Political risk was brought back to the forefront following US President Donald Trump's remarks on the debt ceiling – a frequent threat to the financial system over the years.
Yet, despite the added systemic threat to global markets, it is worth noting that neither did panic well. Perhaps showing deference to the Jackson Hole Symposium that the Federal Reserve is due to host Thursday through Saturday – put more likely reverting back to the sense of complacency that has long drawn traders back into their questionable blanket of safety.
1. Wall Street: The US equity indexes were virtually unchanged through the past trading session. Not only did the close over close barely register, but the day seemed to carve out no range at all. Had it not been for the gap lower on the New York session open, we would have thought it were a holiday. Some would say that we are in the middle of the 'Summer Doldrums' that frequently sees the final two weeks of August drag along with virtually no movement at all.
However, that would be ignoring the feel of unease that is clear just beneath the surface. Resting volatility – the moving average of the VIX – is holding well above the completely deflated levels of late July / early August. Furthermore, we have seen too many sudden jerks higher in activity measures to find any serious comfort. This is not a US phenomenon only. Global equity investors should remain wary.
2. US President willing to revive debt ceiling standoff: US politics are proving to be a threat that simply won't settle. While there is an unconscious reflex to attribute a like or dislike for a person or candidate to an assessment for influence over the market or economy, where the true impact is registered through tangible policy and speculation surrounding those efforts.
Since the vote was tallied in the US in early November, we have seen the S&P 500 and other benchmarks climb in anticipation of a unified government pushing forward the growth-favorable policies of infrastructure spending and tax reform. Yet, nine months on and seven months into the new administration, neither has shown serious progress. That makes the 20 per cent gain in US equities particularly conspicuous. Add to these concerns of 'value' an outright threat to financial stability and the speculators are exceptional prone in US assets. That threat is the renewed peril of a debt ceiling standoff which the Senator Majority leader said was inconceivable only to hear the President threaten just that in a rally when he said a government shutdown should the Legislative branch not find funds for the border wall. They have until the end of September to sort it out.
3. Jackson Hole symposium: From political risk to monetary policy, the top event risk moving forward is the three day 'symposium' hosted by the Federal Reserve's Kansas City branch in Jackson Hole, Wyoming from August 24 to 26. This event carries market moving potential even in the most mundane of conditions – and our environment is far from that. There are a number of areas of concern in this event that traders should watch.
For the short-term speculative sighted, the views of the Fed's policy bearings versus say the ECB's (the group's President is due to speak at the event on Friday) can leverage a clear move in EUR/USD. However, big picture, the importance for this event is reflection on protectionism, the collective downshift in monetary policy towards dovish bearings this past month and the question of effectiveness in monetary policy having already hit the floor.
4. Pre-election New Zealand growth downgrade: A downgrade from the New Zealand Government to the country's growth and budget forecast leveraged a heavy toll on the Kiwi Dollar this past session. The worst performer among the majors, the NZD dropped against all counterparts but has registered particularly painful declines versus the US Dollar (triggering a head-and-shoulders break), Japanese Yen and Euro.
The downward revision in growth measure through June to 2.6% from 3.2%, and a 0.2 percentage point slide in the coming year to 3.5% is noteworthy, but doesn't seem the typical fare to shake speculators appetite for the carry currency. Perhaps the proximity to the election a month out, and the already noteworthy slide for the Kiwi and other carry currencies heading into the news are primarily responsible.
5. Australian dollar: The Aussie Dollar lost some altitude against many of its major counterparts, but it was seeing moves that would hardly be considered as provocative. From the AUD/USD, a modest extension to the 0.7950 retreat on Tuesday hardly looks like a death knell for bulls. Perhaps the most remarkable technical progress on the day was from AUD/NZD. On the impact of the Kiwi's hit, the pair broke a trendline resistance going all the back to May 2013.
6. ASX: Traders are left to wonder what could push the ASX 200 out of its 5815 to 5650 range – a staple technical channel for three months now. In fact, this is the most constricted range over a 60 trading day period that the index has seen since July 2014 – a measure that held the record itself for years. A break is inevitable over a long enough time span, but should we simply wait every day eagerly predicting the move or take advantage of the consistency? Earnings scheduled for today: AAD, IFN, ALU, AWC, FLT, MYO, OZL, RSG, S32, SXL, NEC, SCG, SPO, STO, VRL, PPT, PTM
7. Commodities: While not nearly as persistent as the ASX may be, crude continues to generate swings within a set congestion. Talk of an OPEC+ meeting next month and registering US inventory figures this past session does little to truly move the commodity from its resting range beteween 51 and 47.50. Far more potential rests with gold as it eyes a triple top just shy of 1,300 with a very real-world catalyst in the form of monetary policy speculation via the Jackson Hole meeting.
SPI futures up 9 points or 0.2% to 5705
AUD -0.1% to 78.99 US cents (Overnight range: 0.7882 - 0.7918)
On Wall St, Dow -0.4%, S&P 500 -0.4%, Nasdaq -0.3%
In New York, BHP +0.8%, Rio +2.5%
In Europe, Stoxx 50 -0.5%, FTSE flat, CAC -0.3%, DAX -0.5%
Spot gold +0.3% to $US1289.43 an ounce
Brent crude +1.3% to $US52.56 a barrel
US oil +1.2% to $US48.40 a barrel
Iron ore -2.3% to $US77.82 a tonne
Dalian iron ore +0.5% to 585 yuan
Steam coal -0.1% to $US98.35, Met coal -0.1% to $US195.00
LME aluminium +1.1% to $US2097 a tonne
LME copper -0.2% to $US6565 a tonne
10-year bond yield: US 2.16%, Germany 0.37%, Australia 2.67%
By John Kicklighter, Chief Strategist, IG Chicago