Market Weekly

Fed signals rate cuts despite US economy doing okay, stocks love it – McKenna Macro Markets Weekly

on July 13, 2019

Hi folks, welcome to my weekly newsletter. 

This is post is sponsored by SMARTMarkets 

To sign up for this report weekly click here

Here’s a bit of feedback from a subscriber recently:

“We deal with 20 Banks globally and I get more from your note and video than all of them”

Key Takeaway

What a week.

New record highs for US stocks, Fed chair Powell promising rate cuts and belting the Fed’s own Phd’s over the head by saying rates aren’t as accomodative as their models suggested, US inflation a little (smidge) higher than expected, and Iran’s belligerence rathcheting up tensions in the Gulf and thus oil markets.

We’ve had signs the trade talks are going nowhere, China’s trade surplus with the US continues to grow data release Friday showed, and we had a weird interevention into crypto markets by President Trump which seems – to me at least – likely energised by his antipathy toward Facebook as much as his love for the US dollar.

As the week ends and I get ready for the next one I am left with on clear message – do not fight the tape.

For me it is as simple and as difficult as that as the S&P end’s the week above 3000, as the Dow passed 27,000 and as 10 year Treasuries climbed back to 2.10%. Not to mention the USD coming under a little pressure once more and oil trying to break out. But honestly, after whatever size this USD reaction is do you really want to own Euro? Anyway, the other big play at the moment is is gold, the little engine that might. If it can get through resistance at $1439/45 – until then though…

This is a TINA and FOMO markets with central bank distortions and promise of backstops. The prices of many assets will look over done, maybe even ridiculous. But  this is a don’t fight the tape market unless you can take a long term ultra-macro view view of things.

Not too many of my readers have that luxury – so I’ll deal with the here and now and hopefully we can trade the market in front of us and bailout at the right time. Whenever that might be. 

The Week That Was…

Now for the week ahead, let’s dive in.

Key Themes driving markets

The Fed’s narrative has emerged and rate CUTS are definately coming

Last week I borrowed ForexLive’s Adam Button’s comment that “marekts wanted rate cuts not jobs” as a lead into the weekly. This week I’d have to say the Fed has signalled that markets can have both.

That is a potentially powerful aphrodisiac for stock market bulls, will keep the front end of the curve anchored and mitigates the impact of longer bonds reacting to the Fed’s attempts to get infaltion moving higher again.

The reason I’ve come to this view is that it was clear in Chair Powell’s testimony this week that the non-Phd economist in the Chiar’s seat at the Fed reckons the models are wrong. He did that by saying the relationship between infaltion and unemployment has been getting “weaker and weaker” over the years and as such he went on to say:

“We’re learning that interest rates — that the neutral interest rate — is lower than we had thought and I think we’re learning that the natural rate of unemployment is lower than we thought. So monetary policy hasn’t been as accommodative as we had thought.”

As I highlighted in Friday’s newsletter, there is a bit to unpack in that short statement.

The first thing is that he is saying the pointy headed Fed Phd’s and their models have been wrong about the relationship between unemployment and inflation. Effectively they’ve been too paranoid the one leads to the other in a material way.

As a result of that the second he is saying the fear of inflation has been utterly overblown and thus policy has been driven by the wrong framework. And, finally, in using the word accomodative (which is how I reckon he’s really popped the Phd’s) he is saying that the Fed thought it had a set of rates that were consistent with the expansion continuing – it wasn’t trying to slow the economy – and now finds that it has over tightened.

Mr and Mrs market are looking on with a few “I told you so’s”. But the point is it utterly reinforces the July cut and another after that regardless of the stregnth of the jobs market.

That was something fresh last week.

Powell was joined by a Conga line of Fed officials saying the time is either here or near for rate cuts. Neel Kashkari wants to shock the system, Charles Evans reckons the time is ripe to move, we already know James Bullard voted for a cut. We had Lael Brainard opening the door, John Williams, Thomas Barkin, Patrick Harker too in varying degrees.

It’s not a unaminous voice of course on rate cuts but the narrative is that with inflation not an issue and at risk of staying too low, even with the strong economy policy can be cut because it is simply tighter than the Fed thought it was. So, in order to extend the expansion rate cuts are coming.

No wonder stocks like it – very goldilocksy and certainly reinforces downward pressure on rates across the globe. Especially with Madame Lagarde phoning in her ECB outlook with the IMF’s entreaty for Europe’s central bank to get busy with more stimulus.

TINA at least, probably FOMO too will reverberate across markets folks. 

10’s have now broken higher – 2’s not yet

Powell testimony certainly suggested a July cut of 25 points was a lock but neither he nor any of his colleagues outside of Neel Kaskari are suggesting a 50 point cut. But, whereas the jobs data evaporated expectations of the bigger cut at the end of the month Powell’s testimony has it back around 22.5% at the end of the week.

