Amid Brexit Volatility, Trade War Pain, Earnings - Volatility but No Direction
Volatility Talking Points:
- Trade wars grind on with mixed signals, the US government shutdown is in its 25th day, earnings have offered a lackluster start
- With so many themes competing for attention and without clear progress, the inability to put trend to volatility is understandable
- Top event risk this past session was the Brexit proposal vote and the Pound will likely draw most of the attention today
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The Din of Fundamental Noise Grows Louder
There are no lack of fundamental headlines for traders to lash their ship to at this point - and that is the problem. There are too many competing issues vying for our attention that it isn't clear exactly what can take command of global sentiment, whether the ultimate wave be bullish or bearish. That overload has even helped to curb the recognition that most of those headline issues are fundamentally staged to erode sentiment under most circumstances. How long does this uneasy stalemate last is a game of high-stakes chance. Addressing some of these overriding issues, trade wars remains one of the most pervasive threats. China's trade figures Monday signaled the trade war wasn't causing the direct influence President Trump was perhaps targeting, but there is an obvious slowdown in China's economy in the breakdown. Meanwhile, the message on progress from US officials is a mixed bag and auto industry officials have pled for relief. In response, China announced another infusion of fiscal stimulus (approximately 1.3 trillion yuan) that seems to stoke as much fear as enthusiasm. Meanwhile, Brexit has taken on an international characteristic with the clock counting down with less than 73 days to go. Another count - this time higher - the US government shutdown has passed its 25th day with no sign of resolution. Add to this mix, earnings season and reports that President Trump has floated the idea of withdrawing the US from NATO multiple times, and it is a crowded field.
Chart of the VIX Volatility Index and 100-day Moving Average (Daily)
Pound has the Overt Fundamental Spark
Without doubt, this past session's top fundamental event risk centered on the British Pound. That will likely be the case again tomorrow, but the same surprise reaction is likely to result again. The market's attention was fixed on the long-awaited UK Parliament vote on Prime Minister Theresa May's Brexit proposal. The tally didn't surprise all that much. The MPs dealt May's plan a resounding defeat with 202 for and 432 against her scheme. That was the largest rejection of a sitting PM in modern history. It seems the additional time with the delay from the first opportunity to vote did little good. What's more, after seeing the outcome, opposition party leader Jeremy Corbyn took the opportunity to call a no-confidence vote in the government. This will be debated in the upcoming with the vote coming around 19:00 GMT. As likely as this may seem to the Labour party head, it doesn't look like there is nearly as much wide-spread support for another disrupting election. The vote will no doubt be closer on this issue than it was for the proposal itself. Yet, what should we expect from the Sterling? With the headlines that this event delivered, a fundamental trader who was focused more on the big picture than the context might have assumed the response was an epic Pound tumble. That was exactly the opposite of what we witnessed. The currency rallied after the news - in fact, it was one of the biggest moves for the single unit in such a short time frame (an hour around the vote) in 16 months. There is a discount factor that we saw in the currency itself but there may also be anticipation of a strategy at work. I go into greater detail in a video addressing the event and market's response directly.
Chart of Equally Weighted Pound Index After the Brexit Proposal Vote (60 Minutes)
Dollar and Euro Take Independent Moves that Sabotage EURUSD
Looking at the docket over for the next 24 hours, the Pound will still likely take top spot. The no-confidence vote following the Pound response to the proposal rebuff will not likely build such a wind up, but it nevertheless carries far more risk than most other active themes in our immediate foreground. For the US Dollar, the world's most liquid currency seems to be taking on more of its traditional role as an alternative to more 'interesting' currencies. This past session, we had some low-level data and another round of Fed speak. One of the US central bank's most hawkish members offered up remarks that were decidedly neutral - which is dovish considering her starting point. Implied yields from Fed Funds futures are still gutted from the previous three months, so there is little new to garner from this update. The docket ahead is also limited in its opportunity with more central bank speak and a list of data that may-or-may-not come out owing to the shutdown topped by the TIC capital flows. With this calm sea, the Dollar has taken advantage and staved off the threat of a critical breakdown transitioning into an outright sell off as would be implied from the DXY Index's break. The same technical threat with EURUSD breaking above 1.1500 has had its conviction tripped up. This was in part a Dollar correction and also a broad Euro drop. The headlines were varied in for the world's second most liquid currency from reiteration of Germany's GDP pains, Greece's government facing a confidence vote, Draghi issuing economic warnings and the US ambassador to Germany warning the country's corporations working with Russia on the Nord Stream 2 that they could be at risk of sanctions. We discuss all of this and more in today's Trading Video.
Chart of EURUSD (Daily)
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