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Markets Open to Caution as Heads of Fed, ECB, BoE and BoJ On Tap

Markets Open to Caution as Heads of Fed, ECB, BoE and BoJ On Tap

John Kicklighter,

From the Nikkei 225 to the DAX to the S&P 500, global equities opened to varying degrees of weakness to start the week. While a critical reversal may not be in place for risk trends, the market is in an impressionable state.

Talking Points:

  • Risk trends opened to a measureable sense of caution this week with varying degree of retreat from the SPX, DAX and Nikkei 225
  • A week of monetary policy headlines has the majors and pairs like EUR/USD on hold despite the proximity of critical technicals
  • Top event risk ahead goes to the panel that Yellen, Draghi, Carney and Kuroda are set to speak at - could it even charge 'risk'?

What are the DailyFX analysts' fundamental and technical forecasts for the Dollar, Euro, equity indexes and more through the fourth and final quarter of the year? Download the 4Q forecasts on DailyFX.

Conviction was notably tepid across the financial markets to start the new trading week. That is not to mean bulls were throwing in the towel on their long equities, high yield and otherwise emergent speculative vehicles. Rather, there was a uniform easing from recent highs across all these sentiment-related fields. In global equities, the Nikkei 225 took a nasty spill, the DAX extended a volatile retracement back to noteworthy support, the FTSE 100 continued to traverse its multi-month range and the S&P 500 opened to a gap down. In fact, for the benchmark US index, that marked four consecutive daily gaps lower which is the longest string of bearish opens since April. Despite the persistently weak opens, the neither the S&P 500 nor its counterparts in the US stock market have broken support on technicals that have maintained a clear signal of trend through the medium-term. Confidence is more difficult to earn given the level of the markets and inconsistency of the news, but that doesn't mean it is ready to collapse under its own weight.

Speculative excess can very well prove its own undoing, but it is more likely that that the calcified complacency across so many asset classes and countries would be overwhelmed by a significant event. One particularly high profile event this week that can reach that capacity is the upcoming panel attended by the heads of the Federal Reserve, European Central Bank, Bank of England and Bank of Japan. There is little doubt that the collective policy accommodation offered by these institutions in particular has encouraged - I would argue forced - market participants to build remarkable levels of exposure in the markets. There is tangible evidence that these institutions are starting to signal they are pulling back their unlimited support through plans to normalize balance sheets and/or hike rates. Yet, evidence of the fundamental dawn breaking is easier to ignore so long as there isn't a catalyst to force reality. Hearing the heads of these crucial institutions announce they were turning the corner or that they have run out of tools (perhaps in a call to fiscal solution) would certainly hasten the rise of recognition. Given these policy authorities' efforts to avoid volatility at all cost, I don't expect they would go this route. However, in this hypersensitive speculative environment; it may be difficult to avoid the market's interpretation.

If the unofficial central bank summit were to fail to escalate to a risk driver, the event can still readily serve as a tool to further leverage individual currency and cross speculation. The Dollar is still stalled out just above the bullish break it won a few weeks ago on news of the ECB's disappointing policy meeting - a catalyst through EUR/USD. If Yellen forecasts consistency in pace beyond her term end, it could add push to the stalled run. Meanwhile, a few of her colleagues will be speaking at different venues through the day and we are also due producer inflation (PPI). There is plenty to work with if the markets are paying attention. While there is Eurozone sentiment, Italy and Japanese GDP also on the docket; the clout they are likely to have with the Euro and Yen respectively is likely low. In contrast, the Pound is overloaded for fundamental sway. BoE Governor Carney's remarks will compete with October inflation statistics for a monetary policy view; and the growing pressure surrounding Brexit will add even more trouble. While I see potential for EUR/USD, USD/JPY, AUD/USD and some others for certain outcomes of event risk ahead; GBP/USD and other Sterling crosses look as if they will be too overwhelmed to pick a clear bearing ahead. We discuss what's on the agenda moving forward in today's Trading Video.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.