By December though there has only been a 5% shift to a more dovish outcome than the majority which holds 150-175 bps or 175-200 bps as the most likely outcome for Fed funds after the December 19 meeting. 

Even that though is 3-4 cuts. Quite aggressive if the Fed is saying the economy is still doing okay. And that’s helped to keep the US 2 year Treasury from breaking out in a way the US 10 year has. Though as you can see below the 2-10 curve is back at 27 points toward the higher levels we’ve seen on the spread this year and since last year’s market funk. 

US 2 and 10 year Treasury Yileds and spread – TradingView

Indeed the last 2 week’s candles on the 10’s suggest a move back to 2.24/25%, and if that level doesn’t hoold then 2.33%. At present I’d be a buyer at 2.33% if we see a liquidation event that gets 10’s to that level. On the 2’s it’s still the 1.93/94% region which is key. A move above here and I’d be looking for 2.10/15.

As with last year a break higher in the 10’s could presage trouble ahead for stocks and that may be the case this time should the bond selling intensify. But chair Powell and his colleagues are trying to avoid that by saying they’ll cut even with a strongish economy (2% growth is not terrible, but neiter is it great).

Something to watch though because it would be a surprise for this gap between the blue (S&P 500) and the black line (US 10 year Treasury yield) to close without some sort of stock participation. 

US 10’s (black) v Oil (WTI red), the S&P 500 futures (blue), JNK ETF (purple) – TradingView

Bit of Ad – Where is the system at presently with regard to positioning

I get really good feedback from subscribers on my daily susbscription service – like the one at the top of this piece today. recently I’ve got a few new subs as I’ve finally started to do a bit of marketing and it’s humbling and rewarding to get new members who trust me to help navigate the markets. 

I said that on Twitter last week and this is what I got back from a sub:

“Your Newsletter/Video/Insights are excellent … the subscription to your insights are a well worth investment for any trader – akin to the purchase of a vital piece of equipment to assist in the operation of a business.” 

Thankyou 🙂

Anyway, as you know, I write a lot of rhetorical stuff each day and each week. But the MACD system along with the moving average cross overs, is the basis of my trading. The current positions and signals for Monday are below. As I say, it is not always right. But it works pretty well and subscribers get it every day by 9am Sydney. 

As at 9.06am Saturday July 13 Sydney time for Friday’s close

If you want to have a trail of the daily subscriber service to get this and the 3000 odd words I write on markets each day you can sign up here for a trial

Trusting the JimmyR, stocks still rising

There is really only one thing that matters in this “don’t fight the tape market”, the uptrend on the weekly and daily charts seems intact when it comes to the S&P 500 (as the bellwether for global stocks).

As I have continued to highlight recently my JimmyR is still pointing higher on the weekly charts. 2898 is support on the weeklies while on the dailies support for the S&P 500 is at 2974 and 2940/45. And now we’ve had the topside a break in recent week the the way is open for a run at 3040/50 as a daily FIbo projection.

Indeed on a long term basis the receent weekly price action while above the supports at 2940/45 and then 2900 a target of 3300 is in the frame. I know, mad. But that’s based on the first ever system I traded and is of course long term. 

S&P 500 (futures) weekly – TradingView

You would need to see the support levels identified break to open up the downside.

I’ll update the levels and view as we progress through the week for subscribers. And I’ll deal with individual markets in depth for subscribers Monday. In the meantime though it is worth noting that other markets around the world are lagging. The Nikkei trendline I noted last week still hasn’t given way and the DAX in Geramny had another down week. That’s interesting – especially from a forex point of view potentially. 

DAX (futures) weekly – TradingView

The DAX needs to stay above 12100.

Fed speak hit the dollar but really, Euro, Yen, and Sterling?

The reason I say that the out performance of US asset markets may ultimately be important for forex is that if US markets stand out for returns then we’ll be able to hear the sucking sound from my place  which is 7700 kilometres from Tokyo, almost 16000 kilometres from New York, and 17,000 to London.

That might be for another time though, because traders have really reacted to the dovish rhetoric coming from the Fed it seems. That has seen the USD reverse and print a somewhat bearish candle and reversal. I say somewhat because let’s face it USD – in DXY terms is in a 95.00/98.50 range while Euro is essentially 1.1100/1.1450. 

USD Index (DXY) Weekly – TradingView

But in the same way we shouldn’t get too excited about the USD, Euro, and many other pairs because they are essentially in arange it’s also realistic to wonder how the USD can really weaken when the monetary settings across the globe are moving further toward easing. 

Source: Twitter

And that reality helps explain exactly why there is so much range trading going on. The Fed may be more dovish but so too is the ECB, the RBA, the RBNZ, the BoC, even the BoE now. And of course the BoJ has promised stimulus to the end of time – okay not quite, but at least till its no longer required which is likely to be longer than it takes to own every marketable asset in the country.

