- The S&P 500 is within spitting distance of a record high, yet it's sporting the lowest activity level since December holidays
- Already long, the tariff and sanctions tally for the US is continues to build, threatening to draw more retaliation
- While there is little trend in the market, both the Pound and Kiwi Dollar have seen strong declines - will they last?
Extreme Quiet Just on the Boarder of a Record
The seasonal 'summer doldrums' are in full effect, and it is frustrating both bears and bulls. When the market's capacity to fuel momentum is hampered, it naturally reduces the threat of a systemic risk aversion wind razing the financial markets to the ground. For a market that has founded much of its path these past years through complacency, that is a natural boon for speculative interests. However, the break in liquidity mutes potential in both directions - especially amid the growing appreciation for the systemic disparity between market levels and the underlying fundamental value. The FAANG group has relinquished its ability to lead speculative activity, and now the most remarkably conditions are being reflected in the core measures of the US equity market. The blue-chip Dow carved out its smallest daily range essentially since the beginning of the year. With the promise of a record high just in sight, the S&P 500's past two-day performance represents the smallest 48 hour trading range since December 28th - in the full dearth of holiday trade. Other 'risk' leaning assets are showing similar reservations towards progress - though perhaps not to the same extreme. While not surprising, these are not conditions where the opportunity for reflection will render greater enthusiasm than what is already priced in. Traders should not discount a possible break for the S&P 500 to record highs, but expecting it to be clear signal for a persistent trend is fanciful. That said, a more productive reversal may be more likely, but it is still improbable in these conditions.
SPX 500 Daily Chart
The US Continues to Build Pressure Against Ally and Competitor Alike
Following the United States announcement Tuesday afternoon that it had finished the list for the additional $16 billion in tariffs against China (for implementation a few weeks from now), China quickly rendered its retaliation. The response was like-for-like with $16 billion in US products which would be hit with a 25 percent import tax. The news did little to exact short-term hurt on the US dollar while neither initial volley nor retaliation has contributed to the otherwise charged trend behind USDCNH. Meanwhile, the implications of President Trump's threat to stop business with all who continued to trade with Iran - and the EU's stance that it would issue sanctions on European companies that complied with the US directive - were gaining broader market appreciation as another possible catalyst to put the US and EU at odds. An economic standoff between the US and EU would rapidly bring about global economic and financial pain, but investors are still surprisingly confident that this would be a move officials would be unwilling to make. Meanwhile, there has been little restraint from the US in applying sanctions against Turkey and Russia. The USDTRY continues to climb to record highs while Turkey's 10-year government bond yield has topped 20 percent under the United States sanctions for holding an American pastor. Fresh sanctions on Russia meanwhile earned a sharp USDRUB breakout this past session, clearing a multi-year trendline resistance.
USD/RUB Daily Chart
DXY Daily Chart
Both the Pound and the Kiwi Dive on Fundamentals
In general, when there is a sharp move in markets without the backing of definitive fundamental influence; it can be difficult to build a trend. That is true regardless of liquidity or direction. However, an overt unifying motivation doesn't always guarantee trend - especially when there are caveats for prevailing direction or a curb on market depth. Such is the question of potential that we face with the Sterling and New Zealand Dollar at present. Between the two, the Pound has shown the most persistent drive. As of this past session's close, an equally-weighted index of GBP has dropped for five consecutive sessions - the longest series of losses months. That progress has also earned more than a few noteworthy technical highlights - from the index's clearing of a multi-month range support to EURGBP's break above 0.8950 to GBPAUD's resolution of an intense wedge. This move has been clearly driven by Brexit, the most recent headline that Prime Minister May is to hold a 'no deal' summit with her government early next month. That theme has the capacity to earn much deeper losses, but there is a certain tolerance for risks without policy implementation. For the Kiwi, the selling pressure is more recent, but no less intense. An equally-weighted NZD index has dropped to a multi-year low, reflecting the struggle of this once, high-flying carry currency. The spark for this move was the RBNZ rate decision. While its hold was expected, its suggestion that there would be no movement on policy until the second half of 2020 still earned more dovish response. The question is how much of this outlook has already been discounted in the pained currency?
Technical Pressure for USDJPY, Gold and Crude
There are many technical pictures across the financial system that draw hungry traders to position for the 'action-oriented' outcomes (breaks, reversals) even though general conditions make it a less likely outcome. We should remember to approach the markets from an assessment of general conditions - via volume, liquidity, sensitivity to conviction - first and then evaluate the particular. I am considering that for the Yen crosses and USDJPY specifically given my stake. While the USDJPY carries the potential of the medium-term risk for the Dollar to drop amid global retaliation to its tariffs or via the imbalance for risk trends potential opening up serious declines should the fuse be lit, it is important to set expectations reasonably. Commodities are also setting technical watchers to salivate. Crude oil this past session dropped sharply this past session (there was more than enough headline fodder for traders to justify the slide) to the bottom of its multi-month rising trend channel support. Promise of an imminent technical break is common for this asset, but the big moves rarely take. Gold, on the other hand, has earned more of its interest. The metal has slid productively for months, and is now pressuring the mid-point of its past four years' range. A break is more likely given this disparate progress, but the probabilities and potential of the different fundamental outcomes certainly should have us considering what happens if risk appetite and confidence in global stability amid trade wars were to hit. We discuss all of this and more in today's Trading Video.
Crude Oil Futures Daily Chart
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--- Written by John Kicklighter, Chief Currency Strategist for DailyFX.com