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Talking Points:

  • The two-day G20 summit begins today with the market particularly fixated on the outcome of Trump and Xi's conversations
  • It was reported that the White House is warming to a compromise with China which could capitalize on the post-Powell rally
  • US rate forecasts further deflated as PCE eased, Euro awaits data for the ECB's dual mandate and Canada will respond to 3Q GDP

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Anticipation of G20 Handily Overpowers the Motivation from Powell

It seems the avalanche of enthusiasm following the Fed Chairman's subtle, dovish shift in tone didn't make waves beyond the US trading session Wednesday. The rally from the likes of the S&P 500, Dow and Nasdaq 100 the day before last was exceptional - not record-breaking but hearty enough to raise speculative confidence that a full range swing back towards record highs could take root. Yet, considering the charge didn't even cross the regional barrier into Asia trade Thursday, it was clear that the headlines weren't material enough to call the bulls to arms for a steady march higher to fulfill the seasonal run. While there is good reason to believe that Jerome Powell's measured change in rhetoric was an intentional signal to the market that the group would throttle back from its impressive hawkish clip come its next rate decision (and specifically through the Summary of Economic Projections) just over two weeks away, does that necessarily pose a systemic charge? For the Dollar, there is premium to shed via the currency's carry trade advantage. Add a little risk aversion to that mix, and the pain could actually prove troublingly productive. However, for speculative assets like equities, there is no longer the sense of a 'windfall' when a major central bank defers to a slightly more dovish policy decision. In practical terms, the US central bank is still removing accommodation - just at a slower pace. Furthermore, it easing back from its previously established path because it perceives trouble ahead. Markets are no longer mollified by the yield chase. They are mindful of economic troubles that can turn into speculative rout. In contrast, anticipation can host a wide range of fears when an event like the G20 is involved. The summit of leaders from the world's largest economies will cover a wide array of issues over the Friday-Saturday gathering, but much of the focus will be on the US-China trade relationship. There have been reports that the US President is growing concerned about the long-term economic impact of the ongoing trade war and looking to ease the tension. His remarks seemed to refute that stated concern. Given that this will wrap on Saturday, it would be wise to shed risk-leaning trades that you are not confident in before Friday's drain.

Chart of the S&P 500 and Opening Gaps (Daily)

Rumors Over US-China Trade War Concentrate Market Focus on G20 Meeting

The Fed's Favorite Inflation Indicator Adds Weight to Dovish Fears

While capital markets with a risk lean wouldn't be able to sustain their steady lift Thursday, the Greenback would still coast lower on the pain impacted by a more cautious Fed Chairman's statement. If you were skeptical that Jerome Powell's remarks Wednesday were an intention adjustment to the central bank's finely tuned forward guidance tool, the data over the following session was a little more difficult to overlook. While pending housing sales suffered while personal income and spending grew more than expected, the central bank's favorite inflation report reported material slowing. The PCE deflator (derived from the same metrics used to calculate GDP) for October noted a tangible disappointment. The headline inflation reading held at a 2.0 percent clip - the exact target level for the FOMC - against expectations of a slight acceleration. The core figure on the other hand slowed faster than expected while the previous figure was downgraded unexpectedly. At 1.8 percent, this price metric is running below the Fed's stated objective of 2.0 percent annualized inflation. A pace of 3 (2019) or 4 hikes (2018) is aggressive with inflation merely meeting the target, but keeping to that charge as it tempers is certainly worth second guessing. Where equity indices didn't continue their climb this past session, the Dollar extended its slide. Ahead, the Dollar will find little stir the rate speculation pot, but New York Fed President John Williams (in charge of the group's connections to capital markets) remarks may represent greater heft than we otherwise thought possible owing to the environment.

Chart of the DXY Dollar Index and Implied Fed Funds Yield through December 2019 (Daily)

Rumors Over US-China Trade War Concentrate Market Focus on G20 Meeting

Euro Will Reference the ECB for a Change, When is the Next Tangible Brexit Update

With something like the G20 ahead and the Dollar slowly being usurped at its own monetary policy game, it can be easy to lose track of more targeted developments on the global docket. For now, neither the Euro's existential concern over Italy and the Pound's Brexit mess command the full influence of the speculative rank. However, that shouldn't mean that we grow complacent on two of the greatest threats to volatility (and opportunities for the discerning trader). For the Euro, news this past session that the region's confidence measures (economy, consumer, business) had its scales tipped with the unexpected (to me) update from European Central Bank on financial stability. The group voiced a range of concerns that included regional issues like the UK divorce and Italy's budget standoff. It is not difficult to imagine that reticence to the first rate hike is growing. But, just how much fodder will there be for the group to throw cold water on an overdue retreat from emergency monetary policy? We will see in the upcoming Euro-area unemployment and consumer inflation measures. These two indicators represent the central bank's mandate for monetary policy. If it is week, the hopes of a rate hike in the fall of 2019 will all but collapse. Meanwhile, the Pound's connection to Brexit is unrelenting. Yet, short of the December 11 Parliamentary vote on Prime Minister May's Brexit deal, we may not get any serious commitment from speculators - and certainly not conviction in enthusiasm. This past session it was reported that Lawmakers were reaching across the aisle to reject the Prime Minister's plan which only compounds the fast dwindling time frame for critical progress on the separation. As for anecdotal evidence of pain, a German lobby has suggested 800 billion euros in assets could find its way from London to Frankfurt owing to this path and certain polls indicate a growing preference for 'no deal' instead of May's own policy.

Chart of EURGBP (Daily)

Rumors Over US-China Trade War Concentrate Market Focus on G20 Meeting

Some Concentrated Volatility for the Loonie, Emerging Market Currencies and Oil?

With the G20 ahead, the Fed up to something suspicious and Brexit and Italy are open-ended in course, there is just as much distracting the market from plotting out a clear trending course as there is refining conviction. It can be difficult to get away from the anticipatory features of the speculative landscape - and ultimately, it is important to attempt to. Trading the Dollar, Euro and Pound is likely taking the health of your account into your own hands. Yet, not everything is so bound to complex issues. The Canadian Dollar is just one such option. The Loonie has been drifting lower as of late despite a generally encouraging backdrop. Perhaps the third quarter GDP (rounded out by a monthly September update) will clear some of that fog. It is regardless a good starting point for the Loonie into the coming week when the markets will return to the existential question: will the BOC overtake the Fed in the foreseeable future. Canada isn't the only country due to report high level growth statistics. Both Brazil and India are due to report third quarter statistics which will both offer context for the emerging market connection to trade wars capitalize on impressive technical patterns. Finally, we should still keep active tabs on oil. Some would assign OPEC rhetoric the responsibility for the commodity's rally this past session. However, their assessment of shale oil business in the US smacks of jawboning market prices. Volatility is possible, but don't base full trades on that. We discuss all of this and more in today's Trading Video.

Chart of Equally-Weighted Canadian Dollar Index (Daily)

Rumors Over US-China Trade War Concentrate Market Focus on G20 Meeting

If you want to download my Manic-Crisis calendar, you can find the updated file here.