A Wild Ride for Risk Trends with an Unusual Trade Wars Update
- US markets reopened after the rememberence holiday to a steep dive, but critical support would hold with an abrupt reversal
- Among a host of themes, trade wars again took top spot on news Chinese firm Huawei's CFO was arrested in Canada for US extradition
- Fed rate forecasts may prove the most productive FX theme ahead while Canadian jobs figures presents the most concentrated data
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A Return in Liquidity Brings are Return in Risk Aversion
The speculative charge picked up where it left off before the US markets closed for the mid-week holiday. Thursday's New York session opened to a rout with a large gap lower from the S&P 500 and Dow with a sustained slide through the first half of the day. When the benchmark indices reached heavy 2018 support, fear of impending doom started to mix with calm rational of a manageable fundamental landscape and the lingering speculative opportunism that markets simply can't shake after a decade of bull trend. The reversal for US markets was impressive between large 'lower wicks' on the daily candles and a quick close of the large 'windows' opened by the gaps that started the day. This puts us in an unusual position into the final trading day of the week. Is sentiment ultimately bullish or bearish? Where the S&P 500 may find itself back comfortably in the middle of its two-month range, the recovery effort for global indices, emerging market assets, junk bonds, sovereign debt yields and more are still struggling near lows following far more significant losses. And, where direction may be up for debate, the persistence of volatility is certainly not. We are already seeing a deviation from seasonal norms with this penchant for sudden bouts of extreme movement and course change which is usually reserved for more active periods of the year. This will keep the market on edge. And, this won't inspire a sudden rush of enthusiasm, but it can certainly trigger waves of panic. Proceed cautiously.
Chart of the S&P 500 and Opening Gaps (Daily)
Trade Wars Takes an Unusual Jog
There were a few fundamental themes in play this past session, but one in particular drew particular concern from the speculative rank. It was reported that the CFO of Chinese conglomerate Huawei Wanzhou Meng was taken into custody in Canada. This may not seem at first blush worth of global speculative interest, but appreciation of the situation spread through the market. Huawei is one of China's largest telecommunications and consumer electronics firms as well as one of its leading technology drivers. Ms Meng is also the daughter of the company's founder. The arrest was reportedly made on behalf of the United States for her extradition. It is not fully clear what is motivating this effort, but there have been suggestions that it was due to banking transactions that were flagged and in turn related to the Iran sanctions that the US had implemented. To global policy hawks and China, this looks like a move by the Trump administration to crack down on its claims of intellectual property theft and perhaps even a tactic to force more favorable terms in its negotiations with China during this 90-day hiatus. Normally, I would say that is a far-fetched claim; but we have seen more exceptional developments lately proven true and the market will nevertheless read into this situation. It doesn't help that the request reportedly made during Presidents Xi and Trump's dinner. This will certainly add fresh tensions to the negotiations, but the fall out may not be immediately apparent unless grievances are aired publicly. Meanwhile, other themes will be circling just around the borders of market weight. The US House of Representatives passed a two-week stop gap budget to keep the government open up long enough to save a new debate for Christmas. Taking up the yield curve stories from earlier in the week, the US Treasury rates have continued to slide, but this is more of a global phenomena. As an aggregate of the US, UK, German and Japanese 10-year yield is testing 2018's low. This certainly reflects a deflated global rate path which is more importantly a byproduct of fading growth forecasts.
Chart of USDCNH (Daily)
Dollar Battered by Trade Balance and NFPs but Fed Forecasts are Top Concern
There was no shortage of scheduled event risk looking to stir the Dollar's convictions this past session. Top listing was the October trade balance which reported a $55.5 billion deficit which was larger than expected, the largest negative gap in a decade and based on the largest import figure on record. That does little to bolster confidence in pushing forward the trade war, but it also won't dissuade the Trump administration. The ISM's service sector report grew unexpectedly (to 60.7), durable goods dropped 4.3 percent, ADP private payrolls fell short of forecasts at 179,000 jobs added factory orders slipped 2.1 percent. With November NFPs and the UofM consumer confidence report due tomorrow, we will up the fundamental ante; but that is unlikely to draw the full attention of the market. Markets will remain fixed on the rapid slide in rate expectations of late. The implied yield from Fed Fund futures through December 2019 have dropped to their lowest level in five months and Eurodollar spreads have dropped just as sharply. This past session, typical Fed Hawk Kaplan said he will counsel patience heading into 2019 while Bostic said the central bank was "within shouting distance" of neutral. We are fast approaching the blackout period leading into the final stretch before the next Fed meeting (December 19). If they are attempting to prepare the market for a downgraded 2019 forecast, expect to see it in their rhetoric - the market has already priced it in.
Chart of Equally-Weighted Dollar Index and Implied Yield of December 2019 Fed Funds Futures (Daily)
Brexit Stalling Pound, Canadian Dollar Owns Top Data Listing, Oil Abides Technicals Rather Than OPEC
In other fundamental news, there are an abundance of headlines surrounding a Brexit going off the rails. Unfortunately, the relentless waves of news do more to keep the Sterling from moving than actually guide it on a specific course. Prime Minister Theresa May is no doubt feeling the pressure as Parliament increasingly makes clear that it is likely to reject her Brexit proposal (on December 11). She laid out the choices as "my Brexit, no deal or no Brexit at all". It is that final option that is most remarkable as it seems to be a threat to conservatives that a second referendum could be entertained. The variety of possible outcomes here is wide, and that leaves a distinct sense of uncertainty when trading the Pound - whether bullish or bearish. Friday, the UK house prices and BoE inflation forecasts will do little to distract from the Brexit, while Moody's sovereign credit rating update for the UK will be registered enhanced risks. In contrast to the Pound, the Canadian Dollar can a more distinct move on a concentrated dose of scheduled event risk. The trade balance and remarks from BOC Governor Poloz this past session kept the Loonie on course with its retreat. The November employment update for the country Friday is a well-known market mover. Somewhere between theme and scheduled update, the OPEC meeting has offered little support to crude oil. The group was unable to agree on a production cut this past session, so they intend to continue the conversation Friday. The slide this past session in the commodity notably held channel resistance and maintains a painful multi-week trend. We discuss all of this and more in today's Trading Video.
Chart of Equally-Weighted Canadian Dollar Index (Daily)
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