Market Weekly

Exhaustion or Extensions, that’s the big question for the risk rally right now – McKenna Macro Markets Weekly

on January 13, 2019

Welcome to McKenna Macro Markets Weekly

Hi folks, welcome to my weekly newsletter. 

This is post is sponsored by SMARTMarkets one of the two brokers I currently have deals with for you to be able to open an account to earn up to a 100% rebate on subscriptions fees – I’ll have the links soon. So it will be free to everyone on the broad list each weekend, normally on a Sunday. 

The Platinum pack with the chart scan has already been sent to subscribers.

Don’t forget the Daily Newsletter and Video are behind a paywall now. Don’t miss out on the launch offer which is open at the moment- the cost ends up as the equivalent to about a coffee a day. And you’ll make much more than that back by reading and watching. Here’s the link. 

Key Takeaway

The risk rally continued as Fed speaker after Fed speaker reinforced the message that the US central bank can afford to be patient and thet, if necessary, could even adjust the pace of the balance sheet run down – quantitative tightening.

It was the salve the soothed the frayed nerves of traders and which, along with a little US-China  trade talk positivity, really spoke to a concerted effort by the US Administration and the Fed to talk stocks out of their little funk. And in talking stocks out of their funk, in signaling a pause in rates – even senior Fed leaders still believe their view on the economy is right – the Fed was able to settle markets more broadly.

So the risk rally continued.

But with global growth slowing, with data printing poorly, and with markets now having assimilated and recalibrated Fed expectations the big question with so many stock markets at resistance is the risk rally at a point of exhaustion or extension.

Key Themes driving markets

Richard Clarida was as dovish as he could be without signalling a cut

On Thursday Fed Chair Powell, chatting with his old mate The Carlyle Group founder David Rubenstein said the Fed would “patient” a couple of times but that the US economy was on a solid footing and there are no real signs of the trade war hurting the Chinese or US economies. Eyebrows were raised however when he said the balance sheet would be substantially lower – that is QT – in time.

But Powell’s apparent misstep on QT was washed away swiftly  when during the Asian session his deputy – Fed vice-Chair Richard Clarida – really brought home the message in a very dovish speech (delivered in New York) which highlighted that the economy is in good shape, but that the Fed is in no rush to hike again, and could change plans if needed.

Here’s a couple of highlights:

On the Market overreaction to a perceived slowdown: 

“In terms of the economic outlook, ongoing momentum heading into this year indicates that that above-trend growth is likely to continue in 2019…in July the current expansion will become the longest in recorded U.S. history”.

On what he’ll be considering when he votes this year:

“As I consider what, if any, adjustment to our policy…is warranted…I will closely monitor the incoming data on inflation expectations as well as actual inflation…it is important…future policy decisions…be consistent with both pillars of our dual mandate”.

Thus, the Fed can wait:

“With inflation muted, I believe that the Committee can afford to be patient as we see how the data evolve in 2019 and as we assess what monetary policy stance is warranted to sustain strong growth and our dual-mandate objectives”.

And adjust its balance sheet run down if necessary:

“If we find that the ongoing program of balance sheet normalization or any other aspect of normalization no longer promotes the achievement of our dual-mandate goals, we will not hesitate to make changes”.

So all in all Clarida has delivered a very pragmatic, patient message, and one which reinforces the Powell Put for stocks and puts downward pressure on the USD.

What was also clear though last week – save for uber doves kashkari and Bullard – is that on balance the Fed reckons its view, not the market’s pessimism, of the US economy is right. And if it is – and I think it is – then hikes are going to be very much back on the table after this little planned hiatus by the FOMC.

But if we all know the Fed is on hold what’s going to get stocks through resistance?

When I finished my Platinum member scan over the weekend I was struck by how many stock markets were at critical junctures of either extension or exhaustion to this rally.

Now as a macro strategist and trader I usually spend less time on stocks than I do on the economy, on forex, on bonds, and on commodity markets. Of course stocks, company performance, and the index levels, are part of that framework and flow from the analysis. But such is the nature of market funks and this Mandelbrotian uncertainty in which markets and traders find themselves right now that it is from stocks where volatility across global markets is sourced more broadly.

Which is why the Fed has given the stock market funk primacy and we must too.

To wit I offer you the S&P 500 weekly chart (futures based) and the resistance it is facing right here and now.

The Dow Jones and the Russell 2000 are also at important junctures of exhaustion or extensions. Earnings season is critical and likely CEO’s and CFO are trying to figure how to wax positive and still give a clear message of what’s happening in the outlook for their companies as the global economy slows and the US economy heads back to growth levels more likely associated with “potential” growth rates.

That means the sugar hit of the tax cuts and associated earnings growth is behind us. And if you recall it was the last earnings season where the seeds of doubt about the economy – both US and globally – really found resonance with traders and investors.

Here’s a link to US earnings this week from Business Insider.

Back to the technical outlook for the S&P 500 then and I’ve written in my Weekend Scan, “Weekly: price has recovered toward resistance – previous support – as expected. The easy move is now made. Medium term trend and MACD point down still. Break of 2,600 would open 2,644 and above that 2,694 and 2,738”. On the daily charts the outlook is similar, “Rally target at 2,600 after previous Friday’s bullish engulfing essentially satisfied with intra-week high at 2,598/99. Support 2,547 15 ema and resistance at 2,620 (61.8% of the fall) is critical. Above 2,620 a full round trip to 2,808 is in the offing. MT Trend lower but MACD pointing higher”.

So 2,620 and 2,644 look like very important levels for the S&P 500.

Exhaustion or extensions? I’m not sure and with the “easy move now made” risk reduction or profit protection is favoured.

It’s the data stupid

Zerohedge have an article covering Goldman Sachs views on the outlook for stocks right now. Unsurprisingly that depends on the dataflow.

If, like the FEd, you believe the US economy is in good shape then it’s buy, buy, buy for stocks. If on the other hand you are with the recessionistas then its bye bye to the rally. Here’s the chart showing that unless there is a recession bear markets tend to be short lived.

And here’s my own chart showing the correlation between the US version of the Citibank economic surprise index and the rolling 12 week return of the S&P 500.

As arbitrary as that period is all I’m trying to show is that the data flow matters. So again, if you’re not a recessionista then as Jack Ablin’s chart suggested last week buying the funk is an opportunity.

Trading wise though I’m going to go with the price action, as discussed above – exhaustion or extension.

A head fake for the Euro and the USD Index

there were two big stories on foreign exchange markets for me last week.

The first was that the USDCNH/Y finally rolled over toward the 38.2% retracement level of the big rally which pulled up at 6.98ish at the peak of trade war tensions. It’s not yet at 6.69/70 closing the week at 6.7590 in USDCNH terms. And perhaps it won’t get ther as USDSGD and USDCAD falls stalled at week’s end.

Of course part of that stall was the Euro’s head fake, false break and then reversal off resistance at 1.1570 with a high on the week at 1.1569. It’s back inside the recent range now and the DXY is just below the break down level.

In DXy terms the USD needs to get back above 95.73 to open the topside – but it down look like it is in a little downtrend at the moment. Likewise for Euro having hit my target from last week’s weekend scan the bias is lower again – and it doesn’t look great on some of the crosses.

