Trade Wars Talking Points:
- With all of the unresolved high-level fundamental themes this past week, traders voted a top concern for trade wars this week
- To start the week, the escalating US-EU trade war offered no progress while the headlines showed a very conflicted view of US-China relations
- Growth concerns were bolstered out of the gate Monday as well with the World Bank president issuing warning before the IMF-WB meetings
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Traders Vote on the Top Fundamental Theme This Week
I ran a poll through this past weekend asking traders what they believed would be the top fundamental theme to move the markets this week. Even if there were more options and/or votes, I think the result would have been the same. At the top of the majority's list to stir volatility and potentially charge trends moving forward was the state of trade wars. That makes sense for a few reasons. As traders, we typically look for the early signs of substantial market movements; and that more readily puts us onto 'catalysts' rather than 'outcomes' in the hierarchy. In that spectrum, trade wars is a well-known and frequent spark over the past year-and-a-half. What's more, we left off this past week in a very precarious position as the United States had taken the WTO's ruling on the Boeing-Airbus dispute as divine right to pursue competitive trade policy. No public resolution was offered as of the start of this new week yet the EU hasn't retaliated to the United States' 25% tax on imports of their agricultural and industrial goods. It is unlikely that this holds in limbo for long though.
The more pressing headlines related to trade this week were between the familiar competitors of late: the United States and China. It is not a surprise to see these headlines, but it was the extreme contrast in their evaluation that was truly striking. On the one hand, there were many articles and analysis that reflected on the warming relations between these two economic behemoths in the lead up to the restart of negotiations later this week. This perspective hit upon reports that China was buying US soybeans in the lead up, that President Donald Trump reiterated non-committal remarks that a deal could be struck and White House Economic Adviser Larry Kudlow's assurance that delisting Chinese companies from US exchanges was not being considered. On the other hand, there were very concerning headlines that the US Commerce Department had added 28 Chinese officials and organizations to its economic blacklist, while sources warned Chinese Vice Premier Liu He was coming to the US with a mandate that the key intellectual property matter would not be on the table. That latter piece would theoretically be a non-starter for the Trump Administration. So what is our state? Watch for headlines on this as it will be critical to USDCNH, AUDUSD and risk trends in general.
Chart of EEM Emerging Market ETF with Inverted USDCNH (Daily)
Chart Created on Tradingview Platform
Recession Fears Stirred Constantly and Monetary Policy Can't Be Ignored
The second most troubling matter for this week according to my poll happens to be my top concern overall - shy of a systemic, self-sustaining cycle of speculative deleveraging (risk aversion). Fear of general growth concerns or full-blown recession risk is difficult to ignore considering the wave of global data is struggling or inverting while the warnings from officials is not clearly routine. There were a few data points that added fuel to the fire Monday including the Germany factory orders figure which dropped -0.6%. My principal concern would fall onto the warning from the World Bank President David Malpass however who said the outlook was increasingly troubled between the cumulative issues of trade wars, Brexit and Europe's economic troubles. This is a warning being issued before the IMF-World Bank regular meeting which issues official updates on the state of the global economy and financial stability. To that point, the new IMF Director Georgieva is due to speak on Tuesday.
While trade wars and growth concerns are front-and-center, that doesn't absolve us from the impact that other critical themes can have on the broader financial system. Monetary policy for example is running through a wave of scheduled updates and more abstract evaluation of the critical foundation's effectiveness. This past session, the Fed's George and Kashkari gave the perspective of the entire central bank's spectrum. Ahead, we have BOE Governor Carney, Fed Chairman Powell and an assortment of major central banker officials due to speak. It is possible they can say something shocking that earns some relative impact for the related currency. However, my interest remains with the more critical evaluation of whether monetary policy is effective or not for stabilizing markets and promoting growth going forward. The Bank of International (BIS) remind us the distortions being felt from the extreme monetary policy from the world's largest banks. Malpass would also issue his concerns when he reiterated his criticism that the approximate $15 trillion in government bonds with a zero or negative yield was leading a growth-defeating 'frozen capital'.
While some of the previously mentioned themes are jostling for position, they are at least well-known market movers in their own right. One alternative matter that has potential global impact but which doesn't have explicit traction nor is well established on the spectrum is threat of political pressure. The US-Iran tensions have not eased over the past few months, they have simply faded into the backdrop. In the meantime, it seems a new front in the Middle East / Western standoff is opening up between the US and Turkey. The White House announced it would be pulling US troops from Northern Syria which drew significant criticism and reports that Turkey was preparing to take advantage of the strategic shift. The President responded by saying he would 'obliterate' Turkey's economy if they took offensive action. Naturally, the USDTRY responded to the rhetoric; but the global implications are far from full reflected in the market.
Chart of USDTRY (Daily)
Chart Created on Tradingview Platform
Situational Trouble and Appeal for Pound, Euro, Yen, Gold and Oil
As usual, not all assets are whole plugged in to the proceedings of the systemic - whether with prevailing trends that deviate from conflicting event risk or anchored against alternative cross trends. Once again, the Pound was keeping its attention fully fixed on local issues. There was traditional event risk to take into consideration Monday that otherwise failed to stir speculators' attention. The BRC's retail activity report signaled sales through September dropped 1.3% which was the worst showing for that particular month on record. There is little mistaking that report's Brexit connections. And that is where the market's focus automatically shits. The Scottish courts ruled against an effort to force the Prime Minister to seek an extension on Brexit now, but the market is still warming to the belief that a no-deal will be avoided on October 31st, at least delayed if not permanently avoided.
Chart of GBPUSD with Pound Volatility Index (Daily)
Chart Created on Tradingview Platform
Among other currencies worth watching, the Euro had key event risk on tap with an investor sentiment survey from Sentix dropping deeper into negative territory (-16.8 vs -13.0 expected). The bigger issue with the world's second most liquid currency runs into the more elemental: the ECB's policies are increasingly extreme an questioned for effectiveness; recession fears are starting to hit serious levels and the region is at risk of falling squarely into the United States' trade war focus. That will materially change the currency's standing. The same fluidity is present when it comes to the Japanese Yen. I don't consider this a safe haven in the traditional sense, but its funding status in a latent carry trade through lean years of yield still matters. This past session, the Yen crosses generally jumped, but not with much gusto. Watch it's responsiveness to both trade wars, risk trends and reserve redistribution.
Chart of Equally-Weighted Euro Index and Euro Volatility Index (Daily)
Chart Created on Tradingview Platform
Finally, the commodities should be a regular part of our regular analytical rotation. Gold remains the best alternative to traditional currencies that are quickly losing their reserve appeal - as there is very little interest in shifting exposure to far smaller and thereby significantly more volatile alternatives. That leaves the precious metal among the very few reasonable alternatives. Consider this role on days like Monday or periods like the failed head-and-shoulders neckline breakdown last week when tentative slides tempt bears towards moves that have limited fundamental potential. A slide from oil on the other hand seems to have been postponed with a bounce on range support just above 50, and retail CFD traders carry remarkable confidence in the bounce. Yet, the fundamental connection to both economic forecast and general risk trends calls into serious question the ability of slowly lifting this market to a meaningful range swing.
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