G20 Talking Points:
- Day two of the G-20 summit can dramatically alter the market's performance to start next week...and well beyond
- Holiday conditions will add further uncertainty to market conditions in both the week (July 4th) and months (summer doldrums) ahead
- Top event risk includes NFPs, global PMIs, a BIS annual economic update and RBA decision; but impact depends on systemic relations
What do the DailyFX Analysts expect from the Dollar, Euro, Equities, Oil and more through the 3Q 2019? Download forecasts for these assets and more with technical and fundamental insight from the DailyFX Trading Guides page.
Short-Term Indecision Between Holiday Liquidity and G-20 Anticipation
There remains a conflicted backdrop to the global markets. On the one hand, there is undeniable restraint across the financial spectrum with a modest buoyancy in risk appetite. On the other, anxiety remains extremely high in the background with fundamental threats unrelenting. That has left us with some very difficult trading conditions. There are numerous tentative breaks and reversals that never muster the follow through that the preceding technical pattern seems to promise.
Through the short term, the anxiety has only grown alongside the effectiveness of the fundamental restraint. Heading into the weekend, the obvious risk for markets was the G-20 Summit in Osaka, Japan. Following a first day that seemed to resolve none of the most pressing issues, all the attention turned to the second day where trade wars were expected to find their definitive course between US and Chinese leaders Donald Trump and Xi Jingping respectively. A commitment to walk back their more-than year-long economic standoff could bolster speculative appetite to more closely mirror the performance seen from the likes of the S&P 500 or Dow. That said, the levity in markets these past weeks likely reflect some degree of confidence already priced in and that will struggle to overcome the pull of the US holiday deflating market activity.
Alternatively, if the world's two largest economies fail to compromise, it will invariably lead to further escalation. With both sides vowing not to back down and willing to wait out their counterpart, the situation invites deeper mutual economic pain. While it is possible that both sides refuse an agreement without following through on the their stated next steps (Trump has suggested the remaining $300 billion in Chinese imports could be hit with a 25 percent tariff and China has hinted at a number of options), the market will continue to tally the economic impact of previous measures. Fear has a tendency of turning contagious and only enflaming through thin liquidity conditions.
Longer-Term Troubles Pitting Complacency Against Systemic Issues
The contrast of trade wars stirred by the G-20 summit and the known liquidity drain through Thursday's US holiday creates a very explicit struggle to establish a clear market trend. While not as cleanly defined, we are still seeing the same general unease despite holding patterns in capital markets on higher time frames. Through the medium-term, this past month's buoyancy offered up the best June performance from the S&P 500 in 64 years while the Dow's June was an 81 year record. The first half of the year for the former is the best showing in two decades and we start the new week, month, quarter, half just off of record highs. That sits well with the assumptions attached to the so-called 'summer lull' which shows both a subdued volatility and a measured bullish bias in risk. Fundamentals, however, offer us plenty to worry over. Whether trade wars worsens or begins their long arduous road towards recovery, the outlook for growth has taken on water. How long an risk hold through that.
Chart of S&P 500 and Rate of Change (Monthly)
Looking beyond the forthcoming month, we are dealing with more systemic issues. My principal concern is the extreme highs for US indices - and more restrained excesses of other risk assets - against a backdrop of a very reserved fundamental evaluation. We have passed through various phases of economic trouble, central bank normalization, debt expansion and various 'external' risks; and yet, the markets have held fast. This does not strike me as an indication of true confidence but rather an implacable sense of complacency. That intangible optimism cannot hold forever and is exceptionally prone to recognition of liquidity accelerating develeraging. What ultimately tips the scales will only be known when we look back after the fall out. My primary concern is keeping tabs on the circumstances - such as the gap between cost of entry and value to gauge how fast and far the markets may fall.
Key Event Risk Will Struggle to Land More than Volatility
With systemic pools swirling, it will be difficult for mere scheduled event risk to rise to the occasion of full-scale market catalyst. That is particularly true for the US catalysts for local capital markets and perhaps even the Dollar. The June NFPs and related employment statistics are due Friday, but that is the day between the July 4th holiday and regular Saturday liquidity drain. In other words, this figure will struggle mightily to rouse the Dollar or Dow in a serious way. More consequential and timely are the ISM's manufacturing and services activity reports. This is a good overview of US growth, yet here too, liquidity overrides. If anything the G20 may prove the biggest market mover - with the understanding that improved relationships could ease the need for the Fed to cut aggressively which could inadvertently help the Greenback.
Chart of DXY Dollar Index and Implied Fed Funds Yield Through December (Daily)
Another key event risk on the docket ahead is the Reserve Bank of Australia's (RBA) rate decision. The central bank has been steadfast in its accommodative stance and its rate is already at a record high. They may lower that threshold further at the forthcoming meeting. According to swaps, the market assumes a 75 percent chance that the central bank cuts its benchmark 25 basis points. This is important on a speculative basis, but this simply won't override any committed winds emanating from the trade relationships of the world's two largest economies - which happen to be two of the larger counterparts for Australia.
While not country specific, there is plenty other thematic concern to keep tabs on in the week forward. On monetary policy, the trade wars will present a key prompt for the Fed. Through economic growth, there are plenty of monthly PMIs and sentiment surveys on tap, but my greatest interest rests with the Bank for International Settlements' annual economic update.
Gold and Bitcoin Can See Their Unique Reserve Appeal Leveraged
As we continue to gauge the impact of uncertainty as we move forward, it is important to match resources to problems. For the short-term and punctuated risks of this weekend - and weekends moving forward - it is necessary to find a haven that has significant liquidity over the standard capital market closures. While not a particularly reliable building block of the financial system (yet), cryptocurrency like Bitcoin can offer an outlet which may encourage a weekend hedge to catch.
Chart of Bitcoin and Rate of Change (Daily)
If we are looking for an offset for systemic trouble that undermines the traditional havens and passive yield reach, gold is that outlet. The commodity has at times played the role of inflation hedge, traditional anti-risk asset an Dollar offset. Yet, the real value in this market - again whether intended trade target or simple measure of conditions - is the unique anti-currency properties it represents. The fact that it has risen alongside traditional risk assets like the Dow at a record high should raise mental alarms. Something is brewing in the foundation of the financial system, and the precious metal may represent one of the very few assets that can genuinely provide harbor. We discuss all of this andmore in this weekend's Trading Video.
If you want to download my Manic-Crisis calendar, you can find the updated file here.