Here’s what I wrote to myself on Euro’s outlook.

“Weekly: Last week said, trading a 1.12/1.15 range with a break above 1.1570 (last week’s high 1.1569) opening a run to run to 1.1725/50. Support is 1.1300 but neckline of H&S pattern now sits at 1.1200. Below 1.12 the target becomes 1.0820/40 and ultimately 1.03/04

Daily: Head Fake. Euro broke the range top at 1.15 but failed at overhead weekly resistance before reversing back inside the range. That it reversed Thursday and then tried to break again Friday but failed suggests lower levels beckon. 1.1436/38 and 1.1413/15 are key levels it must hold. A break of trendline and recent support t 1.13 suggests a run to 1.12. resistance 1.1570″.

Oil might just be the key to everything

I expected the oil rally we’ve had. Not in one week certainly, but the set up was there and once resistance broke price accelerated for both WTI and Brent. They’ve stalled a little now and that might be critical for the outlook for markets more broadly.

Of course earnings season is going to be a big event for stocks. But this chart suggests that the Oil market led the way lower for stocks and bonds and was part of the recovery. Certainly for bonds the linkage through inflation expectations is solid while for stocks and credit – risk appetite more broadly – a recovery in oil helps sentiment toward debt.

So I’m watching this space closely too.

For the moment I’m expecting a pullback in oil to test support on this rally.

The week ahead

Chinese trade, money supply and new loans are going to be huge this week as is the ongoing chat about the trade war. Both sides are trying for positive spin but it seems state subsidies – which go to the core of the Chinese system may be a stocking point. But Liu he is heading to Washington at the end of the month  if the shutdown can be sorted out.

The Brexit vote, should it actually happen, is big news. But even bigger news would be its avoidance and a move toward a second referendum or the withdrawal of Article 50.  It seems UK politicians neither want to stay or go which makes staying almost the default option.  Against this back drop UK inflation data is likely less important than usual.

We got CPI Friday and PPI is out next week in the US along with retail sales and the Fed’s Beige Book – yesterday we aren’t far from another Fed meeting and the first of the now mandatory press conferences for the Fed chair. Neel kashkari, among others from the Fed, is speaking.

EU CPI is out too. That could be interesting for Euro and markets. While in Canada at week’s end we also get inflation data.

It’s a big week, enjoy.

Have a great week

Greg McKenna
@gregorymckenna on Twitter
In collaboration with SMART Markets..

The Information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any particular trading strategy. Readers should seek their own advice. Reproduction or redistribution is ONLY allowed with permission. Please speak to Greg McKenna to obtain same.
Copyright © 2018 gregmckenna.com.au, All rights reserved.
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Greg MckennaExhaustion or Extensions, that’s the big question for the risk rally right now – McKenna Macro Markets Weekly

US stocks and the risk rally is at a critical juncture – January 10 2019

on January 10, 2019

Hi Folks – Below is what I sent the Platinum Members as their daily update today.

I won’t usually repost this but I wanted to do it for two reasons:

  1. I want more clients and as you can see from below and I sure you can garner from the free weekly there is value to be had (I won’t make the coffee gaga again I promise); and
  2. We are approaching an important juncture.

So, remember the launch special is on all membership categories till my Son’s 16th Birthday on January 26 – you can get the details here

And for those who like to get up to a 100% rebate the cost of a subscription (subject to your trading volumes) by opening an account at Blueberry markets you can find the link here.  Please email me if you do so I can keep an eye on it.

ANYWAY, here’s today’s Platinum Subscriber report – ENJOY. 

The risk rally faltered a little bit overnight. I know I know, stocks in Europe and the US were still higher but at 2,571 as I write (10.43 pm Wednesday New York, 2.43pm Thursday in One Mile) the S&P futures are off about 25 points from the high during Wednesday’s session in US trade.

That high was associated with the release of the fed’s very dovish minutes and after the very dovish action of the various Fed speakers overnight – the very ones I suggested yesterday would likely be “a dovishly supportive crowd of speakers”.

With Chairman Powell and vice-chair Clarida among the Fed speakers on the Husting’s Thursday we’re likely to see more supportive comments.

But the reason we might like to wonder if the rally in stocks, and thus risk assets, is getting near an inflection point is that prices for the S&P 500, using it as the bellwether, are right in the zone. If I can put it that way.

In your weekend Platinum pack I noted with regard the weekly and daily S&P setups,

Weekly: JimmyR indicator (15 and 30 ema crossover) turned bearish for the first
time since April 2016 when the S&P was around 2,000/2,010 during December that turns the overall trend lower on this time frame. Price then exceeded my Dec 22 target of 2,500/2,523 and the subsequent further target 125 point below with the Christmas eve collapse. Subsequent recovery looks to have legs toward 2600 previous support and perhaps the 15 ema at 2,650.
Daily: Bullish engulfing Friday after some small falls in Asia gave way to a solid NFP and Fed induced rally. Target on break of the week’s high on a 138.2% basis is around 2,600. Support 2,489″.

Now, I’m not telling you what I told you to blow my trumpet – though last weekend’s Platinum pack did nail so many moves from stocks, to bonds, and currencies (please tell your friends, I’d like a few more clients). I don’t do it to blow my trumpet because at some point – this week, next week, today maybe – I’m going to get it wrong.

Rather I raise this to highlight that US stocks – again using the S&P as the bellwether – are back at important and significant resistance levels. And they’ve satisfied my initial targets of what still is a counter trend rally. So for me that’s a place to take some money, some risk, off the table – but that is just me, I’m a cautious trader. 

The Russell 2000 is at a similarly important juncture.

So far though – on the daily charts – other than hitting resistance and a little fall from last night’s highs on US stocks right now there is no reason to abandon the rally. But it’s largely hit the initial targets and the weeklies are still showing downtrends.

But, your money management is up to you and we could get that blow of toward 2,650 in the S&P first.

One market where the Fed’s dovishness isn’t fully priced in and where it is really starting to resonate is with the US dollar. I’m a longer term USD bull. But for the moment the bears have it and it is pointed down. I’ve covered my thoughts in the morning Newsletter which you can read here.

But, despite some pretty poor inflation data this morning in China (PPI 0.9% versus 1.6% expected and CPI 1.9% versus 2.1% expected) , despite appalling German trade data Wednesday (yes the surplus was okay but the underlying import and export numbers were awful) the USD is under pressure again in Asia.

Here’s USDCNH with an arrow pointing at the target I’ve been banging on about for week’s as Platinum and months in my own study.

So the greenback is offered and while USDCNH/Y may not get to the 38.2% retracement in a hurry. If it is anything like the USDSGD or the daily USDCAD then it will grind there eventually.

Just like the moves in US stocks drive many other markets so too do moves in the USD drive assets and markets – including commodities.

So we need to watch this space.

