QuarterlyTalking Points:
- We have closed out the third quarter and defied seasonal conventions of September, don't be complacent about risks ahead
- 'Impeachment' headlines are still diverting attention from growth fears and trade wars, but these themes could easily hit the markets
- EURUSD continued its slide to lows not seen since May 2017 while gold achieved a more pointed break lower on a head-and-shoulders pattern
See how retail traders are positioning in the Dollar pairs, US indices, broader FX pairs, gold and oil intraday using the DailyFX-IG speculative positioning data on the sentiment page.
A New Month and Quarter Starts
There was significant opportunity for volatility to open this trading week as Monday's session represented the end of September and the third quarter. There is significant account rollover that occurs during these particular periods which can see cracks in speculative conviction thrust to the forefront. Yet, though there has been overnight funding pressure in the US - necessitating large repo infusions by the Fed - the quarter ended without any sharp moves along the fault lines of risk trends. It seems the myriad of fundamental distractions continues to water down any troubling fixation on a particular fear, effectively allowing the dubious tools of central banks to be 'enough' for the time being. Yet, we shouldn't grow complacent on the state of our economy and markets.
Chart Created on Tradingview Platform
As we move into October and the fourth quarter of the year, we find long-term statistics for the benchmark S&P 500 offer further breathing room for the speculative rank's default complacency. Typically, the index posts a hearty advance this month - along with November and December - while volume also peaks. Market activity can reflect depth that can foster a robust recovery or the foundation for a trend, appealing for those that have grown impatient for stalled bull trend of 2019 to reignite. That said, more liquidity can also create an environment for fear to gain greater purchase should it be provoked in a headline development or sudden market move. It so happens that the VIX also peaks historically this month. Conditions (like volume and activity) are more consistent with seasonal norms while direction depends more heavily on what fundamental winds are prevailing at the time. As it happens, our backdrop is overloaded for potential systemic risks.
Impeachment Is for the Headlines, Trade Wars and Recession is for Market Movement
The markets, like society at large, is generally directed by the wisdom and folly of the herd. As such, what is deemed most important by the greatest swath of the speculative line often commands the greatest market influence. It shouldn't come as any surprise that dominant themes are in part a function of coverage That is why the fixation recession generated serious market shudders through the end of August and early September Yet, the top headline at the moment is the ongoing impeachment inquiry into the Trump Administration in the United States. This does not have a readily discernable market impact, and following the lines to a material influence is difficult. That said, the otherwise fragile state of markets founded on complacency can always find issues if so desired. I'm dubious of the theme's influence, but it most certainly has little-to-no 'upside' for markets while it could spark some measure of fear.
Recession fears was a theme that impeachment supplanted from top spot, but concern over the health of the global economy has not simply disappeared. This past session, there was both an overview and run of high-level economic statistics to take in. Credit rating agency Fitch updated its World GDP forecast, lowering it to 2.5 percent in 2020 - what would be an 8 year low. That echoes the OECD's recent downgrade which saw 2020 hitting a clip last experienced around the Great Recession. On the data side, the Chinese PMI figures for September raised some spirits. The Caixin manufacturing report was explicit in its improvement with an entire point jump to a 51.4 reading. The government's figures were more reserve however. The Composite reading edged up to 53.1 from 53.0, a product of this measure's manufacturing improvement which was still within contractionary territory (below 50) at 49.8. Japan - the world's third largest individual economy - reported a 4.7 percent drop in industrial production which clouded out the retail sales climb. Ahead, we have the US manufacturing report from the ISM which should be followed closely as much for trade war implications as economic health.
Speaking of trade wars, the capital markets took a tumble in the afternoon hours of Friday's New York session following reports that the White House was considering caps on US investment into China including delisting Chinese firms from US exchanges. Over the weekend, the Treasury issued a statement said they they were not considering delisting. Trump trade adviser Peter Navarro suggested the same and went on to say the reporting from last week was inaccurate. That said, he didn't shoot down specifics of the claims which leaves investors questioning exactly what the options may be moving forward. In the meantime, it was suggested the WTO may allow the US to slap tariffs on Europe to the tune of $7.5 billion for Airbus subsidies - Europe will find out how much it can levy early in 2020. This will be an 'approved' trade war move, but it will strain relationships nonetheless. Another overlooked update on trade this past session would come on the behalf of the IMF's COFER report. The use of Dollars as a reserve dropped to its lowest level since 2013 - while holdings of Japanese Yen hit an 18 year high. Both are in part the result of trade wars and destabilizing monetary policy.
EURUSD and AUDUSD Follow Monetary Policy, Sterling Traders Ready for Trouble
Monetary policy was a theme that deserved close observation even though it lacked for top headline sparks. If you were looking for official reference to monetary policy, the Bank of Japan's (BOJ) survey of opinions suggested one of the most extreme doves was considering doing even more. According to the transcript, some members advocated for rate cuts while there was a discussion over making decisions to show the market that it still had options to navigate policy - a sign of desperation. Less direct, the Eurozone jobless rate slipped to a two decade low and Germany CPI slowed. That mixed bag didn't stop the ECB from redirecting to more extreme policy last month. Regardless, with EURUSD sliding to its lowest level in nearly two-and-a-half years, the risks run high for 'retaliation'. If President Trump weren't distracted with local headlines, he would likely have already raised loud critiques against Europe for 'devaluing' their currency. This may still happen. Be wary when it comes to the world's most liquid currency pair.
Chart of EURUSD and 50-Day Average (Daily)
Chart Created on Tradingview Platform
If you're following monetary policy, the Australian Dollar is another high-profile fundamental risk. The Reserve Bank of Australia rate decision is one of this week's top official central bank updates. The central bank is expected to cut its benchmark rate another 25bps to 0.75 percent and further diminish its standing as a benchmark carry currency among the majors. The real question is how fully discounted this outcome may already be. AUDUSD and AUDJPY are in interesting positions long-term, but AUDCAD and AUDNZD are more independently reflective of the catalyst at hand.
Another specific 'major' worth watching - but not within the monetary policy realm - is the British Pound. Another run of Brexit headlines pulled FX traders' attention. There were reports earlier in the day that rebels were considering a 'humble address' which is a statement from the House of Commons to the Queen, asking for the ouster of Johnson if he didn't file a request for an extension of negotiations by October 19th. The government seemed to preclude this event's necessity though with reports that a plan meant to deliver details to solve the EU tests would be released soon. Yet, latter suggestions that this plan included 'customs posts' along the Irish border were met with preemptive rejection.
Chart of GBPUSD (Quarterly)
Chart Created on Tradingview Platform
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