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Trader thoughts - the long and short of it

While there is not yet a self-sustaining enthusiasm behind US equities, there is at least a little more progress. With the back and forth in headlines related to trade wars, the benchmark indices for the country put in for another positive performance.

Market data
Source: Bloomberg

Wall Street attempts to make more of a recovery: Volume behind the move – a gauge of participation and thereby conviction – was still tepid, but it nevertheless pulled us up to three-week highs. A bullish gap on the open does not absolve the massive jump down Wednesday (the largest in 17 years for the Dow), but it is a start for bulls. Further, the three-day climb is the longest stretch since mid-February. What is necessary for this rebound to turn into a lasting recovery? Absolute quiet. The likelihood of a fundamental rush that bolsters already expensive markets even further is very low and the event risk ahead does not even cater to sentiment. Traders are better off trading ranges than projecting far-off and far-fetched breaks until they are indisputable.

US and global trade: Given the spread of trade war actions by governments and fears from market participants, it makes sense that the actual data related to trade would draw a more critical gaze from the speculative rank. Though the February update on the long-running US trade deficit would not offer any direct reflection of tangible actions taken as of late, it nevertheless contributes to the anxious sentiment surrounding the imbalance. The $57. 6 billion shortfall is one of the largest in nearly a decade and offers strong talking point to President Trump and others in his administration dedicated to the protectionist course they have set the world’s largest economy on. Yet, the momentum to cry foul against one of the country’s largest trade partners – Canada – was undermined when the country printed a –C$2.69 billion deficit. Australia’s surplus rose to A$825 million with yesterday’s update, but that will not likely draw too much consternation. Next week, trade figures from the UK, Japan and China are all on tap. All will add to the equation the United States is trying to work out.

The ever-glaring and under-performing NFPs: Top event risk for Friday’s session is the monthly favorite US NFPs. The employment series from the United States has a permanent appeal amongst traders in part because it has become so ubiquitous and is fairly good at spurring short-term volatility (cat nip for investors). However, the reason for this data’s market moving sway in tangible macro sense has significantly diminished over the past months and years. That is not because of the quality of the data as it reflects on the economy – nor in a monetary policy sense. On both accounts it rather straightforward in its bullish and hawkish contributions. Yet, the market simply has diminished its reaction monetary policy – at least as it pertains to the US Dollar. We are still seeing a distinct debate in the markets and at the Fed between two and three more hikes in 2018. That said, the Dollar is still hovering near three-year lows to contrast the implied yield forecast’s decade high.

A Break from Fed party line: Though there is certainly a range of views and opinions across the Federal Reserve, we do not often see members diverge too far from the group’s central view. That is likely a consideration in their strategy towards transparency on the bank’s policy intentions – and because the people they select are inherently reasonable and appreciate the impact their words can have. And, where there is a greater disparity in scale on the views of policy from hawkish to dovish; it is exceedingly rare to see any individual project a more dramatic view of the markets beyond the cookie cutter assessment that they seem ‘roughly fairly balanced’. Yet, Atlanta Fed’s Bostic must not have gotten the memo; or perhaps we are seeing a new world order under Jerome Powell. Mr. Bostic remarked that some markets are becoming “aggressively” priced. That may seem vague and minor language change, but it was also a market event some years ago when then-Chair Yellen labeled some specific equity sectors ‘frothy’. Beware the Fed and other central banks members’ concerns over markets and volatility.

Aussie Dollar recovery only showing through against troubled currencies: The Australian Dollar has made some remarkable progress in a technical sense against the Japanese Yen, Euro and British Pound. Yet this isn’t an effort being led by the Aussie currency itself. From AUD/JPY we have a reversal from its progressive selloff of the past months, but this is a technical pattern mirrored across all Yen pairs. As for the Euro and Pound, each is pulling back from relative highs – cautiously but persistently – with a sense that positioning that had run a foul of fundamentals is starting to deflate. Elsewhere, equally appealing technical patterns for the target currency such as AUD/USD or AUD/CAD in ‘discounted’ positions show little intention of making for a rebound.

Another active but directionless day for oil: With general investor confidence showing recovery through the past session – even if struggling with conviction – we would expect the growth-linked commodities to carve out the same performance. Agricultural markets such as wheat, cotton and soy beans were higher through the session; but that may be due to the concerns related to China’s retaliation against the US in trade wars. Crude oil in the meantime was showing another wide swinging session that would ultimate close again without a commitment to direction. Risk trends are questionable moving forward because of the lack of growth and open trade that we are registering behind this market. So expect uncertainty from commodities going forward even if speculative appetites heat up.

S&P/ASX 200 attempts to dig into a rebound after large tails: The ASX 200 climb this past session was relatively restrained compared to the gains registered by indices in the European and US session after its close, but that restraint may serve it well – especially with Chinese markets offline. Notably, the technical performance this index is carving out following two large ‘lower wicks’ just above a well-tracked trendline support dating back to the beginning of 2017 will appeal to chart traders. However, measure conviction not in technical level to technical level moves but rather conviction in fundamentals and volume.

Market Data:

SPI futures moved 27.45 or 0.48% to 5788.81.

AUD/USD moved -0.0032 or -0.41% to 0.7684.

On Wallstreet: Dow Jones 0.9%, S&P 500 0.58%, Nasdaq 0.42%.

In New York: BHP 0.32%, Rio 1.06%.

In Europe: Stoxx 50 2.68%, FTSE 100 2.35%, CAC 40 2.62%, DAX 30 2.9%.

Spot Gold moved -0.57% to US$1325.56 an ounce.

Brent Crude moved 0.13% to US$68.11 a barrel.

US Crude Oil moved -0.03% to US$63.35 a barrel.

Iron Ore moved -2.3% to CNY447 a tonne.

LME Aluminum moved 0.66% to US$1991 a tonne.

LME Copper moved -1.06% to US$6724 a tonne.

10-Year Bond Yield: US 2.83%, Germany 0.52%, Australia 2.67%.

Written by John Kicklighter, Chief Strategist, DailyFX, Chicago 

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