Daily Chart Scan

  1. You can see the volatility in the MACD of this table of assets and prices…from risk off last week to risk on this week. Sustainable or ephemeral – that for me is the big questions. Only changes in the MACD today gold pointing higher again (but still needs to break Friday’s high to kick), USDJPY, which is pointing lower again, and EURGBP.
  2. At the moment I’m still treating this rally in stocks and risk as counter trend. But the reality is that It’s usually worth riding the MACD turn to see how far it runs. Just look at oil and gold recently.
  3. So you may be forgiven for thinking the the market is schizophrenic. Which is exactly what it is right now. As noted this week, the question is whether the emergence of the Powell Put stabilises the outlook for a period long enough to retest highs.
  4. Times like these, when traders are uncertain it it is an inflection, transition, or continuation, are always fraught. It is why I trade with smaller size and take money off the table relatively quickly.
And to UPDATE from this mornings Newsletter here’s the

Macro Positioning Thoughts that flow from my analysis of the Platinum Scan and the daily iterations

These are the core views impacting markets and suggesting positioning.

  • The Fed has blinked – we can almost ignore good US data, should it come – with this backdrop. This provides a constructive backdrop for risk.
  • China is stimulating – tis is positive too though their data is awful.
  • Global growth is slowing.
  • The USD is under pressure – it has further to fall (but the Euro is like one of Cinderella’s siblings)
  • There was a rush to the exit for stocks in December and they are having a counter trend rally at the moment.
  • Bonds are likely rise further in rate.
  • Gold and Silver are seeing their rally stall as stocks go bid – but the USD is keeping prices more elevated than I thought. Inside days a warning of the next move.
  • Oil has broken important resistance and is pointing higher.
This will evolve folks and besides the chart scan it will be different each day. It wasn’t part of my original plans but I think it an important communication method for my inner sanctum of subscribers.
FEEDBACK IS ALWAYS WELCOME
Have a great day
Greg 
@gregorymckenna on Twitter
The Information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any particular trading strategy. Readers should seek their own advice. Reproduction or redistribution is ONLY allowed with permission. Please speak to Greg McKenna to obtain same.
Copyright © 2018 gregmckenna.com.au, All rights reserved.

 

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Greg MckennaUS stocks and the risk rally is at a critical juncture – January 10 2019

Volatility reigns as we enter 2019 – McKenna Macro Markets Weekly

on January 6, 2019

Welcome to McKenna Macro Markets Weekly

Hi folks, welcome to my weekly newsletter. 

This is post is sponsored by SMARTMarkets one of the two brokers I currently have deals with for you to be able to open an account to earn up to a 100% rebate on subscriptions fees – I’ll have the links soon. So it will be free to everyone on the broad list each weekend, normally on a Sunday. 

The Platinum pack with the chart scan has already been sent to subscribers.

Don’t forget the Daily Newsletter and Video are behind a paywall now. Don’t miss out on the launch offer which is open at the moment- the cost ends up as the equivalent to about a coffee a day. And you’ll make much more than that back by reading and watching. Here’s the link. 

Key Takeaway

Volatility is high as we enter 2019 – a look at the year ahead.

This images is licenced under a Creative Commons Attribution-ShareAlike 4.0 International License.

This week’s Weekly might run a little longer than usual as I wanted to set up my thoughts on a few important things that will drive markets in the first quarter and potentially the next year.

Before I do that though it’s worth noting the acute volatility we have seen in stocks and other markets in the period since I last wrote my weekly. We have had the worst Christmas Eve for decades, we’ve seen the Nikkei in Japan then fall 5%, bonds rally, and a forex flash crash. And now we’ve seen the Fed guinely blink. It’s not quite the Bank of England back in the early 1990’s but it’s a clear sign of the primacy of markets – stocks in particular.

Before I begin here’s the moves over the past couple of weeks.

Key Themes driving markets as we kick off 2019

Volatility, headlines, and volatility expanders like algos and robot traders

The picture above is from what’s known as the “Mandlebrot Set”. I’ve been fascinated by it and its creator benoit Mandlebrot since I first heard of the great professor back in the early to mid-1990’s (not exactly sure when). What’s remarkable about the Mandlebrot Set – and the fractal geometry that go with it – is that whether you scale in or out you get repetition of and refinement of detail at the higher and lower magnifications.

Those of you who have been reading my notes for a long time will know that this helped influence the way I set up my charts and the system I trade which is the same for 1 minute as it is for 1 month charts.

Anyway, I introduce this to reinforce something I shared with my Platinum subscribers this week about volatility and this volatility cluster we are seeing in markets right now and why it may persist for a time.

I want to explain the increase in volatility lately in terms of a Minsky/Mandelbrotian take with a behavioural overlay I’ve had for years.

We know via these two great professors Hyman Minsky and Benoit Mandelbrot that both stability breeds instability and that volatility clusters. We also know that we transition through these two regimes.

Behaviourally, when it is human traders, investors, and fund managers doing to transactions these periods of acute volatility usually lead to position size reduction, volatility matching, and players moving to the sidelines. That makes things more unstable for a time (volatility clusters) but ultimately as these traders make the rational move to sit things out we see the seeds in the reduction of volatility that eventually follows the volatility expansion.

BUT when the robots and automated trading systems keep pushing, don’t get turned off, and – as I tweeted after the Nikkei’s big Christmas day fall – continue hunting, then the necessary and natural circuit breaker doesn’t occur. It’s why at the end of last year I wrote that 2018’s years volatility hadn’t been unusual by my measures (yearly range divided by previous years closing price) but the last 6 weeks or so was.

Volatility rising in the bear market

That said though the Fed and the data flow has introduced its own volatility into the equation recently. And, as you can see the chart above volatility picks up – materially so – in down markets.

Volatility feeds on volatility, or as Mandlebrot say, volatility clusters.

What’s important here in January 2019 after a couple of months of acute dips and surges, surges and dips in stocks and thus most other asset associated classes too, is that the press are volatility amplifiers, they spruik it up and down – they just want eyeballs. And it is a reality that talking heads – of which you could call me sometimes as i go on telly too – love this too as they get to flog themselves to a wider audience.

And of course as central bankers, react to the market moves, reacting to the headlines we get humans moving to the sidelines and algos and automated systems feeding on themselves and the price action. Then the price action becomes the driver of the narrative and we start again – rinse, repeat.

As this tweet from Glushkin Sheff’s David Rosenberg highlights.

In a nutshell 2019 feels like it is going to be a volatile year. There is much uncertainty in the macro economic environment with the global growth slowdown, with QT at the Fed and an end to QE in Europe, China’s slowdown too seems to be taking hold. through in Brexit, the Trade War, the market price action itself, worries over recession.

Transition periods are always like this – we’ll see lots of ups and downs in the months ahead.

The Fed has just written the Powell Put, but is it really needed

The volatility that traders experience in stocks, bonds, and in foreign exchange markets over the past couple of holiday interrupted weeks ha caught the Fed’s attention. Never mind that this very price action was as much a function of lack of traders and algos’ chasing prices as it was about any fundamental drivers. The Fed was watching and its become a little scared.

On Thursday Dallas fed president Robert Kaplan pre-empted Chair Powell’s comments Friday saying a pause in rates for a couple of quarters and possible change to the automatic pilot of  the balance sheet – quantitative tightening – operations was possible.

Then Friday Powell read from prepared remarks rather than his usual free wheeling, off the cuff style of communication. And it was his prepared remarks which really got risk assets bid – even thought US bonds sold off heavily on the back of non-farms.