EURUSD Weekly – TradingView

We’ll just keep trading the range in DXY, EURO, Aussie and other pairs unless or until they break. But as you’ll see in the CFTC data below the pressure might be building for a small USD reversal to take us to the outer edge of the range if the move in past week and that weekly reversal in the DXY is any lead.

That said folks, respect the ranges unless and until they break. That’s the way I always play it. . 

CFTC Data 

The CFTC data shows a market still long of US dollars and short the pairs against it. With the Pound weakneing to the bottom of the range and then finding support during the week that may offer a pressure point. Likewise should the Aussie be able to best the 200 day moving average at 71 cents we could see some position squaring.

In the absence of something to dissaude traders of the Fed’s cut looming at month end the pressure may be on the USD till then. Thus the pressure point in terms of positioning. 

Bond shorts are likely to increase as yields have increased and gold longs are guilding. These positions would only likely be threatened if recent lows gave way around 1.93/95% and $1279 give way.  

The week ahead

Earnings kick off this week in the US which makes it a big one.

Other than that though, it is a big and tantalising start to the week with a massive data dump out of China Monday with the release of Q2 GDP, industrial production, retail sales, fixed asset investment, and associated metrics like capcity uilisation and the like. After the trade data Friday which suggests there may be some slowdown in China this data dump will be watched closely.

The NY Empire Fed manufacturing index is out in the US and NY Fed president John Williams will be speaking.

Something I’ll also be watching closely is whether ther is any progress on the trade talks or whether, as I believe they are now intractable. We are hearing that US businessfolk are being detained and we have the Chinese blowing up about US arms sales to Taiwan.

China’s Ambassador to the US – Twitter

Something to keep an eye on tho0ugh it’s probably not a market mover yet.

Tuesday sees the relase of the RBA minutes to this months rate cut meeting decision, UK employment data, EU trade, and the EU and German ZEW sentiment indexes. Italian inflation is out and then we get the big one in the release of US retail sales for Jun along with import and export prices for the US. Industrial production, business inventories, and the NAHB hosuing market index are also out in the US and we get a speech from Fed chair Powell and his colleague from Chicago Charles Evans. API data on crude inventories is out after the bell.

Wednesday sees the release of Westpac’s leading indicator for Australian growth, we’ll get inflation data in the UK, Europe, and Canada – HUGE FOLKS. In the US it’s building permits, EIA data, and then the Beige booko in the run up to the EoM FOMC meeting.

Thursday sees the relase of the Japanese tankan survey, BoK interest rate decision, and Australian employment. UK retail sales are out as are jobless claims and the Philly Fed in the US. NYFed’s Willaims is speaking again.

Friday kicks off with South Korean PPI, Japanese inflation and then German PPI . Canadian retail sales are out as well as Michigan consumer confidence in the States as well as a speech from Fed dove Bullard while his colleague eric Rosengren from Boston is also out on the hustings. 

Enjoy.

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 MckennaFed signals rate cuts despite US economy doing okay, stocks love it – McKenna Macro Markets Weekly

US jobs spoilt the party for bonds and stocks, but only a little – McKenna Macro Markets Weekly

on July 6, 2019

Hi folks, welcome to my weekly newsletter. 

This is post is sponsored by SMARTMarkets 

To sign up for this report weekly click here

Here’s a bit of feedback from a subscriber recently:

“We deal with 20 Banks globally and I get more from your note and video than all of them”

Key Takeaway

Last week was a very interesting one. Certainly we got new highs in US stocks which exercised their tractor beam on global bourses. But it was accompanied by a generalised rally in bonds which would normally be a recation to a weak economy and so could undermine stocks very rally.

That it didn’t is testament to the power of the hope – nay expectation – of large monetary accomodation in Europe now that a politician in the form of IMF boss Chritine Lagarde has been nominated to follow Mario Draghi as the next president of the ECB.

“That’s not a dove, this is a dove” markets seemed to say as Italy 10 year Govie yields hit 1.61% during the week (they closed at 1.74% though) :S.

Everything was awesome as expectations the BoE would join the monetary accomodation were topped up by weak data in the US, Lagarde’s nomination, and two Fed governor nominees who appear cut from the rate cutting clothe President Trump wants, throw in rate cut in Australia and it’s rates to and through the floor.

It was the limboing rates market supporting the levitating stock market across the globe.

At least until someone turned the music off, stole a few chairs, and introduced a dose of reality called a strong US jobs market. So the world economy is weak, the Fed will cut eventually, but jobs suggest it’s not the Fed’s patience that will be tested but rather it might be the market’s. 

What a week ahead.

The Week That Was…

Now for the week ahead, let’s dive in.

Key Themes driving markets

To steal a phrase, markets want rate cuts not jobs 

I had to steal that phrase from Adam Button over at ForexLive because as soon as I read the headline it resonated with me given what we have seen and what is driving markets right now. Indeed the 2 year rate in US, in Germany, and eslewhere were absolutely pole axed after the jobs data.

