Talking Points:
- The S&P 500 is running far askew of its global risk counterparts, but the return of liquidity has brought with it doubt
- Concerns of an emerging market contagion will likely compete for fundamental dominance with a multi-front trade war
- Brexit concerns have cut down the Pound's recovery, the Aussie dollar moves from RBA to GDP, the Loonie awaits BoC and trade
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A Return of Liquidity a Return to Unresolved Fundamental Risks
We have just called to close the first full-liquidity trading day of the new month - which also happens to represent the opening session of the more liquid and active 'fall' conditions. Thus far, there is little signal to garner from an otherwise restrained New York trading session. That said, the unmistakable contrast between US equity indices at record highs and the gamut of struggling 'risk' assets from other regions and asset classes remains an exceptional signal on uneven conviction. The S&P 500 Tuesday slowly lost altitude to raise awareness - if not concern - that the benchmark has not deviated from the global balance of the speculative current for long. Further, if an audit of the fundamental environment were to be made, it would not come up with a particularly convincing perspective for the US to bypass global concerns. Concern over emerging markets contagion picked up where they left off last week. There was still clear pressure from the likes of the Turkish Lira and Argentine Peso, but the sharp drop from the South African Rand and new record low from the Indian Rupee present more trouble from less extreme members. Trade wars is likely to fight for fundamental authority as well. The NAFTA impasse and US-EU tensions aside, the specific tension between the US and China is likely to flare up again soon considering the open period for public feedback on a further $200 billion tariff coming to a close and reports that President Trump was intent to raise the stakes.
The Dollar's Indecision Creates a False Sense of Technical Clarity
The US Dollar is not immune to the ill-effects of a global trade war - and more realistically, it stands to potentially suffer more long-term damage than most others given how much it has to loose in terms of growth, reserve status and financial supremacy. This is a big picture concern that will eventually come to pass if the situation is not headed off before the situation pushes over the cliff. However, in the near term, the risks can be overlooked for more restrained fundamental concern. The assessment of what is of primary fundamental concern for the Greenback should be the first thing traders consider before pursuing any trades amongst the majors. It is important to evaluate this side of the equation now specifically because the technicals look so distinctive. This otherwise appealing picture could draw us into scenarios that render fresh false breakouts and reversals which have been so prevalent across the financial markets. The DXY for instance has move back up to the previously-key 95/96 resistance that sets a mirror technical support in 1.1500. Continuation looks like a possibility, but the fundamental uncertainties behind this market would likely make that a difficult trend to sustain. From the calendar, we need to put less emphasis on readings like the ISM's manufacturing report from the past session and more focus on the upcoming trade report which will give us a tangible reading on trade wars. Yet, if we are looking to true trends, the complex risks like trade wars and political uncertainty will play a far more important role.
Brexit Relief Reverts to Crash Out Fears that Restrain the Pound
So much for a break through. Last week, officials from the United Kingdom (UK) and European Union (EU) started to speak with uncharacteristic optimism over the outlook for Brexit negotiations. When the EU's Chief Brexit Negotiator, Michel Barnier, remarked that the soon-to-be ex-EU member could enjoy a wholly unique third party status with the Union, it seemed that there was movement towards a compromise. Sterling traders registered the shift with a key wedge breakout from GBPUSD while other Pound crosses won their own Sterling-favorable rallies. In turn, the combination of a favorable technical and fundamental outlook led me to take a long Cable (GBPUSD) and GBPCHF trade. However, my optimism in this process proved too enthusiastic - perhaps naive - as the reality of two side at diametrically contrasting views of the future devolved into verbal fisticuffs once again starting over the weekend. Prime Minister May stated there would be no compromise on her previously stated plan over the weekend, which led Barnier to say that he was strongly opposed. This past session, Brexit Minister Raab said they were still optimistic and making progress, but the remarks rung hollow. The Pound dropped across the board with Cable hitting my stop. My GBPCHF position would also take a hit, but I still like the reversal in bearing returns us to the status quo we have come to price in for the Pound. Meanwhile, the Swiss Franc is excessively strong against all major counterparts, and this pair is sporting a particularly deep discount.
Event Heavy Conditions for the Canadian and Australian Dollars
Looking at an equally-weighted Franc cross, it is clear that this has been one of the strongest performances amongst the majors over the past months even though there has been little fundamentally to support such an incredible climb. In contrast to the detached 'Swissie' move, there is the clear fundamental drive behind the Australian Dollar. The current account for the second quarter has already weighed the currency with a ballooning deficit of A$13.5 billion, but the Reserve Bank of Australia added to the picture when with its extension of a two-year hold on the lowest benchmark rate on record. While Governor Lowe said the next move is likely to be a hike rather than a cut (not something the RBNZ would agree with in its own policy), he did say the move was some time off - the market thinks beyond 2019. That is troubling for a carry currency. Ahead, the Australian GDP and July trade report will keep the fundamental ball rolling. That said, the fundamentals are arguably more loaded for the Canadian currency. The Bank of Canada (BoC) rate decision is due Wednesday, and here there is far greater probability of a move in policy through the near future - and a stated reasoning or a hold could resonate more deeply as bearish. The July trade report will also be of greater importance given the ongoing trouble in NAFTA negotiations - most recently after the two countries missed a resolution by their self-imposed timeline for last Friday. We discuss all of this and more in today's Trading Video.
If you want to download my Manic-Crisis calendar, you can find the updated file here.