He didn’t say anything particulalry stunning to anyone who actually knows what central bankers do and how pragmatic they have become. But he did say what the media and mavens were saying he needed to to sooth the nerves of traders and give the press fresh headlines to crow about.

Those key comms were that he said, “with the muted inflation readings that we’ve seen coming in, we will be patient as we watch to see how the economy evolves” and also added that if needed “We are always prepared to shift the stance of policy and to shift it significantly”.

“Patient” and “muted inflation” was the key here.

That’s because on the day non-farms doubled estimates with a 312,000 increase in jobs, when wages accelerated to a 3.2% annual rate, and when more people entered the workforce increasing the participation rate you could easily make the argument that the Fed is right about the economy and the market has no idea.

 

source: tradingeconomics.com

Now there are plenty of folks who say that the jobs market was strong just before the global financial crisis, that a rampant consumer confidence means that a recession is just around the corner. But seriously with Fed Funds essential flat to inflation is this really the case that recession looms large over the horizon.

But does it really or are we going to see the US economy ease back toward potential growth at 2% in the year and years ahead rather than collapse in a heap.

My sense is the US economy with this very pragmatic Powell led Fed will pause on rates, maybe pause on QT – because let’s face it it is and will impact markets and liquidity – and will thus deliver something like we’ve seen in Australian growth for many decades now. Sometimes spectacular but more recently around potential.

We’ll see across the year if me or the recessionistas are right. IT has important implications for asset returns – so watch this space.

Recession calls seem preemptive in the US but global growth is struggling

Global growth is weaker in early 2019 than it was as we entered 2018. That much is clear in the manufacturing and services PMI’s released for December. The JP Morgan global composite PMI which is calculated by aggregating the IHS Markit manufacturing and services PMI’s shows that global economic growth has slowed to a 27-month low in December.

Indeed it is worth noting that global PMI is not going backwards but leading indicators like new orders and backlogs are actually below 50 – in contraction territory. So the outlook has certainly and materially shifted.

You can see that, and why the market went into a complet funk recently about growth, China, Apple in China and more recently about US growth by looking at the Citibank economic surprise indexes.

So it is up to the data to disabuse traders and investors of their worries. It’s also up to President’s trump and Xi to end their trade war. That’s likely to happen sometime this year. The question though is whether it will be by the March deadline the US has imposed.

A long term look at the USD and forex markets more broadly

So we have volatility, we have the Fed, we have US growth, and we have global growth all complicating the outlook. No wonder investors headed for the sideline over the holiday season and the robots and algos were free to roam the landscape unfettered by real money bids and offers.

But one of the other areas of uncertainty is the US dollar.

As the other side of almost 90% of all foreign exchange transactions and as the denominator of the vast majority of global commodity trade the level of and changes in the US dollar influence asset prices all across the globe.

To thin slice a little a stronger dollar pressures commodity prices and emerging markets – all other things equal, which I know is never the case. But you get what I mean. The level of the USD adjust trade flows by impacting exchange rates between it and across other pairs. And in doing so it impacts growth in the US and abroad.

At present the dollar’s rally has stalled below significant resistance in the 97.70/98.20 region – in USD Index terms and it’s stuck in a 1.12/1.15 range against the Euro. but even a cursory glance of the above USD index chart can see how the USD is struggling to break higher.

Technically at present the take is that price again constrained by the overhead resistance at 97.70 and trend line. 3rd down week in a row though indecisive has combined with a close below MT trendline which opens up the downside. Support at the 30 week ema at 95.45 is now pivotal along with recent low at 95.60/65. Overall the MACD pointing lower.

So, given that outlook and that the most recent BAML fund manager survey showed investors see the USD as the most crowded trade the near term outlook for the greenback may be for weakness before the overall economic and central bank policy outlooks come back to the fore and the USD finds a bid once more.

The S&P 500 as the bellwether for global stocks

The last 20 days has seen the correlations between markets disrupted by the holidays and a potential short term change in risk appetite as the switch to buy the dip has occurred across a number of markets. How this plays out is difficult to know but we enter 2019 almost diametrically opposite to the positivity we saw from traders and investors as we entered 2018.

That’s seen sentiment collapse and begs the question I posed on twitter and in my newsletter Friday, ‘Could we all be too bearish on #stocks, and growth, too bullish on #bonds #rates and the non-#USD currecnies? Of course This chart, by @JackAblin via @SoberLook‘s excellent WSJ blog suggests we should be getting ready to buy risk assets….on a 12 month horizon anyway”

But catching a falling knife is never easy.

Though it’s clear that some traders – even if they are robots – have been doing that in the S&P and other stocks markets. Indeed short term the outlook may have changed in a tactical sense. Loooking at the weekly chart of the S&P, as the bellwether for global stocks, it is worth noting a price appreciation back toward the break down level/s is in train. The overall medium term downtrend remains intact though based on my JimmyR indicator.

My synopsis is that after the JimmyR indicator (15 and 30 ema crossover) turned bearish for the first time since April 2016 (when the S&P was around 2,000/2,010 by the way) in December the overall trend remains lower on this weekly time frame.

Price then exceeded my Dec 22 targets of 2,500/2,523 and the subsequent further target 125 point below with the Christmas eve collapse. Subsequent recovery looks to have legs toward 2600 previous support and perhaps the 15 ema at 2,650.

We’ll see I guess, but if the S&P recovers expect risk to go bid,. Equally its failure will be the failure of so many markets should that occur. Except bonds of course 🙂

Have a great week

Greg McKenna
@gregorymckenna on Twitter
In collaboration with SMART Markets..

The Information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any particular trading strategy. Readers should seek their own advice. Reproduction or redistribution is ONLY allowed with permission. Please speak to Greg McKenna to obtain same.
Copyright © 2018 gregmckenna.com.au, All rights reserved.
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Greg MckennaVolatility reigns as we enter 2019 – McKenna Macro Markets Weekly

A liquidity event hit markets in Asia today – here’s what happened

on January 3, 2019

When the deepest and most liquid markets on the planet flash crash something is up

Apple released a disturbing report after the bell in New York Wednesday. It spoke of an unexpected (only by Apple) slowdown in China hitting returns and it saw the Apple price after hours get hammered.

That Tim Cook and his company mentioned China as the reason behind the downturn in the company’s outlook seemed to hit exactly the pressure point traders and investors were already alarmed over.

That is, the China and global slowdown which seems to have been confirmed by Wednesday’s global manufacturing PMI data. I talked more about it in the Markets Morning newsletter today – but suffice to say as we enter 2018 we are almost diametrically opposed in sentiment to the ebullience with which markets entered 2018.

That’s a potential positive for sometime this month or this quarter.

back to this morning though and USDJPY came under pressure after the Apple news as stock futures went a little offered and as it fell stops were triggered in USDJPY and on the Yen crosses. This was particularly acute as it broke Fibonacci support at 108.40. The cascade into the 104’s is captured in my daily video in real time as I was recording at the moment of the collapse – if you haven’t seen it you can view it here.

The flash crash was clearly triggered by stops and options but also clearly a liquidity event.

