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Talking Points:

  • Risk and growth-related assets surged to start the week on news a 90-day pause on US-China trade war escalations
  • The S&P 500 posted its third largest bullish daily gap in a decade, the EEM ETF cleared its channel and AUDUSD broke a H&S pattern
  • Brexit tides rolled back in on legal challenges, Dollar's slide paused as Powell's speech was delayed and oil shirked OPEC news

What are the possibilities and risks in the US-China trade war moving forward? How is the Dollar positioned for the shift in Fed policy moving forward? Are there trends to be found before the year's end? Bring your trading, market and strategy questions to the Tuesday Trading Q&A Webinar. Sign up on the DailyFX Webinar Calendar.

Presidents' Trump and Xi Announce a Pause in Their Trade War

As anticipated, the G20 summit this past Friday and Saturday was a reflection of discord between some of the world's largest economies and their leadership. Yet, also as expected, the inevitable update on the US-China trade relationship delivered a sharp market response on Monday's open. Though there was little opportunity for the countries to make meaningful progress in their steadily-deteriorating trade relationship in the official course of the summit, the dinner bringing together Chinese President Xi and US President Trump would signal the market one way or the other. If the two sides did not announce a halt or reversal in their economic sanctions, it would at the very least ensure the sharp increase in the import tax on $200 billion in Chinese goods currently under tariff by the United States. And, there was further the open threat made by the President to add the final $267 billion in goods from its trade partner to encompass the entirety of China's exports to the US. Instead, the sides announced progress - the bare minimum of progress, but progress nonetheless. A 90-day delay to the tax increase allows more time for diplomacy to gain traction, but time wasn't the hold up in the first place. Perhaps the appointment of US Trade Representative Lighthizer will encourage more progress than the impasse inspired by voices like Navarro and Kudlow.

USD/CNH Chart (Daily)

S&P 500 Gaps Higher after US-China Trade War Pause, But Is It a Trend

The Fundamental and Conditional Landscape for Risk

If the trade wars between the United States and China were the only major fundamental risk plaguing global markets, there may very well be significant trend potential to follow Monday's impressive charge. The S&P 500 led the day with an impressive bullish gap on the open - the third largest in the past decade. This was a move that translated to all the major US indices as well as their European (DAX and FTSE 100) and Asian (Nikkei 225 and Shanghai Composite) counterparts. It was indeed a charge that seemed to inspire risk appetite across the asset class boundaries. Carry trade in Yen crosses, junk bonds and emerging market assets were all confirming the broad buoyancy in speculative assets. In particular, the EEM ETF's gap higher was technically impressive with the break of a multi-month descending trend channel that would otherwise register as a possible trend reversal. That begs the question: how much 'run' is there following the impressive gap to higher to start the week? There is little doubt over the breadth of the move for capital markets to start the week, but there was also immediate doubt in the intention for follow through. Despite the bullish gap to start the week, there was little to no follow through from the S&P 500 and Yen pairs through the active session. Practically speaking, easing the tension between these two economies does delay the threat of a global slog but it doesn't reverse the course we are on. Slowing growth, troubled monetary policy, geopolitical risks and more define the environment in which we are navigating. Further complicating this propensity for volatility is the expectation for liquidity to deflate over the coming weeks. It is possible that a true recovery in sentiment and capital markets can take root, but it would be a very unlikely path to weave.

SPX 500 Chart (Daily)

S&P 500 Gaps Higher after US-China Trade War Pause, But Is It a Trend

Dollar's Tumble Earns Respite While Pound's Brexit Anxiety is Back on Track

While our primary concern with navigating the capital markets should remain the global scope of trade wars and risk trends, there are other issues that can churn more than their fair share of concentrated volatility - and potentially spill over into global territory with the proper provocation. One of the more prominent boons for US equities and threats to the Dollar this past week was Fed Chairman Jerome Powell's remarks on policy. While some would dispute the significance of his statement, saying it was merely reiteration of the obvious, I believe it was a meaningful adjustment of the central bank's primary policy tool: forward guidance. Stating his view that the Fed is closer to the neutral rate range is more likely a concerted effort by the group to acclimate the market to a downgraded forecast without triggering concern over the reasoning why such a tempering is necessary. If indeed this is the intent - and the Dollar will is set on a course for more significant retreat - we would expect to see further effort to discount this shift in view through official speeches. Powell's testimony before the Joint Economic Committee would have been the perfect follow up to pace the adjustment to the December 19 FOMC decision, but the event is now delayed owing to the market close in honor of former President George HW Bush. Where the Dollar's move has been throttled, the Sterling has been revived. An equally-weighted Pound index shows the currency dropped to 13-month lows on news that MPs were demanding full legal advise from the government following the attorney general's summary of the 585 page document Prime Minister May has the European Union initially in agreement with. With each day that passes without a clear resolution between the UK and EU, the cost of delay will increase. The Pound will likely pay for this with altitude.

GBP Index Chart (Daily)

S&P 500 Gaps Higher after US-China Trade War Pause, But Is It a Trend

Comparing Gaps from the Aussie Dollar, Kiwi, Loonie and Oil

Elsewhere, gaps from the US-China trade news echoed further and further out from ground zero of the deal; but if there is doubt over the continuation from those assets that would benefit most, how is the outlook for those further out on fringes of the news. The Australian Dollar arguable represents one of the most closely established benefactors from the news that isn't China or the United States. The country managed to avoid full-blown recession during the height of the Great Financial Crisis in large part due to its trade relationship to China. That connection can work for and against Australia, but the threat of steady deterioration in demand for raw material exports certainly registers as a positive development. Given the general lean on the Aussie Dollar these past few months and the technical picture of AUDUSD (an inverse head-and-shoulders pattern breaking its neckline), this seems like a harmonious opportunity. The problem however, is a laundry list of Australian event risk from the RBA rate decision to 3Q GDP to trade and numerous other indicators. In comparison the Kiwi Dollar has the same general China connection with a quicker pace of independent climb and little event risk on hand. Yet, as far as the New Zealand currency has run, extending the run without genuine enthusiasm for risk appetite may prove difficult. The Canadian Dollar is further removed from the secondary benefactors with its own trade efforts with the US taking precedence. Yet, that major hurdle has passed and the Loonie still hasn't repriced to fully reflect the unique hawkishness of the Bank of Canada (BOC). That may change with the BOC rate decision Wednesday. Then there is US crude oil. The commodity posted its biggest daily gap higher since March 2016 which also happened to be the biggest bullish gap over a weekend since December 2008. The no doubt owes much of its performance to the trade news, but there are still risk, growth forecast and supply-demand factors to account for. And, news that Qatar is quitting OPEC doesn't bode well on this front. We discuss all of this and more in today's Trading Video.

AUD/USD Chart (Daily)

S&P 500 Gaps Higher after US-China Trade War Pause, But Is It a Trend

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