Talking Points:
- The S&P 500 and Nasdaq gapped higher to start the week but follow through was absent - other risk assets showed similar struggle
- Trade wars remain a key global risk as the US weighs its next $200 billion versus China while NAFTA and Japan tread water
- While the Dollar and Euro produced notable FX moves, the most dramatic performances were registered by the Pound and Swiss Franc
A Tepid Sign of Risk Appetite to Start the Week
Finally, an advance for the S&P 500. This new trading week started with a gap higher for the benchmark US equity index that technically earned a gain on the day. However, if it weren't for the largest opening jump on the open since August 27, we would otherwise be looking at another measured retreat through Monday's close. Looking to immediately related measures, we find a far better measure of market sentiment. Another preferred US index itself, the Dow registered a loss on the day with a deeper retreat following its own starting jump. The difference between the S&P 500 and the Dow is the latter's status as a risk asset (relative to the blue chip) and its subsequent deeper dive the past few weeks. There was a more distinct sensitivity to speculative appetite and a more prominent 'dip to bid'. Other measures helped to qualify the exceptional setting on risk appetite. The Vanguard's global ex US ETF offered up a gap-dependent move that is a mere gasp from a more-than-year low. In one of the poignant signs that not all of the risk settings are set to enthusiasm, the EEM emerging market ETF dropped to a fresh 14-month low. The same pain was not registered across the EM currencies - particularly the sanction and contagion-hit players - but the lack of consistency was easy to read.
SPX 500 Chart (Daily)
Trade Wars Still a Lingering Giant with Threats and Opportunities
The general financial environment is a fundamental mine field. Excess dependency on stimulus, over-inflated asset prices, fading growth forecasts and isolated points of instability around the world are just a few undercurrents that could sweep global investors away given the proper course setting. Yet, as flimsy as the backdrop may be, catalyst are still likely to play an important role in starting any future avalanches. Emerging market contagion and political risks are still prominent risks that can readily retake the reins, but there is little engagement to start the week. Trade wars is similarly in a holding pattern, but the threat to the global economy and markets is exponentially larger. We are still awaiting word from the Trump administration on whether they intend to push forward with the additional $200 billion in tariffs against China following the closing of the public feedback period. And, in the meantime, we should keep an eye on further mentions of the surprise $267 billion upgrade President Trump threatened this past Friday. In weak retaliation to the virtually-explicit threats the US President made against Japan to prompt capitulation in negotiations, Prime Minister Abe offered insight that tit-for-tat tariffs benefit no one. As for the day-by-day NAFTA negotiations between the US and Canada, there was no progress to report through Monday's close, but Canada's Freeland said they would restart talks on Tuesday. It is worth having options for scenarios where a breakthrough occurs. Perhaps the most encouraging development on trade for the day was report from the EU trade minister Malmstrom's office suggesting they and their US counterparts (Trade Representative office) believed progress could be found on certain key points by early November. A weak assurance indeed.
Tencent vs. FAANG Chart (Daily)
What is Motivating the Dollar and Euro?
Looking to the FX market to see how it kicked off the week, there was a hefty rebound from EURUSD to open the week; but that did little more than offer a swing back into the middle of its multi-week range (and the right shoulder of an inverse head-and-shoulders pattern. Looking to the ICE's DXY Dollar Index, we can see a hefty slip from the Greenback. However, an equally-weighted evaluation of the US currency offers a different picture: little movement from noteworthy resistance. What is moving - or could move - the currency heading forward? On the positive side, the implied rate forecast from Fed Funds futures (specifically June 2019's contract) is the highest level for the contact and generally the loftiest rate in over a decade. The currency is still trading at a discount to that forecast - likely because it carries less fundamental weight. Then we can reference the 2-10 Treasury yield curve, considered a sign of economic potential and a recession warning when it inverts. This spread dropped sharply this past session to halt the modest recover that built up over the past few weeks. Ahead, we will weigh in on sentiment (a theme this week globally) through the business figure from the NFIB. From the Euro, we may have found the bulk of the EURUSD's performance - and likely a hefty portion of the Greenback's weakness. An equally-weighted measure of the currency surged forward but didn't prompt speculation of any crucial breaks. This past session, the Sentix investor sentiment survey slipped and concern over the Swedish election on Sunday is a steady thrum. Today, we will have the Zew's investor gauge, but it too will struggle to move the dial with anything other than an extreme reading owing to concern over the ECB rate decision scheduled for Thursday.
US Dollar Index Chart (Daily)
The Pound Rallies and Swiss Franc Collapses - Will These Moves Last?
Where the Dollar and Euro moves were masked for performance according to what counterpart we evaluated and fundamental cue we assumed was at the forefront, there was clarity in the Pound and Swiss Franc moves. From the Sterling, we had a clear rally evident across the board. Where EURGBP comes with a lot of fundamental baggage and GBPJPY is an effort to override risk trends that are not deeply set, GBPUSD's progress brought the pair yet another technical milestone by closing above the 50-day simple moving average (SMA). If Cable overtakes 1.3050, we will have cleared out a host of resistance; but conviction will remain a matter of 'it depends' on whether we find follow through. Motivation falls to fundamentals, and Brexit is top concern. It is that front that earned the Pound its charge this past session. While the July GDP figure, the trade balance and construction output beat expectations; it was again EU chief Brexit negotiator Michele Barnier that moved the currency. The official said a deal in 6-8 weeks was possible - never mind there was also a story running Monday that UK unions were mulling support for a second referendum. In contrast to the Sterling's overabundance of event risk to work with the Swiss Franc was met with very little in the way of explicit motivation. Nevertheless, the currency that has produced a remarkably consistent and productive rally these past weeks posted a sharp decline Monday. This is only a single day and unconvincing rebalance, but the extent of the preceding climb demands close attention for this unique haven. We discuss all of this and more in today's Trading Video.
GBP/USD Chart (Daily)
If you want to download my Manic-Crisis calendar, you can find the updated file here.
-- Written by John Kicklighter, Chief Currency Strategist for DailyFX.com
