Risk Aversion Talking Points:
- The S&P 500 - as a benchmark for broader risk trends - failed to catalyze a critical break Thursday, mirroring gold's stunted H&S pattern
- There was no material improvement in critical themes this past session but at least the US-EU trade war didn't balloon out of control
- As with the precious metal's refusal to catch traction, risk trends will find their direction through underlying bias directed by themes
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.
The S&P 500's Refusal to Break 2019's Floor Evokes Gold's Own Save
Heading into Wednesday evening, the global financial system was in a precarious position. After suffering a broad wave of selling pressure across regions and assets, the day closed to the news that the United States Trade Representative's office was pushing forward with tariffs on the European Union. Not just levies on imported European planes - the foundation of the World Trade Organization's (WTO) ruling - but hefty border tax on key industries including agricultural and industrial goods. With fear of an oncoming recession and a key driver of this pain identified in the US-China trade war, it was easy to see this development turn into a spark that starts a long-overdue blaze. In turn, I and many other traders were on high alert for a critical and systemic shift in risk trends. In particular, I was watching to see if the S&P 500 and Dow as high-flying representatives of speculative appetite would collapse through their respective and overt 2019 trendline supports.
Chart of S&P 500 with 50- and 200-Day Moving Average
Chart Created on Tradingview Platform
Initially, Thursday's session seem to carry forward the risk aversion that could have tipped the scales fully on complacency. The indices traded below the high profile technical levels and other risk assets would follow in suit. At this precipice, we would expect to see panic start to set in and momentum take over as a need to 'de-risk' drove participants to cut exposure with less concern as to the premium they are commanding. That fear never caught however. A rebound from the US indices - with the notable exception of the Nasdaq - held them firmly within their ranges. And it wasn't simply a rebound from a serial outperforming asset class. A smart bounce from rest-of-world equities, emerging market assets, junk bonds, carry trade and more showed the same consistency in performance that an one of the best overall measures of a sentiment-derived market move.
This failed technical move looks very much like the immediate loss of traction by gold earlier this week after producing what was a textbook head-and-shoulders pattern break. After a long climb with a bout of acceleration in the past quarter, two months of congestion had set up a clear tipping point for the precious metal. If this particular facet of the asset's backdrop - the technicals - were all that mattered, there would likely have been an incredible and long-lasting dive to follow. Yet, overtaking support wasn't the only milestone - and it wasn't even the most important one. Fundamentals stalled the commodity as the outlook for economic activity deteriorated for a material impact on risk trends and the expected support from major central banks was both seen coming up short and devaluing traditional fiat assets. This supported the safe haven and anti-fiat appeal of this metal. It would be difficult to fuel a bear move given this backdrop.
Chart of Gold and 50-Day Moving Average
Chart Created on Tradingview Platform
How Fundamental Themes 'Actually' Developed Thursday
The most pressing theme to keep tabs on this past session was the next step in the quickly unfolding US-European Union trade spat. The European Community was purportedly already preparing retaliatory steps to any US aggression following the WTO ruling, but authorities seemingly held their fire after the Trump administration jumped at the opportunity of externally-approved tariffs. EU Trade Minister Malmstrom stated this past session that they believe it was still possible to strike a deal with US counterparts, but that may be setting expectations too high. It is important to understand the position of their counterparts. The White House is under remarkable stress from the House impeachment inquiry and that that will leave lead to a negotiation partner with little appetite for capitulation and no small motivation to escalate external pressure in order to press a perspective of the 'America First' commitment. If European officials see little option other than to respond with tariffs of their own, expect the overview of the global economic outlook to suffer the most.
Chart of EURUSD with 50-Day Moving Average (Daily)
Chart Created on Tradingview Platform
If you want to put trade wars into perspective, their true effect for the average citizen, politician, CEO is through the economic throttling they represent. As it happens, we are already sporting a troubling backdrop for economic growth. The data on tap through Thursday was fairly universal in the downtrodden view it projected. In Europe, the service sector PMIs were largely final readings, but they remarkably managed a downgrade from the initial print with the Eurozone figure dropping from 52.0 to 51.6. Further the UK service sector flipping into contractionary territory (50.3 to 49.5) which threatened recession while the US signaled its own struggle. The ISM non-manufacturing (essentially services), which accounts for over three-quarters of output, slowed far more aggressively than expected from a 56.4 reading to 52.6 (versus 55 expected). With factory activity contracting -0.1 percent and durable goods excluding transportation unchanged, it was clear the US economy was treading water. All of this is particularly discouraging and casts in deep shadow any material 'risk on' efforts that may insinuate themselves into our evaluation.
What to Watch Ahead: NFPs, Powell, Trade War Updates
As we move into the final trading day of the week - with the clear interest on what will fundamentally carry over into the new trading week - it is worth evaluating what carries the greatest potential ahead. Trade wars remain my principal focus with the opportunity for escalation in the new US-EU confrontation a raw nerve for most traders already discombobulated by the US-China confrontation and those reeling from recession fears. Unfortunately, this is a situation that will not abide the calendar, so we will need to keep tabs on the headline if we intend to keep abreast of the meaningful developments. In particular, EURUSD will be critical to watch. I don't think there is a benefactor to this situation, only a 'greater loser'. USDCNH is a good example of this situation.
Aside from the close headline watching, there are a few key event risks that traders should monitor for systemic impact. The US labor report for September will draw a significant amount of interest. There is a distinct status to the monthly NFPs out of the United States, but it seems there is just as much benchmarking to the figure as there is genuine economic implication. The job figures will certainly tap a sensitive risk and economic backdrop, and I will be watching the recognition of these labor trends when we consider underperformance is comparable to unique situation such as government shutdowns and hurricanes that don't bode well for an assessment of what we would consider 'normal times'. The run of Fed commentary is another element to keep tabs on. While there are a number of high-level global central banker speeches on tap, FOMC Chair Powell will take center stage. A dovish rhetoric that lives up to recent, extreme dovishness could throw Dollar traders off - but refusal to acquiesce would be even more remarkable.
Chart of DXY Dollar Index with Implied Fed Funds Yield Through End 2019 and 2020 (Daily)
Chart Created on Tradingview Platform
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