—–

QUICK AD – I have been asked by many interested subscribers who were focused on Christmas and New Year spending if I could leave the launch special open a little longer…so I have kept it open till Mr 15 turns 16 on Australia day – but that’s it. 

To those who’ve used this note as a catalyst to sign up, thank you. For those of you who would like to – YOU CAN SIGN UP HERE.

Please note, this is a genuine LAUNCH special and thus the discounts apply for the first 24 months of membership – 2 years folks. 

—–

As I noted yesterday, 2019 starts as 2018 ended – with much uncertainty.

But when you see the types of moves we saw in forex markets – the deepest and most liquid on the planet – you know this is not your usual market. Of course Tokyo was largely absent on a bank holiday which would have facilitated the move in the way that the Christmas Eve and boxing day moves in US stocks were exacerbated by thin markets.

But Aussie dollar traders were at their desks – we just hit an air pocket and the price collapsed to around 0.6743 according to Reuters. That’s the lowest level since the Financial Crisis.

I was short AUDUSD and took them back once my video had finished. I’ll look to sell again on a bounce, or a collapse as may be the case. But I’ll report my thinking and trades to subscribers each day as they change and the landscape shifts.

With the volatility in stocks (S&P futures down heavily in Asia), in oil (down sharply today after yesterday’s bounce), with US 10’s and other global rates rallying, and now increased volatility in forex markets, traders need to be cautious.

It all means that position sizing, risk management, and volatility matching are important for traders and investors right now. It feel’s like it might be one of those years. One with plenty of volatility, at least to start with.

I know part of this note is also that I am spruiking my services, but this is exactly the type of market you need someone with 30+ years experience to help guide you.

If not now, when?

So for deeper insights and my thoughts on positioning and what I am carrying you can sign up for the morning note and videos. 

Have a great day
Greg 
@gregorymckenna on Twitter

 

The Information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any particular trading strategy. Readers should seek their own advice. Reproduction or redistribution is ONLY allowed with permission. Please speak to Greg McKenna to obtain same.
Copyright © 2018 gregmckenna.com.au, All rights reserved.

 

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Greg MckennaA liquidity event hit markets in Asia today – here’s what happened

As china and Asia’s economies slow traders fret and the Aussie dollar swoons

on January 2, 2019

A tough day in Asian markets as the reality of the global growth slowdown bites

Markets tried to shrug off the weaker than expected official NBS China manufacturing PMI Monday, instead favouring to positivity that news President’s Trump and Xi had had a convivial chat about the trade war.

But the release of the private sector Caixin manufacturing PMI which slipped to 49.7 from 50.2 last and 50.1 expected, along with South korea still in contraction zone – yesterday’s exports were ugly –  not to mention the overall Asia region has made it more difficult for traders and investors to ignore what looks like a genuine global economic slowdown.

Source: Bloomberg.com

As a result the Hang Seng is down 2.4%, the FTSE CHina A 50 futures are off 1.6%, the CSI 300 and Shanghai Comp are off 1.2% and 15 while the ASX has lost 1.6%. The Aussie dollar is back at 0.7018 down about half a percent, the Kiwi is at 0.6697 off 0.3%,  and bond rates continue to rally.

—–

QUICK AD – I have been asked by many interested subscribers who were focused on Christmas and New Year spending if I could leave the launch special open a little longer…so I have kept it open till Mr 15 turns 16 on Australia day – but that’s it. 

To those who’ve used this note as a catalyst to sign up, thank you. For those of you who would like to – YOU CAN SIGN UP HERE.

Please note, this is a genuine LAUNCH special and thus the discounts apply for the first 24 months of membership – 2 years folks. 

—–

So, as I wrote in this morning’s note 2019 starts as 2018 ended – with much uncertainty.

China and the US, or at least the two Presidents are trying to make a deal happen on trade. Why that is, is clear in the Chinese data and in the recent deterioration in US economic data and weakness in the US stock markets.

Both Presidents have their own agenda AND BOTH are served by a deal which can aid their economies and markets.

The question though is having collapsed in December whether US stocks have made a sustainable bottom or whether this is just a counter trend rally in a greater unwind of risk while the Fed unwinds its balance sheet.

With cross market correlations between the S&P and other assets high that’s a key question.

The sea of red across Asia’s stock markets and US futures today is thus troubling. Concerns about growth as reflected in Asia’s bourses and the Aussie and Kiwi dollar’s falls add to that disquiet. I”m firmly in sell rallies mode for stocks and have taken a long term short position in the Aussie dollar today also.

But in the end it’s about US stocks and the US dollar. For deeper insights and my thoughts on positioning and what I am carrying you can sign up for the morning note and videos. 

In the meantime, here’s the China A 50 index CFD as it slips south.

Have a great day
Greg 
@gregorymckenna on Twitter

 

The Information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any particular trading strategy. Readers should seek their own advice. Reproduction or redistribution is ONLY allowed with permission. Please speak to Greg McKenna to obtain same.
Copyright © 2018 gregmckenna.com.au, All rights reserved.

 

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Greg MckennaAs china and Asia’s economies slow traders fret and the Aussie dollar swoons

Holiday Season Macro Markets Morning 28122018 – HOLD ‘EM, FOLD ‘EM

on December 28, 2018

Morning folks – Welcome to McKenna Macro’s Market Mornings.

Just quickly for those who missed yesterday’s piece on volatility here it is

And here’s a piece reinforcing what I’ve been saying on Twitter about the machines as the source of the vol from the Wall Street Journal

What I learnt playing cards at Christmas

When I was a kid there was this family ritual every Christmas and Easter. My dad, uncles and aunties would grab a chair around our kitchen table (Christmas was always at our place back then) pull out a deck of cards, their coins and start playing Poker or Pontoon/21.

As a kid I desperately wanted to play in these all-nighters which often didn’t end till lunchtime the following day when the kids and the non-playing relatives dragged the card sharks away. Through time I was allowed to sit in when someone wanted a break and then eventually as a young teenager I got my own seat.

We weren’t playing for sheep stations. But as a youngster in the early 1980’s I learnt a thing or two about risk, about luck, about the interplay of the different players, the cards and luck and risk. And I also learnt about when to Hold or fold.

I’m certain these experiences helped me get my first trading job. Anyway, here’s a few thoughts on knowing when to fold ’em.

You need to get it wrong to get it right as a trader

Trading isn’t about winning and losing – it’s about risk management. Obviously, if you’re a rubbish trader and lose all the time, you’ll pretty soon be the trading Dodo bird.

Did you ever hear that old Kenny Rogers’ song ‘The Gambler’? Okay, okay, I’m showing my age and my musical taste (or lack thereof). Maybe you’re just not old enough to remember but the lyrics are a lesson in how to approach the trading game:

“If you’re gonna play the game, boy, ya gotta learn to play it right 

You’ve got to know when to hold ‘em, Know when to fold ‘em,

Know when to walk away, and know when to run,

You never count your money when you’re sittin’ at the table,

There’ll be time enough for countin’ when the dealing’s done”

This song and dated wisdom is the seed of your trading success yet for many it just seems to challenge our natural intuitions.

