Will Dow and EURUSD Range Or Break as Trade War and Recession Fears Linger?
Volatility Talking Points:
- The week ahead represents one of the most reliable periods for seasonal restraint in volatility and liquidity
- With markets taking up the cause of critical fundamental themes - like recession fear - through sentiment, the outlook is unpredictable
- For scheduled fundamental risk: tech companies' testimony Monday, global PMIs Thursday and the Jackson Hole Symposium are top flight
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.
The Biblical Battle Between Seasonal Calm and Fundamental Storms
We are entering the height of the typical summer doldrums, but our present circumstances are anything but conventional. Historically, August is a quiet month in terms of turnover and liquidity which typically earns a reserved but positive performance for those assets that have a risk bearing. Yet, traders have been much more reticent to shift to autopilot and take a vacation from the screens through this year's solstice. That is owing to a persistent harassment from systemically important fundamental themes that draw serious scrutiny to the decade of steady asset appreciation and the value gap it has in turn built over time.
Chart of S&P 500 Seasonality Performance and Volume by Month
There is plenty of scheduled and unscheduled opportunity to stir innate concern over trade wars, recession risk and monetary policy limitations ahead. Yet, despite those fears, benchmarks like US indices have held fast to within easy reach of record highs and the principal EURUSD exchange rate has maintained the least productive pace of activity since the extreme period in the Summer of 2014. While we may not trigger a wholesale trend in the week ahead, it is still a much higher risk than typical and there remains a distinct threat of high volatility.
Chart of EURUSD and 20-Week Average True Range (Weekly)
Chart Created Using TradingView Platform
Predictable Sparks for Trade Wars, Recession Fears and Monetary Policy Fights
Looking out over the coming week, we have scheduled events that will cater to the most systemically-important and market-moving fundamental themes. Chronologically, the most prominent wave to wash up early in the week may very well be trade wars. The deteriorating economic relationship between the US and China may be the common source of headlines, but there are other fronts for which we should be expressly vigilant. A spread of the asymmetrical competition to the critical US-European relationship could readily tip a strained global backdrop into a full-blown retrenchment. As it happens, the largest tech companies - including Google, Amazon and Facebook - are due to testify in Washington on the recently announced French digital tax. These companies will aim to protect their own revenues, but they could inadvertently add cannon fodder to President Trump's push to expand his tariff fight.
Chart of FAANG Index (Daily)
Though there are a host of other notable events in the subsequent 48 hours of trade after Monday's highlight, the next systemically important depth charge hits on Thursday. Given the attention afforded to recession risks across the globe this past week, the run of August PMIs due in the penultimate session of the week could help curb some of the fear or give it firm traction. Manufacturing sector, service sector and composite readings are due as the day progresses covering Australia, Japan, the Eurozone and US. Favorable showing will likely find its reach limited but disappointment will find a speculative rank eager to build upon their existent fears.
Chart of JPMorgan and Markit Global Manufacturing PMI
At the end of the week, we find the most important event risk - and the least concentrated. The Kansas City Federal Reserve-hosted Jackson Hole Symposium begins on Friday and runs through Sunday. This annual gathering of global central bankers, financial leaders and even political leaders covers the most important issues facing the global economy and markets. This year the group will no doubt address the scourge of trade wars and its unmistakable impact on the global economic outlook. Given the threat of a stalled economy, monetary policy in an era of stretched traditional tools will likely come up - if obliquely, considering the authorities don't want to highlight their own impotency against futures financial risks.
A Market Increasingly Going Off Script for Is Thematic Concerns
If markets were to stick to the docket, it would be convenient for those attempting to schedule their volatility. Also, if markets were to reserve the big moves for the timed updates, it is more likely that we simply see a reversion to the seasonal lull that we typically expect around this time of the year. If market direction and volatility is saved for key events, there is a certain degree of probability of 'favorable' versus 'unfavorable' outcomes - not to mention the 'in-line' scenarios which see markets drift. Further, waiting until the end of the week for the Symposium or the weekend G-7 leaders' summit would rein in market action as anticipation anchors expectations. That said, market speculation itself is starting to play a greater role in the interpretation and timing of fundamental themes. Consider the influence of the 2-10 Treasury spread which caused a jolt of recession panic this past week with its inversion. It is a high probability that this popular segment flips negative once again over the coming week. Be prepared for an alert market to respond in kind.
Chart of US 10-Year to 2-Year Yield Spread (Daily)
Range or Run for EURUSD, Dow and Gold
With the seasonal expectations working against the systemic themes, the focus ahead should be on the standing of key markets that find themselves at the balance of key technical transition. The Dow and S&P 500 for example found a floor in the vicinity of 2019 support this past week, helping to fend off the recession fears that tipped these and many other 'risk' measures into an aggressive - but short-lived - dive through Wednesday specifically. If the S&P 500 clears 2,825 and/or the Dow 25,200, I think the we could enter a self-sustained tumble that doesn't need a fundamental chaperone to usher us into a contraction.
Chart of S&P 500 (Daily)
Chart Created Using TradingView Platform
If risk aversion is to deepen through growth issues or some other elemental concern or should one of the systemic fundamental themes simply raise the specter of fundamental instability, a haven that should be first on your watch-list is gold. The precious metal has profound advantage over government bonds burned by extreme monetary policy, 'funding' currencies in carry trades that were never built up for unwind and US-based assets that are undermined by the blowback likely from belligerently pursuing trade wars. As economic and financial troubles spur the demands for help and governments refuse to collaborate for their protectionist ideals, central banks will be leaned on. They will be ineffective as they try to reanimate dead policy efforts, but they will be effective in devaluing traditional fiat assets that support few viable alternatives other than gold.
Chart of Equally-Weighted Gold Index and Consecutive Candle Count (Weekly)
Monetary policy is the backup plan upon which investors unconsciously place their conviction, not really worrying about the feasibility of these stretched source of reinforcement until pressured. The market is still placing inordinate conviction behind an aggressive easing policy from the Fed through the end of the year. That will either leave the market disappointed by the group's intended 'measured' pace or fear will need to build pace to force the group to meet demands. In contrast, it seems the ECB is already committed to revive the extreme policy. Oli Rehn this past week suggested a massive stimulus upgrade is coming from the group at its next meeting, and the markets were clearly intrigued. The question is whether the program can truly meet - much less beat - expectations. We discuss all of this and more in this weekend trading video.
Chart of EURUSD with German-US 10 Year Yield Spread (Weekly)
Chart Created Using TradingView Platform
If you want to download my Manic-Crisis calendar, you can find the updated file here.
What fundamental themes should you follow next week? How will they impact the markets at large? Sign up for our webinars to better evaluate how market developments are shaping markets. Sign up on the Webinar Calendar.
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.