Trader thoughts - the long and short of it

We were left on a cliff’s edge last week with the US close Friday. The nasty tumble through the week accelerated into significant support – like the 15-month trend line support for the S&P 500.

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Source: Bloomberg

Wall Street steadies before the pain gets serious: Since much of the pain was felt through the US Friday afternoon, the Asian and European markets already closed at the time would be encouraged to discount to that loss of value. As such, it wasn’t too surprising to see European markets under pressure Monday and closing in the red. The mixed performance for Asia, however, offered an interesting assessment of global sentiment continuing over the weekend to create a self-sustaining momentum. Yet, the liquidity fire break seemed to rewire fear a little more aggressively than would be expected when New York trade opened Monday. The opening gap for the S&P 500 to open the week amounted to 1.2 percent – the largest bullish jump on the first trade since November 2008. Further gains were added through the session, but is this a roaring endorsement for buying a more exaggerated ‘dip’? There is certainly a toe hold for fundamental optimists with reports that US and Chinese officials are negotiating trade, but the circumstances of this complicated relationship are such that placing confidence on this process is an exceptionally speculative approach.

US Dollar threatens break of two-month uptrend: The greenback is back on the defensive at the start of the trading week. The currency fell even as front-end Treasury bond yields recovered and the priced-in rate hike outlook implied in Fed Funds futures steepened amid a recovery in risk appetite. That suggests ebbing haven demand following last week’s liquidation is the likely catalyst. If this opens the door for the return to speculation that a broadening global recovery will push top central banks to follow the Fed’s hawkish lead, USD may suffer deeper losses. Indeed, prices are threatening to break the bounds of the rising trend carved out against the US unit’s top counterparts from late-January lows.

Gold gains but most commodities lower: Gold prices enjoyed a lift at the expense of the weaker US dollar, leveraging its appeal as an anti-fiat alternative. Crude oil prices retreated, however, rebuffing geopolitical risks that helped push them to a two-month high last week. An attack by Iran-backed Houthi forces on Saudi Arabia and the appointment of hawkish former UN ambassador John Bolton as National Security Advisor to President Trump were not enough to amplify supply disruption fears such that they offset broader weakness across the raw materials space. That seems to reflect easing worries about a trade war between the US and China after Treasury Secretary Mnuchin expressed optimism in reaching a deal without resorting to tit-for-tat protectionism. The world’s top-two economies form the backbone of a global supply chain formative for broad-based commodities demand.

Australian shares taking cues from Wall Street: The S&P/ASX 200 benchmark shed 0.52 percent in the week’s opening session, with Financials names that make up over a third of the index leading the way downward. They shed 0.84 percent. The similarly overrepresented Materials sector commanding almost 18 percent of the average lost 0.34 percent. The drop probably echoed Friday’s brutal bloodletting on Wall Street. The subsequent recovery there in Monday’s session may likewise echo forward, however. Indeed, SPI futures are pointing convincingly higher before Tuesday’s opening bell.

Australian dollar inches up as market mood improves: The recovery in risk appetite has helped engineer a tepid AUD/USD bounce, though prices remain firmly within the bounds of the digestion range carved out after the currency pair slid to a three-month low last week. A daily close above March 22 swing high at 0.7785 opens the door for a challenge of resistance defining the near-term down trend established from mid-February, now at 0.7894. Immediate support is in the 0.7663-76 area, with a push below that exposing a rising trend line guiding the longer-term advance started in January 2016. That currently sits at 0.7608.

US consumer sentiment reflects a complacent confidence in markets: Perhaps the most remarkable feature of the week ahead of us is the curb on liquidity that would seem to follow the holiday conditions scheduled for the Western world. Good Friday is a market holiday for many of the most liquid financial centers around the world, and this anticipated curb on turnover will dampen all but the most dedicated efforts to swing the underlying sentiment theme one way or the other. Yet, with this distortion accounted for, there is still the capacity for short-term data-driven volatility as well as an accumulation of fundamental speculation that will trigger landslides later down the line. A key event risk in the upcoming session is the US consumer sentiment report for March from the Conference Board. This is not as isolated an indicator as it may seem on the face of it. The US consumer is the world’s largest collective consumer of goods and services in the world. Their confidence can turn the tides of growth for export dependent economies just as surely as tariffs can. The US consumer is also the source of a vast concentration of wealth that is integrated into the global system. Important in this reading is the state of the economy, wage growth (for rate forecasts as an aside), assessments of protectionism with an eye towards trade, and a general evaluation of political stability.

Twitter joins the effort to cut off fresh capital flows to Crypto: Fresh capital is critical to permanently establishing emergent markets. In the vital growth phase of novel financial products or market, there is a point of critical mass where the product can flourish and instil itself as an important piece of the global system or it can be choked off and fade into obscurity. While Bitcoin and cryptocurrency are likely beyond that fork, it is still at risk of floundering for an extended period of time or transitioning into a period whereby the market re-positions its use and place. Blockchain technology and smart contracts are no doubt here to stay, but the coins that look to replace traditional currency still face a fluid future. We have already seen Facebook and Google cut off critical sources of new investment – particularly among the demographic that would be most keen to adopt it: those familiar with the technology, innovation and with a distrust of counterparties. This past session Twitter joined the rank and widened the blackout in social media for new funds. It isn’t a total blackout, but the speculative draw will certainly be cut. Bitcoin and crew felt the impact with significant (percentage relative to recent activity) slides across the board.

Market Data:

SPI futures moved -30.26 or -0.52% to 5790.47.

AUD/USD moved 0.0046 or 0.6% to 0.7745.

On Wallstreet: Dow Jones 2.76%, S&P 500 2.56%, Nasdaq 2.92%.

In New York: BHP 1.61%, Rio 2.16%.

In Europe: Stoxx 50 -0.59%, FTSE 100 -0.48%, CAC 40 -0.57%, DAX 30 -0.83%.

Spot Gold moved 0.46% to US$1353.5 an ounce.

Brent Crude moved -0.5% to US$70.1 a barrel.

US Crude Oil moved -0.49% to US$65.56 a barrel.

Iron Ore moved 0.34% to CNY440 a tonne, SGX Iron Ore moved -0.13% to US$69.89 a tonne.

LME Allumnium moved -1.18% to US$2050.5 a tonne.

LME Copper moved -0.52% to US$6660 a tonne.

10-Year Bond Yield: US 2.85%, Germany 0.52%, Australia 2.66%.

 

Written by: Ilya Spivak, Market Strategist and John Kicklighter, Chief Strategist, DailyFX

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