US Non-Farm Payrolls with 12 month moving average (and ma low for the post crisis phase)

What we saw was a pretty spectacular increase of 224,000 jobs in June with May’s awful 75k increase revised only mildly to 72k. So there was no giveback there to mitigate the pundit’s – who had been expecting +160,000 – big miss. 

And what that did was reinforce that maybe Rate and Bond traders had overdone it in their aggressive Fed rate cut expectations. That’s important for so many markets as this correlation table shows

Price correlation Daily

Certainly it was 2’s that really moved but as you can see here in this table is that bond rates are driving US stocks, safe haven currency pairs like the Yen and the Swissie, and most certainly gold over the past month. Indeed on a 90 day correlation the relationships between 10’s and other markets are broader and stronger.

So the bond market rally is a core part of what going on in markets right now. So many markets.

Bond rally still at risk as Fed to take its time – price action close to a break higher in yield

The real risk now is that Fed repricing continues if the minutes this week show the very patience that FedSpeakers have been consistently pushing before and since the meeting. Remember what Loretta Mester said last week folks, the market is not always right.

No suprise then the chance of a 50 bps cut at the July meeting has dropped from 32.3% last week to just 4.9% Friday. Rate expectations have been pared further out toward the end of the year, but there is a clear majority expecation – based on proabilities using the FedWatch tool – that there are 2 or 3 cuts this year.

I’ve been writing 1 or 2 and I hold that as my base case. 

CMEGroup FedWatchTool – December 11 Fed meeting rate probabilities and changes as at COB Chicago July 5 2019

So market pricing may still adjust, and as highlighted above. That is going to impact bonds, forex, and stocks. 

But the question becomes how much market repricing happens, does the market further walk back expectations of Fed rate cuts from the 50 bps that was priced by many to a reduced expectation that the Fed would cut at all this month.

That would be a big step given the US Citibank EconomiC Surprise Index score is is still languishing in negative territory at -58.5. China and the UK’s CESI scores have collapsed over the past 4 weeks as well. So unless the data materially improves or the Fed signals (via the minutes or speeches) that the market is still wrong it might be too much to expect a wholesale fundamental repricing. 

Price action though is another thing and the recent moves give some clear levels to watch. A break above these levels in terms of yiled on the 2’s and or 10’s would impact sentiment in both interest rate and other markets.

I’m watching 1.95% in the 2 year Treasury with a breach above 2.11% in the 10 year the level to watch.

US2-10 spread (top), US 10 year treasury yield (middle), and US 2 year treasury yield (bottom) Daily – TradingView

And of course should we see global rates marekts reprice it will certainly impact gold, stocks, and forex trade.

Bit of Ad – Where is the system at presently with regard to positioning

Were you long USD’s Friday, short Euro’s, short Sterling, long stocks recently, jumped off gold during the week? Anyway, each morning subscribers get an update of changes to my system in table form at the bottom of the daily newsletter. They can see what has changed and what the system’s position is at the close of New York trade the previous day.

Here’s the changes since the end of June, not always right certainly – but I reckon a really important part of the trading toolkit whether a day trader like me or if you use the bias as a guide to whether to fade or go with market moves intraday. 

System bias and changes as COB NYC each day

As you know, I write a lot of rhetorical stuff each day and each week. But the MACD system along with the moving average cross overs, is the basis of my trading. The current positions and signals for Monday are below. As I say, it is not always right. But it works pretty well and subscribers get it every day by 9am Sydney. 

As at 9.10am Saturday July 6 Sydney time for Friday’s close

If you want to have a trail of the daily subscriber service to get this and the 3000 odd words I write on markets each day you can sign up here for a trial

Stocks may need a pullback against this uptrend

President Trump isn’t going to stop belting the fed about lower rates – indeed, he did it again Friday. And it is clear whatever the jobs data the US – and global – economy is still slowing. So the bid is likely to remain in rates and bond marekts even if they sell off a bit. And that, ini turn, will continue to underpin stocks for a time. 

Indeed the uptrend on the weekly and daily charts seems intact. Certainly JimmyR is still pointing higher on the weekly charts. 2882 is support on the weeklies while on the dailies support for the S&P 500 is at 2950 and 2915/20. Topside a break of the recent high around 2967 opens the way for a run at 3040/50.

S&P 500 (futures) weekly – TradingView

You would need to see those support levels break to open up the downside. I’ll update the levels and view as we progress through the week for subscribers. And I’ll deal with individual markets in depth for subscribers Monday. In the meantime though, here’s the weekly Nikkei chart – interesting.  

Nikkei 225 (futures) Weekly – TradingView

The US dollar held firm and then bounced Friday – next?

The USD did better than expected last week as the Euro reversed and as the Madame Lagarde nomination got traders hot about more monetary accomodation from the ECB. But then the USD and Euro did essentially nothing for a few days given the 4th of July holiday and waiting for Friday’s non-farms.