Gotta learn to play

From the time we could hold a pencil, we were told we had to get the answers right and the letters on the line. If we only got 8 right in the spelling or maths test, the smart kids looked at us derisively as if 80% wasn’t a good score.

The poor kids who only get 5 or 6 right, well, they were in the dunces’ corner, weren’t they? This didn’t change as we got older. Some kids who got 98 or even 99 in their final year exams, absurdly still missed out on the courses they wanted to get into.

Things do get a little better in life with universities awarding 45s as a conditional pass and the smart kids only had to get 85 to get a high distinction. That’s a lot more like life but it’s still hard to break the bonds of youth and those ingrained lessons of more is good and less is bad.

These learnings then get ingrained in traders who think you have to be right all the time.

Know when to hold ‘em

If you’ve ever taken part in a footy, baseball, or other tipping competition and if you are anything like me you probably diligently study the form of the teams as you try to get all the ‘picks’ right each week. Sometimes if you are a real diehard you will even tip against your own team in the name of winning the competition – I don’t, I’m a Collingwood supporter.

A lot of people I know who are new to trading bring the same approach that they were taught at school or take to footy tipping to trading. They try to get every single one right. Every trade has to be a winner or they’re unhappy.

Guess what – if you want to lose a lot of money stick to trying to get every single one right. That’s because behaviourally it slants your thinking, it makes you hang onto losers and unfortunately it also leads to traders cutting winners too soon.

Know when to run

Sounds counter intuitive, doesn’t it?

But this is a serious point and one that causes most traders to lose before they learn to win. In addition to our schooled socialisation, our primordial caveman instincts seem to get in the way. Behavioural psychologists have also shown that most traders seem to need to get it right all the time but in doing so they cut their profits short and let their losses run.

To explain imagine the following scenarios where you buy EURUSD at 1.1400

Scenario 1:

Imagine the EURUSD is at 1.14 and you think it’s going to 1.1450 so you buy. It rallies after you get in and is trading at 1.1423  – what do you do?

Some might let it run until a reason to exit becomes clear but the psychologists say that many of us will take the 23 points and run only to then see it run another 10, 20, 50 or maybe even more. You have won but you lost too, you made 23 points but you didn’t let your win run – you cut it too fast because you didn’t want to lose money.

You may think that I’m crazy when I say this but you can go broke making money, scenario 2 will show you how.

Know when to walk away

Scenario 2:

Lets say that the set-up is the same as above and you are long Euro at 1.14 but you soon find it trading at 1.1377 – what do you do? This is a 23 point loss as opposed to the 23 point gain in scenario one.

Once again the psychologists tell us that you are likely to hold onto that position even though it is a loser – in fact because it is a loser. What will you do if it then trades down to 1.1350? Perhaps you might still hold it – you are now down 50 points and 100 points away from what you thought was going to happen.

Where is your stop? If you don’t have a stop loss you are out of the plane without a parachute – what are you thinking?

Some people will think the loss is only a bit of a temporary setback and that they’re right and the market is wrong. Many traders also don’t want to reverse at what might be a low – they want to be right, they don’t want to take a loss and confront the fact that they were wrong.

I’m sure you can see how this approach to pcutting profits and letting losses run ends up with a potential negative probability and payoff matrix.

Know when to fold ‘em

So, forget about getting it right all the time – leave that to footy tipping. Remember that in trading, it’s all about staying in the game and about cutting losses and letting profits run.

As Kenny Rogers said you just got to know when to fold ‘em and know when to hold ‘em. When you learn that, you are on your way to becoming a successful trader.

And it’s as true if you are managing your super, 401k, or any other investments. The only difference is the time frame your talking about.

And here’s Kenny

Have a great day
Greg 
@gregorymckenna on Twitter
The Information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any particular trading strategy. Readers should seek their own advice. Reproduction or redistribution is ONLY allowed with permission. Please speak to Greg McKenna to obtain same.
Copyright © 2018 gregmckenna.com.au, All rights reserved.
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Greg MckennaHoliday Season Macro Markets Morning 28122018 – HOLD ‘EM, FOLD ‘EM

Very Bad Santa. – McKenna Macro Markets Weekly

on December 23, 2018

Welcome to McKenna Macro Markets Weekly

Hi folks, welcome to my weekly newsletter. 

This is post is sponsored by SMARTMarkets one of the two brokers I currently have deals with for you to be able to open an account to earn up to a 100% rebate on subscriptions fees – I’ll have the links soon. So it will be free to everyone on the broad list each weekend, normally on a Sunday. 

The Platinum pack with the chart scan has already been sent to subscribers.

Don’t forget the Daily Newsletter and Video are behind a paywall now. Don’t miss out on the launch offer – it’s equivalent to about a coffee a day. And you’ll make much more than that back by reading and watching. Here’s the link. 

Key Takeaway

Very Bad Santa.

Risk appetite fell off a cliff after the Fed failed to react to market fears about the outlook IN THE WAY THE MARKET WANTED.

I argue they did react, they downgraded forecasts and signalled a pause is coming. VERY SOON.

But fed by a headline chasing media parsing every word and nuance the market took the Fed to be unsupportive. President Trump hasn’t helped either with “tariff man” tweets, a government shutdown, and emerging (again from headline chasing media) threats to sack Chair Powell. We need volatility to settle and asset prices to stabilise otherwise its trading a risk averse market as the best style of play.

Will thin liquidity into year end see support evaporate and markets collapse or will the same bid chasing sellers focus on the topside and run prices higher? I’m having a few days off but throughout my career I usually work between Christmas and New Year because it’s the best time of the year to work as trades pop up that make money by the first week of January.

I’ve seen that year in and year out.

Key Themes driving markets

The Fed has been spooked by what happened this week

The Fed has been spooked by what happened this week

I’ve taken a pop at the press and I think they deserve it. They cheerlead assets and markets on the way up and then they assiduously chase markets down. They are reporting on what’s going on naturally but they are also volatility amplifiers.

That’s their job I guess. But in a world of headline chasing algos what also clear is that in the press and on places like Twitter there are algo trigger headlines that are being written in order to generate both clicks and further headlines from market moves.

That’s something that I think has rattled the Fed this past week.

I say that with reference to the conversation between CNBC’s Steve Liesman and NY Fed president John Williams on Friday. It was a very good chat and Liesman was tough but fair on Williams. What struck me though was the arcane nature of the discussion about the Fed’s messaging.

Here’s Williams answer to Liesman saying the FEd still seems to be on a set path, not data dependant at all (my bolding).

“First of all, we made some changes — important changes to our statement around that. One is we changed the word from “expects further gradual increases” to “judges.” Now if you look it up in the dictionary, judges means – is, you know, we’ve made an opinion. It’s our judgment or opinion. That’s where we see things going. This is not a commitment or promise or in any way a sense that we know for sure that’s what we’re going to do. We are actually saying pretty clearly this is how we see it now based on our positive pretty optimistic view of the economy and we’ll change that as needed. We also put the word “some” in front of “gradual increase” which is indicating that although we don’t think we’re done raising rates, we’ve made a lot progress in getting interest rates back to normal. Finally we did add the sentence, which I think is really important, is that ‘the committee is monitoring and continues to monitor global economic and financial market developments and their impact – potential impact on the economic outlook.’ So when we add a sentence like that, that’s not just — that has meaning, it’s indicating to everybody that we’re very focused on that and very attuned to the possibility that this outlook may change in coming months and we’re going to be very focused on studying that and open to reassessing our views.”

