Dow Talking Points:
- Another strong gap higher for risk trends finally earned Dow its record high, and the ACWI global equities measure is within reach
- Trade wars was the top theme to start the week with enthusiasm around US-China relations, but an afterhours headline brings in storm clouds
- An RBA rate decision holds potential Tuesday but top event risk on my list is the US service sector activity report from the ISM
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Another Gap to Record Highs Finally Inspires the Dow
Risk appetite opened with another strong charge on Monday's open; but where there was breadth to the move, there wasn't a lot of immediate follow through to anchor anticipation for momentum where there may be some otherwise inspiring technical cues. The statistical highlight of the opening session this week was once again the extended run for US indices. Strong bullish gaps to relieve pressure built up over the weekend notched fresh records for the S&P 500 and Nasdaq, but it was the Dow's effort to finally join the crowd that stood out. As far as this category of high-flying asset can reflect a scale of risk, the Dow is the blue-chip and therefore imbued with a little more stability and majority than its peers. Its jump adds a little more confidence to a group that is already notably throwing caution to the wind.
Chart of Dow with Opening Gaps (Daily)
Chart Provided by TradingView
Yet, even with this trifecta of US equity benchmarks earning records, my position on the risk-reward balance in the open market hasn't changed. There is still an extraordinary amount of exposure to risk (reach for yield) against a practical backdrop of limited return and remarkable disconnect from financial/economic troubles that are already at hand. I'm not against trading a long-risk move but my preference is to seek out areas were there is perhaps less saturation and premium to value isn't already pushing extreme levels. And yet, that isn't where the market is seeking its marginal exposure to the uneven backdrop of sentiment. Instead, market participants are showing greater deference for exactly those assets that are accused of being the most stretched. Why? It is the momentum that is drawing traders as they seek capital gains ('buy high, sell higher') rather than value. Keep tabs on the momentum the Dow and others exhibit and whether there is a convergence with its many asset counterparts.
Trade Wars Carry Risk Appetite Higher Though Markets Aren't Picky on Reason
If you were looking for the motivation for risk appetite this past session, you wouldn't have to look any further than ever-present developments around trade wars. Friday offered headlines to suggest that the White House and Beijing were on the verge of a deal to sign off to complete the so-called 'Phase One' deal. Over the weekend, that confidence would build significantly with rhetoric from US President Trump and Commerce Secretary Ross that made it seem as if all that was missing was a place and time to sign on the dotted line. The reach of the theme offered risk appetite across regions and asset classes with the comments leading to the bullish gaps. Yet, there was notably a lack of follow through on these speculative assets. After the New York close, reports circulated that China was pushing the White House to remove some of the existing tariffs the US has saddled the country with - rather than just head off the planned December 15th increase. That is not surprising given the imbalance in demands between the two, but it does threaten to derail progress.
It isn't just traders on social media that view trade wars as a top priority fundamental theme. Search interest and capital market responses to related developments show there is a significant amount of interest dedicated to this uncertainty. Having escalated for more than two years and various estimates of extreme global economic impact (like the IMF's $700 billion cost estimate for next year), this is simply a very familiar pain. That will mean that headlines or high-level related data will result in more immediate and significant market response. Ahead, we have US trade figures and Chinese PMIs which could tap into this vein, but I will keep my focus scanning the headlines for tonal shifts between the two countries. As I do that, however, it will be important not to lose sight of the other fractures around the world that can explode or fill in. Secretary Ross had also made remarks to start this week suggesting the Administration may permanently defer auto import tariffs. The decision cut off is for November 14th.
Chart of USDCNH with 100-Day and 200-Day Moving Averages (Daily)
Chart Provided by TradingView
Growth Concerns May Inspire the Dollar, Monetary Policy is an Aussie Dollar Spark
As we scan the horizon for trade stories, there is more tangible event risk to monitor for both influence over the underlying currents of the market and targeted volatility from key players. Growth continues to represent a significantly underappreciated risk in my book, and we were given a few updates on the topic this past session. While US factory orders, UK business sentiment and Eurozone investor confidence reports were all noteworthy; an update from JPMorgan's Global Manufacturing Index reminded us of the state of affairs with which we are dealing. Though the reading improved over the past month, it was in contractionary territory (below 50.0) for the sixth consecutive month while new export orders earned the longest slid since 2002.
Chart of US 10yr3mth Yield Curve and Gov’t Yields to VIX Ratio (Daily)
For Tuesday, there are a host of indicators that can be interpreted for their economic reflection: Chinese service sector PMI, UK services and US economic optimism among them. Yet, the indicator that carries the greatest potential in my opinion is the United States non-manufacturing (essentially services) activity report from the ISM for October. This sector represents the vast majority of economic output for the world's largest economy, so a surprise reading - significant deviation from forecast - can leverage a strong 'risk' or Dollar reaction. A weak showing would carry the greatest impact as it undermines one of the greatest fundamental gaps, though it would insinuate a serious potential break for the long-standing bullish DXY trend channel.
Another theme that is taking back seat for the global perspective, but which can render active response from certain areas is monetary policy. New ECB President Christine Lagarde gave her first official speech, but she wouldn't play her cards on the opening hand and steered clear of monetary policy. There were also a few Fed speakers on tap looking to calm market speculation for consistent easing for the indefinite future, but they drew little conviction from the market. There are more speeches scheduled ahead. For something that an render a response, I will be watching the Reserve Bank of Australia (RBA) rate decision. While the group is unlikely to change course, the Australian Dollar finds itself on the cusp of a break for continuation or reversal in AUDUSD and EURAUD. These are loaded technical patterns which could take advantage of a fundamental spark.
Chart of EURAUD with 200-Day Moving Average (Daily)
Chart Provided by TradingView
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