USD Index (DXY) Weekly – TradingView

But lets not get too excited about the USD or Euro (see below) moves yet as they are still clearly in a braod range. Structurally I have them in respective weekly up and down trends though. But if we drill down to the daily charts on the DXY it’s not the close above 97.00/10 I mentioned during the week which changes the short term outlook but rather 97.40 where a little downtrend line comes in the DXY needs to best.

The Euro though below 1.1240 does appear to open up further downside toward teh 1.1185 region I was mentioning during the week amd ultimately a retest toward 1.1100.

EURUSD Daily – TradingView

Should that occur then other forex pairs would be expected to be caught in the maelstrom of USD strength within this broad range we’ve been in for some time. 

Gold’s had a big reversal…

The CFTC data is not out yet so lets have a quick look at the gold chart.

You know from the above correlation table that gold is trading as a hybrid of rates and the USD. Naturally there is a linkage there too. So in some ways it’s vulnerable if the USD gets a wriggle on more so than just bond yileds themselves – noting there is a feedback loop there anyway.

As you can see in the chart below gold has fallen back to the support zone of the breakout. The low Friday of $1379 was only just above the 38.2% retracement I told subs Thursday/Friday I thought it was heading back to at $1376. That for me is the key level after the double top in the $1439/45 region with the ramp in early Asia last week.

Gold (XAUUSD) TradingView

If, if, bond rates rise a bit and the USD finds support and rallies back toward the top of the recent range then gold will be under pressure. Below $1376 it is $1357 with some support at the daily 30 ema around $1366. 

The week ahead

It is going to be a big one folks with the Fed minutes, BoC meeting, UK GDP, EU and US inflation, not to mention speeches from Fed chair Powell and other central bankers across the week.

Monday opens with Machineery orders in Japan, ANZ job ads in Australia and then German trade and industrial production. US consumer credit and inflation expectations will be interesting as well.

Tuesday kicks off in Australia with that most important of data releases – the NAB business survey. We get Italian retail sales, the NFIB survey from the US, mexican infaltion, Canadian building data, and CRITICALLY a speech from Fed chair Powell. JOLTS is out and then the Fed’s James Bullard and Randy Quarles will be delivering speeches. API crude data is out late in the day in the US.

Wednesday is Westpac consumer sentiment day in Australia and we also get Chinese inflation data. French and Italian industrial production are out as is Britain’s may GDP data with the associated 3 month average as well as industrial production. The ECB has their non-monetary meeting but we do get a BoC decision and statement before DFed Chair Powell speaks again and at 2pm Washington time the FOMC releases the minutes of the most recent meeting. We have speeches from the BoE’s Tenreyo and Fed’s Bullard.

Thursday is home loan data day in Australia as well as a speech from the RBA’s Guy Debelle. German inflation is out as is French inflation data, Brazilian retail sales, and the minutes from the most recent ECB meeting. Infaltion is out in the US and we get another speech from Fed chair Powell along with one from Williams and Quarles again.

Friday kicks off with South Korean importan dn export prices, a speech from the Fed’s neel Kashkari, and then Chinese trade data. Japanese industrial production is also out  as is german wholesale prices and Spanish inflation. We’ll be also looking for China’s loans and social financing data and M2 money supply. EU industrial production, and US PPI will round out the week.

Enjoy.

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 MckennaUS jobs spoilt the party for bonds and stocks, but only a little – McKenna Macro Markets Weekly

Trade War tensions ease after G20, what’s next – McKenna Macro Markets Weekly

on June 30, 2019

Hi folks, welcome to my weekly newsletter. 

This is post is sponsored by SMARTMarkets 

To sign up for this report weekly click here

Here’s a bit of feedback from a subscriber recently:

“We deal with 20 Banks globally and I get more from your note and video than all of them”

Key Takeaway

Hope springs, or at least that’s my bet this week after the breakout of trade War glasnost at the G20 meeting in Japan over the weekend. It means we can largely ignore, but not entirely the moves last week. 

The reason I say not entirely is because with bonds right on support, stocks having held support, gold reversing sharply, and the DXY a little offered, the last week provides a solid launchpad for some decent moves across markets more broadly. 

Let’s have a look at the setup…

The Week That Was…

Now for the week ahead, let’s dive in.

Key Themes driving markets

Base case scenario wins out as Trump backs away from escalation

My base case articulated to subscribers last week was that we’d end up pretty much with the result that we have seen over the weekend at G20. I’d characterised it as an “extend and pretend”  because my sense was there’d be compromise but no real movement forward. 

But both sides seem to be painting a picture of genuine compromise.

President Trump – in a 3 tweet thread – said:

So we get the extend bit, but maybe a little less of the pretend bit. I say this because it’s not just that the US is taking it’s foot off the throat of Huawei it is that China seems to feel that it has America’s respect. And that is critical to talks continuing and it is also something I didn’t think the US could deliver.

Our old mate Hu Xijin sums it up neatly – “equality and mutual respect”:

Source: Twitter

So where does that leave markets and the economy?

