Trade War Talking Points:
- A retreat in risk assets during US trade a response to US-China trade war headlines, but this doesn't yet qualify as a true turn
- Dollar faces a more definitive update on recent monetary policy speculation with the FOMC minutes on tap
- From volatility for the Pound, Canadian Dollar and oil, is there opportunity for follow through?
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Risk Trends and a Focus on Trade War Headlines
Another day passes whereby we seem to fall deeper into the influence of general complacency among speculative bearings and the predictable seasonal norms take up residence as a driving force of justification. In terms of conviction founded in risk appetite, correlations were still intact across those assets that tend to have their course dictated by the fear and greed of the crowds. That said, tempo was the missing ingredient. A broad risk aversion showed through US indices, rest-of-world equities, emerging markets, junk bonds, carry trade and Treasury yields. While it is possible there was motivation for each of these areas of the financial system to retreat, it is a low probability and more likely a common driver. That said, ultimate progress was little. The Dow was one of the more substantial movers with a market consistent gap higher on the open followed by retreat through active US trade. The retreat is still very tentative and should not convince anyone of a full reversal. I set my conviction to the abundance of technical and fundamental evidence. The more numerous and significant the support levels that are broken and prominent a fundamental driver to lobby around, the greater my confidence that a turn is taking place. We are barely on the watch list with this past session.
Chart of Dow Index with 10-Day Moving Average (Daily)
Chart Created with TradingView Platform
If we were evaluating the scene from purely a technician's point of view, we could assign weight to the progression of support levels as we retreat deeper from the Dow's or S&P 500's record perch, determining what our ultimate tipping point for conviction would be according to our own risk tolerance. However, I am a firm believer that a clear motivator is the best means for keeping the market moving after it starts. If there were one active theme of greater significance this past session, it would have been trade wars. Once again, this constant cloud over the market was not defined by scheduled event risk but rather impromptu headlines. Building on a back and forth in perspective from 'sources' as to the standings of the US-China negotiations, President Trump set the tone Tuesday by saying tariffs could be further raised if China did not compromise. While that is aggression to be assumed from the Administration, it is very different to hear one of the chief players in the discussions to voice such a line of belligerence. In the meantime, the Senate's voting on a political position around Hong Kong that will formally set the US at odds with China only makes a quick and tide economic/trade resolution that much more difficult to reach. This is a detrimental addition to the environment but unlikely to establish a renewed trend by itself.
Dollar Faces a Tangible Update on a Favorite Speculative Theme
Sticking to the top-line fundamental drivers to keep tabs on, monetary policy is the most prominent theme over the next 24 hours - at least from a scheduled perspective. The Reserve Bank of Australia (RBA) meeting minutes from their last rate decision released this past session showed a dovishness that would not further the Aussie Dollar's slide. Ahead, there is a European Central Bank (ECB) financial stability report that hold a remarkable amount of potential - particularly should it redouble concerns over the already-troubled outlook for the European economy - and Canadian inflation statistics. Monetary policy is a critically systemic theme as a critical prop to otherwise uneven risk trends. Should confidence born from central bank support suddenly collapse, the calm in the markets would be irreparably broken.
Unmooring the confidence rooted in extreme accommodation will take time or a systemic event, but that doesn't mean we aren't in for significant movement in the meantime. The Dollar in particular faces meaningful risk on this front. The slide from the Greenback over the past week seems to root heavily to downshift in rate expectations. We haven't see the outlook for a hike from the market in well over a year, so that isn't our waterline. Instead, the reticence towards negative rates is the measure and recent critique from President Trump of the US central bank's policy to avoid full capitulation the throttle. Ahead, we are due the FOMC meeting minutes. This will offer greater insight into the group's outlook following three straight rate cuts. It should be noted, however, that the Fed projected before each easing that it expected no move. Should we be any more convinced by their conviction now?
Chart of DXY Dollar Index and Implied Fed Change from Dec 2019 to 2020
Chart Created with TradingView Platform
Differentiating Volatility from Trend Potential for GBP, CAD and Crude
In addition to the uncertain prospects of trade war headlines or scheduled monetary policy updates, there is something to be said about the course of global growth - more critical assessed as the fear of recession. There isn't a lot of event risk through the immediate future that I would label as definitive for the undercurrent of forecast. For growth, I will be watching the Dollar as it has the most premium to lose. However, another currency that seems to borrow much from the Greenback is the Canadian Dollar. The 'Loonie' is acutely sensitive to the BOC"s own monetary policy bearings, which I would label a more consistent market moving opportunity. This past session, the focus seemed to be on trade wars through headlines around the USMCA doubts which charged USDCAD, GBPCAD and NZDCAD among others. There are even some notable, tentative breakouts but I remain dubious that there in enough behind this theme to keep the Loonie sliding.
Chart Created with IG Charts
Another currency worthy of our attention this past session owing to its fundamental developments is the British Pound. With the debates between Prime Minister Johnson and opposition Labour leader Corbyn, the market was tuned into the speculation around progress towards a Brexit deal. The eb and flow, risk appetite and aversion behind this currency is very sensitive to the unexpected breaking news; but don't readily pursue trends in the interim. Given the election due in a month and the Brexit deadline out to the end of January, we could very well drag the Pound along for a frustratingly indeterminant amount of time.
Chart Created with IG Charts
Another interesting area of evaluation for the global financial markets is the performance of commodities. I look at this financial segment not just for the unique opportunities that it presents but also the signal it offers for thefinancial system at-large. Gold for example edged higher this past session as it holds remarkably steadfast to its recent multi-year highs (near record if you measure gold in an equally-weighted index). That undercuts the already flimsy notion that risk appetite is robust if we were to take US indices at their word. Another commodity that is more interesting for recent developments is crude oil. Both an asset that reflects speculative appetite and financial stability, the sharp drop this past session should raise some measure of concern. Looking to retail trader's positioning, there was a sudden and strong flip in speculative expectation this past session which saw a clear play to the range. What will hold out: market condition or speculative upheaval.
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