The Fed was listening to the market, but was too cute for its own good. Seriously “look it up in the dictionary” – only I do things like that :).

It tells me that I read the Fed right in the signal that they are readying for a pause, it tells me they may not hike again in Q1 2019 and may come back in January with more explicit dovishness.

As I wrote on Twitter and in the daily note on Thursday, Powell looked nervous at his press conference. That didn’t help messaging. They’ll try again in the month ahead.

After a tough week what’s next for stocks

The easy answer is more volatility.

The unhelpful answer is that in this very thin period for markets that could mean a big head fake rally just as much as it could mean further big falls.

Medium term though my Jimmy R trend indicator pointing lower on the weekly charts for every single major stock index I look at. So even though I know the put call ratio is as low as it’s been since the GFC the outlook remains lower for stocks.

One very good reason for that is the reality that the Citibank Economic Surprise Index for all the major markets except the BRICs is in negative territory. So whatever the markets and punditry was expecting in terms of growth has been disappointed. In the case of Europe that is materially so.

So we have the markets viewing the Fed as unsupportive, we have data suggesting a global growth deterioration – relative to expectations – and we have technical indicators pointing lower.

It’s a toxic combination for the bulls and for buyers. Bears are having their moment and the thing holiday lead up period and recent volatility since October has strengthened their hand.

The takeaway, as reflected to Platinum members this week (adjusted for the cash chart below) is that the JimmyR indicator (15 and 30 ema crossover) turned bearish for the first time since April 2016 when the S&P was around 2,000/2,010 two weeks ago. That cross corresponded with a cross of the 50 sma making this a powerful trend indicator.

I had targeted 2,505/2,540 which is the 38.2% retracement of the 2016 to 2018 rally and the February lows. If that was broken I noted that opened the 125 point fall to the 50% of that rally which comes in at 2,374 with the 200 day moving average at 2,345 making this a CRITICAL SUPPORT ZONE. If this level does not hold 2,240 is the next support.

And here’s the weekly chart.

Bonds are building for a rally

It wasn’t supposed to be this way. Bonds were supposed to react to the big Treasury issuance, a strong economy, and the Fed tightening by roaring higher. Some, like multi-decade bond bull A. Gary Shilling were derisive of this and believe lower long term levels beckon for US bo because of the deflationary environment.

My own analysis called for 3.25/28% and I thought at the time we were on the cusp or a break toward 3.45/50%. The double top though and the 10 year rate’s inability to hold above 3.25% disabused me of that view and I have been riding the bull market in rates down since October.

And that bull market may not be doew yet. At 2.78% the 10 year Treasury may be on the cusp of a run to 2.63%. But if the oil price collapse and the associated fall in inflationary expectations are any indication then further falls could eventuate.

On its own that might hurt the USD – but everything is suffering

Euro is 1.12/1.15 within in a broader 1.12/1.18 range. The USD is 97.70/96.00 with a break and hold either side needed to kick things on. That everyone is in this weakening economic outlook game together is contributing to the range trade.

But as we head toward 2019 it’s worth looking at the big picture for the Euro using the monthly charts.

My takeaway is that the overall downtrend form 2007/2008 highs remains intact. No trend in
evidence but last 3 months candles suggests lower levels. Short term resistance (in monthly chart basis that is) comes in at 1.1585/1.16 support 1.12 then 1.06.
Overall this looks very much like a sell rallies market with the break of 1.12 triggering a big head and shoulders on the weeklies which targets the 1.03/05 region.

The week ahead

There is some second tier data out during the Christmas/New Year period but with correlations tending toward crisis level linkages it is the price action of US stocks which will drive markets across the globe this week.

For those who celebrate Christmas can I say Merry Christmas and for everyone else, Happy Holidays.

This weekly will return in the New Year.
Greg McKenna
@gregorymckenna on Twitter
In collaboration with SMART Markets.

The Information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any particular trading strategy. Readers should seek their own advice. Reproduction or redistribution is ONLY allowed with permission. Please speak to Greg McKenna to obtain same.
Copyright © 2018 gregmckenna.com.au, All rights reserved.
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Greg MckennaVery Bad Santa. – McKenna Macro Markets Weekly

Markets Morning Daily Video 17122018

on December 17, 2018

Markets Morning Video

Good Morning folks,

It’s Monday so I have a look at the weekly setups for markets. I’m starting with stocks because they are at the heart of everything right now as we head to the Fed meeting this week.

In Order today:

  • Wrap & Outlook
  • SPX, DJ30, Nasdaq, SPI200, DAX
  • EURUSD, USDJPY, GBPUSD, AUDUSD, USDCAD, USDSGD, NZDUSD, USDCNH, and USDSGD
  • Gold, Copper, XAGUSD, Brent & WTI
  • BTC

Please click on read more to see the video.

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Greg MckennaMarkets Morning Daily Video 17122018

Bad Santa, or Saint Nich. – McKenna Macro Markets Weekly

on December 16, 2018

Welcome to McKenna Macro Markets Weekly

Hi folks, welcome to my new weekly. 

This is post is sponsored by SMARTMarkets one of the two brokers I currently have deals with for you to be able to open an account to earn up to a 100% rebate on subscriptions fees – I’ll have the links soon. So it will be free to everyone on the broad list each weekend, normally on a Sunday. 

The Platinum pack with the chart scan will be out a little later.

And don’t forget the Daily Newsletter and Video will go behind a paywall from tomorrow. With all the market ructions the average read of each post last week hit a new high. So, don’t miss out on the launch offer – it’s equivalent to about a coffee a day. And you’ll make much more than that back by reading and watching. Here’s the link. 

Key Takeaway

Bad Santa.

I wrote in my daily newsletter recently that when traders are desperate for a market move to happen, like the Santa rally or a big bounce or fall in an asset price, it often doesn’t happen because a broad cabal of traders position for it early. This, in turn, saps the available limits and position space to drive the move.

So, even though it’s not Christmas yet and Saint Nich hasn’t finished delivering the presents, and maybe too early to say it won’t happen, the Santa rally is under pressure.

That’s particularly the case given that just three weeks back we saw the biggest weekly gain seen 2011 yet the subsequent fortnight has been destructive for bull sentiment with big back-to-back falls and rallies failing fast.

Traders want the Santa rally, many are positioned for it. Many bought dips hoping someone else would come along and join the bid helping drive prices higher – so they could sell to them no doubt.

And certainly the Administration, the President, and even the Chinese seem to want to support Santa. All three have been trying hard to communicate a deal for a long-term end to the trade war is being worked on. Yet stocks can’t hold their rallies – that’s telling. More pointedly though, that the S&P 500 closed the week below the recent range is troubling.

But these ructions in markets are about more than just the trade war.

The key reality is that data in China, Europe and other jurisdictions is slipping – materially so. Europe’s Citibank Economic Surprise Index collapsed to -76.2 last week, its lowest level in 6 months. China’s CESI sits at -19.7. So at -7.3 the USA CESI score is a relative bastion of health. So too the EM CESI score of -1.5.