As China’s official NBS PMI’s showed Sunday the economy is still struggling. We saw Services print okay at 54.2, but manufacturing was still struggling in contraction territory at 49.4. That means only 2 months since November have been above 50. Chinese industry needs a deal. But the current tariffs are still in place.

So we’ll see a positive reaction from markets this week most likely as risk assets get a little bid, bonds, Swissie, Yen, and gold a little offered. The question of for how long is an interesting one. Mor information about Huawei is likely coming this week as is US non-farm payrolls at the end of the week. So a cautiously better tone on trade but with the market repricing the chances of a Fed cut in July it could all be a wash pretty quickly too.

Watch the price action, Trump Twitter, and comments from either side’s negotiators for market reactions.

But the weak economy we have, in China, in Europe, across the globe won’t change in a hurry. The US economy is slowing too, though likely to do better than Europe and many other jurisdictions in the year ahead. So many of the trend in place won’t change because the US isn’t going to make the trade war worse. Because that’s all we got over the weekend – no escalation with no rush from the US to get things finally sorted. Till 2020 anyway.

Bond rally now at risk, Fed to take its time

Are there better levels for the US 10’s or 2’s to react to the break out of trade War glasnost than the current levels of very important support for yields?

You can see in both charts below that we are at critical junctures in the rally of yields on both the 10’s and the 2’s.

US 10 year Treasury yields weekly – TradingView

The 10’s above have continued to hover around this support zone – which could be extended all the way back to the start of the chart in 2016, maybe even 2013 as a key point of resistance and support for yields on the 10 year Treasury. My system is already long the bonds on the daily charts and last week to subscribers I noted it was time o lighten the load on some of my long of bonds position down at these levels. I’m still structurally bullish at the moment but I am currently tactically cautious.

Levels to watch are 2.07% and 2.17% as the 15 and 30 ema’s on the dailies. But I wouldn’t be surprised to see a run toward 2.26/2.34% on the weeklies.

Like the 10’s the 2’s have been sitting around an incredibly important level of yield support – resistance to the rally. 

US 2 year Treasury yields weekly – TradingView

What you see above with the purple line is the 2 year Treasury yield retesting the 3 decade downtrend that was broken in recent years as the fed tightened. 1.81% then 1.92% are the key resistance and ema’s on the dailies while the 15 ema sits at  2.09/2.10% on the weeklies. 

I expect the shape of this curve to change during the week. The 78% expectation of a July cut that was in evidence Friday not shown here) in the US is likely to be reduced somewhat and then the overall expectations of the number of rate cuts is likely to change. The critical think is that the fed has signalled they wanted to wait and see how things play out. Sure it’s clear the Fed leadership stands ready to react if the economy slows materially. But that time has not yet arrived.

CMEGroup FedWatchTool – December 11 Fed meeting rate probabilities and changes as at COB Chicago June 28 2019

Recall a few weeks back Robert Kaplan suggested that it was too early and he wanted to wait and see. The clear implication – I wrote at the time – was that he wanted to see how the trade talks tracked. We’ve heard from many on the Fed in the intervening period. Powell and Clarida offered a move if its needed, Kashkari wants a a big cut now, Bullard wants an insurance cut but only 25 points, and Mary Daly highlighted it is still too soon for her to know whether a cut is needed or if so how much to cut.

And don’t forget Kaplan last week reiterated that a jobs market creating 60-120 thousand jobs is still a strong one. The re-calibration of Fed intentions and timing of any changes will likely begin on Monday morning in Asia. And as long as President trump doesn’t walk back the positivity from G20 and there is a genuine feeling of positivity then the fed will do as Mary Daly and many others said last week – they’ll wait on the data.

Market pricing won’t reflect that fully, but it will adjust  

Bit of Ad – Where is the system at presently with regard to positioning

Each morning subscribers get an update of changes to my system in table form at the bottom of the daily newsletter. They can see what has changed and what the system’s position is at the close of New York trade the previous day. 

I write a lot of rhetorical stuff each day and each week. But the MACD system along with the moving average cross overs, is the basis of my trading. The current positions and signals for Monday are below. As you can see it is not always right. But it works pretty well. 

As at 16.36 Sunday 30 June for Friday’s close

If you want to have a trail of the daily subscriber service to get this and the 3000 odd words I write on markets each day you can sign up here for a trial

Stocks ready to reach for new highs?

Sure the fed may delay, sure the market may reprice that chance of a fed cut as well as the magnitude of same. But as the China PMI’s showed Sunday it’s not as though this trade war glasnost is a panacea for a global economy slowing outside of the confines of the trade battle between the US and China.

But sentiment and expectations are as powerful a force as conditions and reality, more so often and on shorter time frames. So I expect a rally in stocks at the outset in the US and across the board. Of course the rally we have seen in H1 2019 and in June was a powerful one. That means there has been some expectational front running of the outcome from the weekend’s G20.

