Such a small slip as the one seen in US equity indexes to end this past week would usually not cause this degree of discomfort, but such extremes in inactivity tend to amplify fear. As traders keep a wary on sentiment ahead, monetary policy will be an inescapable top theme.
Talking Points:
- Risk appetite suffered a set back this past week, and the level of skepticism built into the market doesn't allow for much
- Monetary policy will be a central theme through the coming week with an inordinate amount of central bank speak and key data
- The Dollar remains a particularly at-risk currency for volatility with critical unfulfilled technicals, Yellen and CPI holding over
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Is the market's robust confidence and appetite for yield unassailable? Of course the answer to that question is no. It is only a matter of time and circumstance until we eventually see speculative exposure rebalance. Yet, those questions of when and how are critical to how we operate in these lean times. For the trader, volatility is a necessary ingredient for establishing successful trades that can be exploited in a reasonable time and with a meaningful probability. To the investor, low volatility is a boon so far as it contributes to taking advantage of discounts in price and the collection of income associated to most financial assets. No matter what side of this scale you find yourself on, conditions are unfavorable. We have extremely quiet markets with record low returns that means our success is in assuming already stretched markets will reach further in a short enough time frame that we won't encounter a fundamental disaster. By that arithmetic, the rank and file seem to be increasingly dependent on hope.
While benchmarks like US equities are already at record highs, they can always be pushed a little further; and they can certainly collapse under the weight of fear. Yet, either way, the market has clearly dulled to the point of needing an even more explicit and robust push. The unexpected crisis or windfall is always an effective motivator, but we cannot reasonable anticipate them so it is foolish for most to attempt an active strategy as these happenstance measures as a centerpiece. Instead, there are familiar fundamental sparks that could always set a blaze under the right conditions. Whether concerns over the implementation of the ambitious tax reform plan (which carries more than a little influence over anticipation for infrastructure spending), political investigations in the US, troubled negotiations at the Brexit table, trade disputes or outright military belligerence (as with the US and North Korea); there are tangible and unresolved issues ahead. However, the most promising and productive theme is likely to be monetary policy. And, while the contribution to speculative access that stimulus has had over the years may play a crucial role in the market's receding risk tide; my primary interest will be in the relative bearings of these programs and its influence on FX.
There is an incredible number of central bank speeches scheduled over the coming week with members of most of the major central banks on tap. The most important, singular event in this run is Tuesday's ECB Panel that will host ECB President Draghi, Fed Chair Yellen, BoE Governor Carney and BoJ Governor Kuroda. These four people represent trillions of dollars in stimulus and control interest rates for the vast majority of currency loans in the world. Their collective vision for monetary policy matters. Further, the market is highly tuned to the nuance of these groups' language, so the slight advantages and disadvantages registered months and even years in the future can lead to a significant currency movement. While all currencies stand to feel the influence of that particular panel and the collective view imparted through the week's headlines, I will be watching the Pound and Dollar in particular. The Sterling will see Governor Carney and top MPC members speak at the same event Thursday and the market is keen to see how committed to the one-and-done view the group left us with at their last rate hike. Add to that UK CPI and jobs data, and there is a lot to work with. That said, this theme will compete with Brexit troubles. For the Dollar, the list of speakers is the longest, October CPI is due and markets are pricing in a more than 90 percent chance that the Fed hikes at the December 13th meeting. When there is so much at stake, there is a propensity to trigger volatility. We assess the market's conditions and opportunities for the coming week in this weekend Trading Video.
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