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S&P 500, Dollar, Pound Volatility Return Alongside September Liquidity

S&P 500, Dollar, Pound Volatility Return Alongside September Liquidity

What's on this page

Volatility Talking Points:

  • US markets reopened after the holiday weekend to a seasonal shift and plenty of strong fundamental winds to weather
  • Trade wars were on display with the US and Chinese adding new taxes while recession fears were fed by a run of indicators confirming pain
  • A late-in-evening Brexit vote by the UK Parliament seemed to push back PM Johnson's bid to keep a 'No Deal' solution at the fore

See what live coverage is scheduled to cover key event risk for the FX and capital markets on the DailyFX Webinar Calendar.

Where Liquidity Meets Steady Pressure from Fundamentals

The US capital markets were back online Tuesday and with their return came the attention of investors across the world. As much a result of habit as practical curb on participants, the Labor Day holiday is indirectly observed by the speculative world and treated as an extension of the 'summer doldrums'. It is also the unofficial transition point into the more active fall period. And, we were already seeing the market live up to historical expectations through Tuesday's active trade - with more than a little help from persistent fundamental waves crashing on our top headlines. A jump in volatility was not unusual to see this past session, and many of the moves were still qualify as corrective in nature. Yet, with these particular developments, we find a more loaded threat of triggering moves with follow through.

Chart of the S&P 500’s Seasonal Performance and Volume

The return of liquidity is no small matter when it comes to evaluating the trading conditions in which you will operate. Thinned liquidity as with holidays, before major event risk or during other seasonal lulls can amplify volatility but also kill the capacity of follow through. With market depth, we may cap some of the amplitude from the most extreme shifts - not something we should miss given the impracticality of positioning for such random events - but we also find greater capacity for meaningful trends to develop. That presents considerable potential with many risk-leaning benchmarks (like the S&P 500) swinging aggressively within tight August ranges. With the right amount of pressure, we may find a break with enough market behind the development to keep it running.

Chart of S&P 500 and 60-Day ATR Relative to 60-Day Range (Daily)

Chart creating using the TradingView Platform

Trade Wars and Recession Fears Prevail

Crossing the invisible border of liquidity hasn't changed the fundamental backdrop much. The key themes continue to pose significant risk to the ill-deserved complacency. Trade wars were immediately on display to start this new trading week as new US tariffs on Chinese goods went into effect on September 1, as did the planned retaliatory taxes on US imports into China. Announced last month by President Trump in a tweet, the original $300 billion in goods that would come under a 15 percent tax (escalated from 10 percent after China announced plans to retaliate) was significantly reduced, but it is still unclear what percentage of the remaining imports from the country will on the list come December 15th through the second wave. China for its own part only moved on approximately a third of its stated fresh tariffs.

Chart of USDCNH (Daily)

Chart creating using the TradingView Platform

Both sides spacing their rollout of the economic burden and even pulling back on some of the most extreme threats likely see their own actions as good will. Unfortunately, they both continue to see themselves to be 'in the right' and merely retaliating to the aggression of their peer. It will be difficult to find a middle ground when some degree of capitulation is necessary. A story that should raise the concern of most traders, it was reported by CNBC that back on August 23rd when the US President heard that China was preparing retaliation for the latest US tariffs, that he was upset and wanted to double the tax rate. Apparently, calls prompted by the US Trade Representative and Treasury Secretary by key American CEOs on the economic impact that would have cooled the fire - but for how long?

As the trade war continues, the pressure on the global economy continues to accumulate. The first 48 hours of trading brought a run of economic data that was well positioned to offer a comprehensive overview of economic activity. The reading was not an encouraging one. The Chinese PMIs for August were little changed, but the manufacturing sector was still underwater - and government figures trumped Caixin's improvement. The US manufacturing sector reported contraction for the first time in three years, while Europe's largest economy (Germany) reported a final reading deep below 50 and the UK posted the worst figure in 7 years.

There are further, traditional growth-oriented updates on the docket for the coming days, but the market may resort to its new favorite measures in US Treasury yield curves. The 10-year to 3-month spread is still well into inversion, but the market's favorite 10-year to 2-year poked its head back above the zero mark. I wouldn't take any of these individual readings too literally and instead evaluate it comprehensively - which doesn't offer a favorable signal.

Chart of the 10-year to 3-Month Treasury Yield Curve and US Recessions (Monthly)

Chart creating using the TradingView Platform

The UK's Brexit Position Adds Complication - A Boon for the Pound?

As the markets were filling back out in earnest for the new week/month/season, there was a more targeted event in mind for global traders: Brexit. US traders weren't the only group coming off recess, the United Kingdom's MPs were returning to a far more complicated situation following Prime Minister Boris Johnson's efforts to suspend Parliament while they were off in a bid to keep a 'No Deal' Brexit scenario front and center. The upheaval this move caused wasn't fully appreciated by the government, however, with a late evening vote rendering a 328 to 301 vote that would shift the Common's agenda back into the control of Parliament.

The vote itself proved far more substantial for rebels than expected, but it wasn't exactly the catalyst for the day. That specific shift was established when a single Tory MP, Philip Lee announced he was defecting to the Liberal Democrats to officially remove the Conservatives' majority. The Sterling responded with a rally that was only moderately boosted by the official landslide much later. Why would the Pound rally on more government uncertainty to make the UK's position in future negotiations unclear? The diminished probability of a split without replacement trade deals is considered a boon for the Pound, Euro and global market at large.

Chart of GBPUSD and ‘Tails’ (Daily)

Chart creating using the TradingView Platform

Monetary Policy Highlights from the Fed to RBA to BOC Draw Scrutiny

Another systemic theme that is stirring direct interest in particular regions/currencies but which can readily escalate to a global driver is the state of monetary policy. My contention remains that this is a safety net upon which the market has cast far too much dependency and is starting to unravel under closer scrutiny. The central banks may have taken a few strategic moves to back out of extreme accommodation, but not nearly enough to reset their position to fight future fires. Far from it. In that light, the Federal Reserve's intentions were being discussed again Tuesday with a few members on the wires. The most notable remarks were made by our present top dove, St Louis Fed President James Bullard. He would suggest further easing was necessary and a 50 bp cut would put the central bank back into alignment with the market's assessment. The question I have is when will the President feel it time to act to compensate for the Fed's inaction?

Meanwhile, the Australian Dollar has received some much-needed relief from the Reserve Bank of Australia's decision to hold off from an aggressive pace of easing following its efforts already this year. The RBA wasn't expected to cut at yesterday's meeting, but the market was still appreciative of the tone tempering the currency's rapid loss of its coveted carry trade status. It also doesn't hurt that the run of surrounding data was generally supportive - from the current account balance to corporate profits. The ball continues to roll with 2Q GDP due today.

Chart of AUDCAD (Daily)

Chart creating using the TradingView Platform

Another monetary policy decision to keep tabs on in the forthcoming session is the Bank of Canada (BOC) rate decision. One again, this is not a meeting that is anticipated to end with a 25 basis point cut, but the market is very intent to garner any insight into their intentions moving forward. The Canadian authority stands as one of the most hawkish (that term used very loosely and very much relative) major central banks still standing. Either reinforcing that unique stance or reversing course could lead to a substantial Loonie response.

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.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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