S&P 500 (futures) weekly – TradingView

So the uptrend on the weekly and daily charts seems intact. Certainly JimmyR is still pointing higher on the weekly charts. 2869 is support on the weeklies while on the dailies support for the S&P 500 is at 2914 and 2885/90. Topside a break of the recent high around 2967 opens the way for a run at 3040/50.

Now I’ll deal with individual markets in depth for subscribers Monday. Suffice to say though in directional terms where goes the S&P 500 so goes the global stock market. Here’s the S&P futures versus the DAX, the FTSE 100, and the Nikkei 225.

S&P 500 futures (black) v Nikkei (blue), DAX (orange), and FTSE (green) weekly – TradingView

Trade glasnost is not necessarily positive for the USD even if the Fed holds

A simple knee jerk thought would be that if the fed is going to delay easing while Europe and other jurisdictions (RBA maybe even this week) are actually cutting then the USD should rally. It is a reasonable assumption and one of the many possibilities we may see happen in the days and week’s ahead. 

But, an alternate hypothesis could be that if the US isn’t actually going to make things worse for China and the global economy, if President Trump is going to talk positively about the chance of a deal and rage against the fed and USD strength then what we actually end up with is more of the medium term range trading we’ve been seeing lately with a current downside bias for the US dollar. 

USD Index (DXY) weekly – TradingView

It still seems to me that a run toward 95.00 is on the cards for the US dollar and then we’ll see if this is just the inside range or whether the USD is going to have a more protracted period of weakness. Above 95.00 things look okay for it, but should that break then I’d be looking for a run toward 93.80 then 93.00/20.

EURUSD daily – TradingView

And of course the Euro seems to have a topside bias on that basis. That’s particularly the case give  that it closed the week above the 200 day moving average for the first time since May 2018. This is a potentially very important signal the worm is turning and the trend changing for the Euro and USD more broadly.   

Indeed it is my hypothesis that we need to see a turn in the US data flow before the USD can recover. Equally though I continue to believe trade war glasnost is a USD negative because it signals the US lifting its foot from the throat of the Chinese and global economies – that means expectations of better performance elsewhere. Even if it proves ephemeral.

I’m now targeting a move in USDCNH down toward 6.79 again if the recent low around 6.8370/80 gives way 

USDCNH weekoly – TradingView

A look at CFTC positioning

The risk of a liquidation event is still high in a number of forex pairs in the manner that saw the big short in US 10’s cut materially in the past week or so. WTI remains both bid and long – but OPEC early this week is likely to reinforce that, while gold is at risk if the release of some of the trade tensions results in a calming of nervousness about the overall outlook. Equally while Iran is a different kettle of fish entirely President Trump’s visit to the DMZ and handshake with North Korea’s Kim Jong-un shows he is the very epitome of political iconoclast. That’s a risk for gold

Source: CFTC via Refinitiv

The week ahead

It is going to be a big one folks. We kick off with the reaction to the trade tensions release and then we end with US non-farm payrolls on Friday. In between it is a week choke full of data and event risk. 

Monday kicks off with manufacturing PMI’s all across the globe, Australia, Japan, China, Asia, Germany, Europe more boradly, and of course the US. We also get the Tankan in Japan as well as South Korean trade and Australia’s new home sales. Germany also releases the unemployment rate and in the US we get construction spending as well as the grand daddy of PMI’s with the release of the ISM. There are also speeches slatted for ECB’s Lane and De Guindos while I’ve seen one in for the Fed’s Clarida as well. There is an OPEC meeting of course and Canada is out for Canada day. 

Tuesday kicks off with Kiwi business confidence and building approvals, then we wait till lunchtime in Asia and 2.30pm here in Oz for the RBA’s decision whether or not to cut rates. The market is pretty hot for another cut but I’m not overly convinced on this one – Governor Lowe can give us his thinking at 7.30 pm that night my time. Germany releases retail sales, house prices are out in the UK, while PPI is out for the EU. Canada catches up with manufacturing PMI in the US it’s ISM NY, vehicle sales and at the end of play API inventories.

Wednesday is services PMI day across the globe. That means we get the composite data as well. Australia releases trade and building approvals, while in the US we get the Challenger and ADP p[precursors to Friday’s jobs release. Trade, factory orders, and jobless claims are also out in the US while trade is out in Canada. We also get a speech from BoE’s Broadbent. And of course the EIA energy data. 

Thursday is the Fourth of July so US markets will be out. Retail sales will be released in Australia and for the EU while the ECB’s Lane is speaking again as is de Guindos. Cruisy day this one – enjoy.

Then it’s all about Friday. In Oz we get the construction PMI, Japan’s coincident indexes are out, factory orders in Germany, French trade, and then the BIG ONE – US non farms and all the associated data. Canada also has its jobs data out. 

Enjoy.

