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Trader thoughts - the long and short of it

Markets look to be caught in chop after a week rife with high profile – but indecisive – event risk. There is little consistency in the build up or unwind in speculative markets across different regions or assets.

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Market data
Source: Bloomberg

While Yen crosses representing carry trade in FX are rising, European shares have tumbled and emerging market assets mill about. With the global market’s pacesetters (such as the Dow 30) thrown off course, the need for a fundamental charge has grown particularly strong.  Carrying on with ‘animal spirits’ and against the current of traditional valuations requires deep speculative conviction. Each time the global winds of  speculative appetite die down, the threat of a true reversal increases. We have one more major fundamental milestone to absorb before the week ends – US January NFPs – but we are at the point where only the systemic themes like protectionism, aggregate monetary policy or risk trends themselves will satisfy next stages.

Wall Street: While the benchmark US equity market was able to avoid the acute losses registered by some of their global peers (the Shanghai Composite, FTSE 100 and DAX), bulls are certainly not reflecting the boundless well of enthusiasm they seemed to espouse over the past year. Through the session, the S&P 500, Dow and even the Nasdaq were working with green candles; but that was not so much a bullish day as one of recovery. The major indicies gapped lower on the open Thursday – the third such troubled open in the past four trading days and a clear reminder of the dramatic technical break on Tuesday. With a wave of key earnings statistics due after the close – Apple, Google, Amazon, etc – and the monthly labour statistics on the docket for Friday morning out of Washington, there was understandably little interest in choosing conviction one way or the other.  

US Payrolls: In any given week, the presence of the United States monthly payrolls report is usually the fundamental centerpiece of the entire week. In other words, the Dollar and US assets will often bide their time until the update can set the course for speculators’ next run. Yet, the sway of this data run has faded significantly over the past few years. The true impact of the payrolls and its accompanying statistics is the implications for monetary policy or update to growth expectations. Yet, the Federal Reserve has made it very transparent their intended pace for monetary policy and the nearly two-decade low jobless rate does not pose an imminent threat to its forecasts. More abstract themes like protectionism carry greater speculative influence. For traders, the knee jerk response to the NFP change can offer some short-term volatility and a substantial change in wage growth may move the needle on rates speculation; but it is unlikely this data will be seriously reflected on, come Monday’s open.  

Rate Decisions Next Week: Since we are coming to the end of the week, it is worth setting beads on the top event risk for the coming week. While there is a lot of scheduled and unscheduled fodder ahead, the monetary policy meetings will be particularly interesting for local market volatility. Both the Reserve Bank of Australia and Reserve Bank of New Zealand on deck, but the nascent fear/hope that they could slowly start the wind up to a tightening regime was crushed these past two weeks by particularly weak Q4 CPI readings. Swaps are pricing in virtually no chance of a hike from either this month, and the probability of a hike before year’s end stands at 69% and 59% respectively. The real question is how long can carry-currencies carry on without the hope of higher return to draw yield-hungry international capital?

For the Bank of England rate decision, the outcome on rates is very likely to be the same ‘no change’. The swaps market offers a sparse 5% chance that we will see the rate lifted from its 0.50% perch. However, this is not where the real interest is for this meeting. The Super Thursday event will bring the Quarterly Inflation report, which will carry with it the speculation for timing for the future, as well as the on-going speculation surrounding the Brexit’s impact on the UK economy.

Cryptocurrency Rebound: In the early stages of a market’s development, there is a need for critical mass: a certain level of absolute conviction from the capital that backs it that it can survive systemic concerns and speculative withdrawal. Traders in this market must truly evaluate whether Bitcoin and its most liquid peers have hit that peak? The collapse suffered this past month is more likely to be a market-defining event rather than the dips that eager bulls were more likely to buy previously. With new and inexperienced entrants to any market that slides, the pain of losses can permanently turn them away. And, if we consider the future for where this market is heading where blockchain has a true place, it registers more like a utility or like payment system, and how appealing are those to speculators? Regardless, the news that Tether and Bitfinix are being reviewed by US regulators and Facebook has cracked down on crypto ads to the very demographic that spurred its epic rise, the seas are growing tumultuous.

ASX200: Though the ASX 200 is not forging new highs, its technical standing is considerably better than that of the Dow 30, Shanghai Composite or FTSE 100. The US and Chinese indices suffered aburpted reversals this past week which are not yet so deep as to be self-sustaining but have yet to truly secure the footing of interested bulls. The UK index is simply under momentum for bears. The past two days’ rebound has held the broad trend of the past five months, and the sector breakdown suggests it was a broad based move. Yet, depending on how the US tech sector fares in its after-hours earnings, we may find gravity flip readily.  

Commodities:  At the start of the week, the combination of protectionism, monetary policy and risk trends all starting to gain traction looked to support one particular benefactor: gold. The ‘traditional’ alternative to fiat currency  was already helped higher by the slide of the dollar the past two months, but to make it to and above $1,400, it needs to cater to one of its deeper fundamental appeals. Yet, coming to the week’s end, none of those key themes has stepped up for the metal. And, if nothing does, a simple milling about from the Greenback is not going to be able to single-handedly keep this market above $1,330.  

Australian Dollar: The chart for AUD/USD should look particularly interesting to technical traders. After an extremely consistent, month-and-a-half rising trend channel, the pair managed to break support this past session with a clearance of 0.8050. At a point where a break was necessary – either continuing the charge through 0.8150 or turning back, the path-of-least-resistance prevailed. If the NFPs gives this another push, the pair will respond; but it will be predisposed to a larger reaction to a decline deeper into range.

Market Update:

SPI futures moved 52.38 or 0.87% to 6090.07.

AUD/USD moved -0.0023 to 0.8032.

On Wallstreet: Dow Jones -0.11%, S&P 500 0.08%, Nasdaq -0.33%.

In New York: BHP 0.49%, Rio 0.64%.

In Europe: Stoxx 50 -0.88%, FTSE 100 -0.57%, CAC 40 -0.5%, DAX 30 -1.41%.

Spot Gold moved 0% to US$1345.08 an ounce.

Brent Crude moved 0.74% to US$69.4 a barrel.

US Crude Oil moved 1.24% to US$65.53 a barrel.

Iron Ore moved 1.57% to CNY516 a tonne.

LME Allumnium moved 0.57% to US$2219.5 a tonne.

LME Copper moved 0.96% to US$7118 a tonne.

10-Year Bond Yield: US 2.77%, Germany 0.72%, Australia 2.8%.

 

By John Kicklighter, Chief Strategist, Daily FX

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