No wonder EM stocks and the US dollar are stronger again.

Now for the Fed this week. Will Jerome Powell and his colleagues send St Nich, or Billy Bob Thornton?

Key Themes driving markets

The USD is in the march again

I’m going to get on my high horse here. There are too many commentators masquerading as macro strategists or currency gurus waxing lyrical about why the Fed pause will drive the dollar lower yet the dollar isn’t lower.

For the record and so readers will be without any doubt that these single factor enthusiasts are macro and currency tourists – foreign exchange markets are complex beasts driven by a multiude of inputs – ON BOTH SIDES OF THE CROSS – and while interest rates are important they are not the only driver.

Put more succinctly – NO MAJOR CURRENCY IS THE RESULT OF A SINGLE FACTOR MODEL

Rant over.

To the US dollar then, and while it hasn’t broken yet the dollar index, closing the week at 97.42 for its best weekly close May 2017, is strong.

Many traders and commentators will want to fight that, to decry it. The Fed is about to pause they say, a majority on a twitter poll conducted by Pension Partners Charlie Bilello (2015 respondents) this week said there will be zero or just one tightening by the Fed in 2019.

That expectation comes despite wages growth sitting at a 9 year high, the economy remaining above potential, the Beige book and NFIB suggesting tighter labour markets and higher wages.

My expectation is that a pause is coming. Of that I have no doubt because it is the prudent next monetary policy step. But the Fed is unlikely to signal no hikes or just one after this weeks meeting.

So with the ECB’s Panglossian outlook for Europe undermined just the day after the December meeting by moribund PMI’s. And with Chinese data showing a clear acceleration of the slowing (can you actually do that?) in the world’s second-biggest economy, it will only take a mildly less dovish than expected FOMC statement, dot plot, or press conference, to see the US dollar index, the USD more broadly, rally to new highs.

But I’m not a raging US dollar bull, not yet anyway. In USD index terms it is still the case that a close above 97.70 is necessary to kick higher. A daily would be strong, on a week, stronger. We’ll see.

Here’s the chart.

So trade doesn’t matter now?

My rhetorical self, the one who looks at fundamentals and shifts, rationalises, and weights different drivers and influencers in markets, thought that the reduction in car tariffs and recommencement of soybean purchases by the Chinese – as clear signals of intent to move forward on the trade truce – would have been positive catalysts for both sentiment and price.

Indeed I said that in my videos and wrote it in my daily notes.

But my trading self, the one who looks at price action and the various inputs I use when deciding to what and how to trade, couldn’t help but be cynical on that positive view given the price action in stocks and in Soybeans too.

This is the value of macro and cross-markets analysis. It is a recognition that signals can be generated from the noise of other markets.

So, it seems that markets have assimilated that the US and Chinese sides are talking and working together. The markets have assimilated that President Trump is winning tactically and the Chinese ARE in fact working through the shopping list of items they promised at the G20 meeting.

Crucially though, the market seems to have also recognised that the completion of this shopping list IS TABLE STAKES to have further discussions about the ACTUAL end to the trade war.

A deal is going to get done eventually. President Trump is correct when he implies China needs the deal. President Xi’s China economic transformation is not far enough along to endure a protracted trade war with 25% tariffs.

The question is when and where will global and US growth be when the deal is eventually announced in 2019.

In the meantime, traders need to watch the current level in soybeans as much as any other market. It’s very quick shorthand to sentiment right now.

The trouble really is growth right now

The ECB and its president Mario Draghi put a brave face on the outlook for the Eurozone economy last week as they ended their quantitative easing program in the face of clear slowing in growth and despite Mario Draghi saying QE had been integral in driving the growth that Europe has seen in recent years.

So without QE where does Europe stand?

Not in a good place says Chris Williamson, IHS Markit’s chief business economist who tweeted Friday after the poor European preliminary PMI’s, “just one day after the #ECB halts QE, flash #eurozone #PMI hits 4-year low with forward-looking indicators deteriorating. Price pressures also cooled. Comparison against #GDP points to 0.3% growth in Q4, but momentum down to just 0.1% in December”.

This is important folks.

The US is cooling too, Williamson said of the US PMI’s, “US flash #PMI shows weakest growth since May 2017. #Manufactring output growth stuck at subdued pace seen in November, service expansion slowest since January. Indicates 2.0% GDP growth rate in December”.

Still plenty of economic and thus policy divergence there folks to drive differing reruns for the USD and Euro, the S&P 500 and the DAX.

China too is slowing as the big miss on retail sales, industrial production, and investment data for November showed last week. Notions that China will see a drop in growth are high, but will it really be able to hold above 6% as many forecast without a big stimulus.

I agree with Tony Nash

Asia more broadly is slowing too. This is the narrative traders are focused on. As we enter 2019 it’s not the synchronised growth uptick folks were focussed on a year ago but rather the opposite. Slowdowns are everywhere.

Contrarian Corner – are markets too bearish US and global stocks

Zerohedge tweeted the following after the close Friday, “Citi: “Our models suggest that global equity may now be too bearish on the earnings outlook. This suggests investors should buy the dip.”lol”.

They, ZH, added the lol not me.

But it is not just Citi. Bloomberg reports Goldman’s chief US equity strategist David Kostin says the equity market is currently pricing no growth in 2019 when his firm’s forecast is 2.5%

A number of other notable strategists went bullish last week too. One even sees a more than 10% rally in the next 30 days for the S&P – good Santa.

As it stands though the price action suggests caution.

The DAX hasn’t been able to break back above 11,000, The SPI is sold at every rally, and the S&P 500 closed the week below 2,600. We are only a less dovish Fed away from 2,500/10 which is 38.2% retracement of the rally from the 2015/16 lows.

The week ahead

Given the market mood, nothing matters as much as the FOMC meeting Wednesday.

The decision, to be announced at 2pm Washington, 7pm London, and 6 am Sydney/Melbourne, will very much set the tone as to whether the Santa rally has any chance of turning up in 2018 – or not, as may be the case.

Expected to tighten the FOMC and chair Powell must walk the fine line of communicating that while the US economy is slowing it is not weak. While the market is troubled by the outlook wages are still growing at a 3.1% rate and labour markets are tight. But equally, it must acknowledge inflation itself remains on target and the time for a pause to evaluate the economy is soon near.

My expectation is that whatever it ends up doing it will signal at least two hikes in 2019. That could be enough to make doves cry.

Also out are the minutes to the RBA’s recent meeting (Tuesday), Australian employment data (Thursday), and Kiwi trade and GDP data (Thursday). The BoE has a meeting and announcement (Thursday) but there shouldn’t be any shocks in that. brexit too looks settled – it’s going nowhere fast at the moment.

In the EU the highlights are EU CPI and trade (Monday), German Ifo(Tuesday), EU PPI and UK inflation (Wednesday). Canada also has CPI data out Wednesday.

Another big week, enjoy.

Greg McKenna
@gregorymckenna on Twitter
In collaboration with SMART Markets.

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Greg MckennaBad Santa, or Saint Nich. – McKenna Macro Markets Weekly