Loonie gave up gains made earlier on the day, but it didn't progress its retreat of the past few weeks. We discuss all of this and more in today's Trading Video.
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