Indices Talking Points:
- Liquidity effectively stalled Tuesday's risk slump, will its return revive the move?
- Fundamental threat assessment tracking for the US-China trade war, yield curve warnings and central bank signals
- Dollar will weigh Fed speak versus key data, Pound anxiously monitors Brexit proceedings, BOC pumps the breaks and Oil struggles
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Wednesday's Liquidity Drain Paused a Strong Risk Aversion, Will Its Return Restore the Pain?
The past session was notably reserved when we evaluate performance through a global sentiment lens. That should have come as little surprise to traders considering the gap in liquidity expected for the US trading session. US equity and bond markets were closed in honor of the recently passed former President, George HW Bush. Sure, it was possible that European, Asian and other American markets that were still open for business could have picked up the mantle to drive a decisive move in speculative positioning - or even simply pay out volatility from their own unique fundamental themes. Yet, the key themes seemed to lack for the necessary drive to overcome the absence of a major financial center's liquidity. Following initial tumbles in European and Asian indices Wednesday morning to account for the acute pain radiating from the S&P 500's and Dow's drop that preceded their sessions, there was notably little follow through during the active sessions. In the futures and FX markets, turnover and trend were notably deflated through the US hours. The question now is whether the return to full liquidity over the next 48 hours will inspire a quick return to the bearish charge that generated no small sense of fear Tuesday. If we considered the drop in US indices through that session - one of the worst daily declines of the year - a building wave of speculative unwind, we could very well expect a ready return to risk aversion. However, I believe much of the drop the previous session was a strategic reduction in risk to avoid unexpected developments during the holiday. If that is indeed the case, a trend or reversal will not be readily triggered without a fresh fundamental or speculative shove.
SPX Chart (Daily)
An Abundance of Fundamental Concerns but a Lack of Necessary Triggers
If we have to rely on a clear and effective fundamental driver to restore momentum to the broader speculative markets, we aren't exactly short on potential drivers. However, there have not been many significant updates on any of these key dramas to allow them the reins simply because liquidity tide rolls back in. Through Tuesday, the fundamental headlines didn't seem to suit the intensity of the move we witnessed - for good reason, as I believe it was more accurately a speculative rebalancing effort. One of the unexpected headlines was the spread of fear related to the US yield curve flattening and even inverting in certain segments. Historically, economists consider such a development a fairly reliable recession signal; but there are many caveats to this, not the least of which is the distortion by central banks' presence. What's more, we have been heading down this route for quite some time, so why the urgency now? We will see whether this story earns a growing sense of anxiety in the days to come, but it would need to generate serious media fanfare to truly regain traction. More reliable in its sway over the global markets is the ongoing trade war. That was another headline that earned serious traction this past week, but the motivation behind the theme deserved serious scrutiny. The risk aversion seemed to translate into skepticism over the efficacy of the 90 day pause in aggression between the US and China, but there was as little reason to doubt the progress now as there was to find true enthusiasm in the last minute pause in escalations. There are few scheduled headlines to anchor progress on the trade war theme in the immediate future, but the tendency is for shake up out of the blue - usually to the detriment of trade and sentiment.
USD/CNH Chart (Daily)
Dollar's Docket Overwhelms, Pound's Focus is Concentrated - Yet Both May Struggle for Conviction
Looking to fundamentals for guidance in volatility and trend, the Dollar and Pound arguably carry some of the greatest potential. And yet, both may struggle to establish a clear trend. For the Greenback, there is an abundance of high level event risk over the next 48 hours - amplified further due to the delayed Wednesday releases owing to the unexpected holiday. One of the few updates that remained in place this past session was the Beige Book. The Federal Reserve's official economic run down for officials to pour over for the rate decision exactly two weeks after the release was generally positive and offered little to reinforce speculation that Powell was attempting to talk down rate expectations last week. Thursday, the calendar will offer up a service sector activity report, the trade balance and private payrolls in advance of NFPs. These updates are important economically, but it remains to be seen if they can strike a market moving nerve. In contrast, the British Pound's focus is otherwise straightforward. Though there is a little data coming across the wires, it will be swallowed up by the focus on the Brexit. We are in the midst of political wrangling that will culminate in a December 11 vote by Parliament on Prime Minister May's proposal that will almost certainly be shot down. That is when the transition to desperate solutions kicks in. To take a stand on the Sterling for the short-term (days or weeks) ahead of this would be bold, to say the least. I will be watching with rapt attention, but it would need to be an extreme confluence of circumstances to raise my confidence to place a GBP trade.
GBP Index Chart (Daily)
The BoC and RBA Make a Case for the Kiwi Dollar, Crude Oil Failing to Affect Conviction
This week, we have seen updates from two major central banks - and, no surprise, both would deliver dovish policy decisions. This past session, the Bank of Canada (BOC) decision ended with the expected hold on rates; but the forecast for further tightening in the foreseeable future was materially diminished by Governor Poloz and crew's assessment of the economic circumstances with diminished oil exports and tempered growth this quarter. According to swaps, the probability of a hike by mid-2019 has dropped from near-certainty just a month ago to less than a 50 percent chance as of today. As for the Reserve Bank of Australia (RBA) meeting earlier this week, the hold and dovish concerns were right in line with expectations. However, the 3Q Australian GDP update compensated with a definitive bearish view on quarterly growth of 0.3 percent that was half the 0.6 percent forecast and 0.9 percent previous state of growth. If the Loonie and Aussie are in retreat, it is unlikely that the Kiwi Dollar will be able to go its own and sustain its incredible rally - whether on monetary policy, speculative appetite or any other theme. Take stock of the altitude of these many New Zealand Dollar crosses and plot out plans for any changes in tack. In other markets, Gold's rally on Tuesday with the charge in volatility stalled this past session. However, the state of risk trends and monetary policy are seeding potential for this precious metal into the future. The more active commodity remains US crude oil. Though it hasn't revived its incredible 30-percent plus bear trend - nor reversed it - the degree of volatility is hard to miss. Pressure is being maintained on the descending trend channel and the upper wicks show repeated failures at turning the trend - Wednesday's tail was the largest since December 2016. It seems the talk among OPEC members to cut production is not having the desired effect by this collective of suppliers. We discuss all of this and more in today's Trading Video.
NZD Index Chart (Daily)
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