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Trader thoughts - the long and short of it

Global markets were marginally more productive on Thursday than the previous session. However, conviction would not, through a clear direction or activity level, overtake the opening salvo of the week.

Market data
Source: Bloomberg

In a fundamentally-quiet week punctuated by dramatic headlines such as the US President’s threat to revive the debt ceiling crisis, many traders are finding it more comfortable to simply wait and see where the chips fall. This strategy of complacency hasn’t failed them lately, so it seems the most logical course. It often does until markets and financial stability collapse.

Wall Street: US indices closed this past session in the red, but they did not venture beyond the ranges they set to start the week. This keeps the market well back from a full-tilt technical breakdown that we seemed to be flirting with a week ago, following the S&P 500’s slide below 2,440 and subsequently a trendline that had lifted the market throughout 2017. More remarkable – and telling – than the restrained losses for the S&P 500 (-0.21%), Dow Jones Industrial Average (-0.13%) and Nasdaq (-0.11%) was the volume through the session. Already deflated, turnover behind the S&P 500 has registered its lowest daily reading for a non-holiday period in three years. This stew of persistent complacency, political uncertainty and monetary policy anticipation has helped to foster inaction.

Jackson Hole Main Event: The first day of the Jackson Hole Economic Symposium hosted by the Kansas City Fed held a few noteworthy highlights – like Dallas Fed President Rob Kaplan suggesting a market correction wouldn’t necessarily be troubling, while Kansas City Fed President Esther George insinuated that the partial aim of policy has been to bolster asset prices – but not the big waves investors have been bracing for. That crescendo is expected in the upcoming US session when Fed Chairwoman Janet Yellen and ECB President Mario Draghi are scheduled to give separate speeches.

The theme of the Symposium is ‘Fostering a Dynamic Global Economy’ which does not exactly strike traders as a topic that answers critical concerns and interests coaching or hounding the market higher.

However, in this umbrella, sturctural concerns can be tapped: protectionism, fiscal and monetary policy imbalance, reaching the limits to monetary policy, threats to financial stability and more. Of course, neither central banker would willingly wander into these points; but that doesn’t matter.

Markets are thematically and notionally leveraged up in the market, and they will read into any and all remarks made. So, while we should watch EUR/USD through these remarks, we should also keep a cautious eye on volatility measures across the various asset classes.

US Debt Ceiling Simmer: The opportunity for inflammatory language in US politics receded this past session, but traders – regardless of where they are based – should keep tabs on the path they are winding. In the aftermath of US President Trump’s off-handed threat to force a government shutdown should the budget not support the border wall he long campaigned on, Republican lawmakers have attempted to play down the remarks and reiterate voices of calm and confidence that the necessary increase to the debt cap would be lifted.

However, experience has shown market participants that calling such threats a bluff have resulted in shocking developments before. After Congress comes back from recess, it only has a few weeks to resolve the situation or face what would be an financial emergency for the US and its assets.

The US Dollar and the Treasuries it prices are considered safe haven for the world – often referred to as ‘cash equivalent.’ This label provides a rudder and buffer for the global system when shocks arise and absolute liquidity and stability are most needed. Should the US experience a technical default, that status will definitively fall into jeopardy.

Confidence may not collapse all at once, but it will inevitably fall apart. There is even risk that this loss of status follows even if the lift is made with some degree of contention. Standard & Poor’s infamously downgraded the US in 2011 despite a last-second solution. When the answer to the question ‘where do we go in the event of a global crisis’ is not clear, it only amplifies the panic when sentiment faulters.

Australia Dollar: Against its largest counterparts – Dollar, Euro and Yen – the Aussie Dollar was little changed this past session. There is no surprise here, as the forthcoming session’s Jackson Hole gathering will carry direct fundamental implications for the Fed, the ECB and speculative appetite in general. Where the anticipation is not so concentrated, we find more capacity for follow through. However, the AUD/NZD multi-year trendline break Wednesday with a subsequent move to five-month highs and the AUD/CAD’s sixth session slide show that there is not much clear motivation for the currency one way or the other.

ASX: Given the tepid performance of US and European shares preceding the Friday session, futures are set to a modest negative open. Miners gave the ASX one of its strongest gusts Thursday but that doesn’t come with license for ready follow through for this final trading session. Range traders are still reaping the benefits from this index moreso than any other major index around the world.

Commodities: There were some impressive moves within the commodities market this past session, but the greatest tension remains with gold as it struggles below 1,300. This triple top still finds the pressure built over multiple months of steady advance, but the real amplitude is to be found on the fundamental side. Should the take away from the Jackson Hole gathering be a collective downshift in monetary policy and thereby deflation of global currency, there are few assets better positioned to benefit the flight to non-fiat than gold. Meanwhile, another strong swing in gold this past session tested 47, but few would claim any real break from this bound market until we clear 49 or 46.50.  
 

Market Watch:

S&P/ASX 200 up 8.317 points or +0.14% to 5745.476

AUD -0.05% to 0.7900 US cents

On Wall St, Dow -0.05%, S&P 500 -0.14%, Nasdaq -0.06%

In New York, BHP +0.02%, Rio +0.73%

In Europe, Stoxx 50 +0.18%, FTSE +0.33%, CAC -0.04%, DAX +0.05%

Spot gold -0.35% at US$1286.27 an ounce

Brent crude -0.82 % to US$52.15 a barrel

Iron ore +0.03% to US$91.415 a tonne

Dalian iron ore at 596.0 yuan

LME aluminium (cash) +0.72% to $US2101.25 a tonne

LME copper (cash) -0.15% to US$6537.25 a tonne

10-year bond yield: US 2.19%, Germany 0.38%, Australia 2.63%

 

By John Kicklighter, Chief Strategist, IG Chicago

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