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 MckennaTrade War tensions ease after G20, what’s next – McKenna Macro Markets Weekly

A tumultuous fist half of 2019 is drawing to a climax – McKenna Macro Markets Weekly

on June 23, 2019

Hi folks, welcome to my weekly newsletter. 

This is post is sponsored by SMARTMarkets 

To sign up for this report weekly click here

Here’s a bit of feedback from a subscriber recently:

“We deal with 20 Banks globally and I get more from your note and video than all of them”

Key Takeaway

Fear, panic, hope.

They were all felt in some measure by traders and investors in different markets over the past week. It’s a very fluid point in time for global finance right now as we head toward a crucial G20 meeting where we can either see an escalation or relaxation of the current trade war between the world’s two biggest economies. 

At the same time, we have possible escalations between the US and Iran keeping a bid in oil and we have the promise of more central bank sugar hits keeping stocks and gold with a TINA and FOMO trade. It is no exaggeration to say that we are at a critical juncture right here and right now as we end what has been a tumultuous fist half of 2019.

The Week That Was…

Now for the week ahead, let’s dive in.

Key Themes driving markets

Central bank rate cuts are coming (what that means for markets, especially gold)

I have been on the record over many months saying the central banks are not yet ready to give up the ghost on their view of what the world’s economy should look like or how it should respond to their policies. Even though there is ample evidence that at present deeply negative rates are not stimulating inflation or growth they seem determined to push rates further into negative territory. These bankers, sure they have the prescriptions to what ails the patient they’ve had on life support for the past decade seem determined to push even lower still as they throw good money after bad and in confiscating the wealth of savers try to force some sort of spending and economic activity in individual nations and across the globe.

In the space of a couple of week’s we’ve heard Mario Draghi, effectively, saying the ECB stands ready to again do whatever it takes to deliver more monetary stimulus. he’s on his way out as his term approaches its limit in the next few months so expectations are that any delivery will be soon. Indeed, so sure of his intent is Germany’s Commerzbank that they pulled forward their expectation of an ECB rate cut from Q4 2019 to July – next month!

Not everyone is on board though it seems as Mario Draghi’s promise seems to have caught some ECB members on the hop. But it’s clear even with objections from the usual suspects that monetary accommodation is again coming to Europe.

Likewise in the US as I wrote Thursday morning it is noteworthy the economic expansion has been downgraded from solid to moderate by the Fed, that they say households are saving more, the markets view of inflation has fallen, and uncertainties about the outlook have grown.

The Fed has promised to closely monitor the outlook and make changes to policy appropriate to support the expansion which I see as a low bar for a rate cut folks. I can make the case now that a rate cut would be appropriate to support what’s clearly a slowing economy – with or without the trade issue and the G20 meeting. But Powell suggested at the press conference the Fed just wants to wait for the moment.

That fits with what Robert Kaplan told us a couple of weeks back Rate cuts are coming, the market essentially has a 100% chance priced into July. The Fed is just waiting to see if the whole trade war might end in which case it will stall cuts for a little bit, otherwise rate cuts are coming very soon – and we might even get a 50 pointer.

Remember Powell said, “an ounce of prevention is worth a pound of cure”. 

Rate cuts are coming and that is important for many markets but in some ways none more so than gold. Also as I wrote Thursday after the Fed,”Lower Fed rates, lower global rates can drive TINA and FOMO is equity and other risk asset markets. But negative rates can drive a capital protection bid for gold…n a deflationary world of negative rates gold may surprise many simply because of the negative rates and peoples desire to preserve capital rather than pay for the privilege of owning Govies. 

Gold (XAUUSD) Weekly – TradingView

Gold had a powerful move Thursday Friday as a result rising $50 at its peak of $1411 from where it closed Wednesday afternoon in New York. As I highlight above on its own gold can catch a bid if for no other reason than folks – who aren’t trading bonds for capital gain – are happy to hold gold rather than pay for the privilege of holding many Govies across the globe. It’s different in the US where 2’s, 10′ and 20’s still offer a positive return (which should help the USD in time).

But when you throw in a conflict bid over the Iranian drone – even though President Trump stepped back from escalation in calling off the planned retaliatory strike –  it is easy to see why gold shot higher.   Looking now support is $1371/85 as the breakout and 38.2% FIboZone with $1480/90 the 50% retracement zone of the big fall.

Where is the system at presently with regard to positioning

Each morning subscribers get an update of changes to my system in table form at the bottom of the daily newsletter . They can see what has changed and what the system’s position is at the close of New York trade the previous day. .

I write a lot of rhetorical stuff each day and each week. But the MACD system along with the moving average cross overs, is the basis of my trading. The current positions and how they have changed this month are below. As you can see it is not always right. But it works pretty well. 

Screenshot, some of the markets I watch each day. I have a weekly version of this as well.

If you want to have a trail of the daily subscriber service to get this and the 3000 odd words I write on markets each day you can sign up here for a trial

Stocks at highs while trade talks hit the decision point

If there has been one theme I have been constantly pushing over the past few months it is that the trade battle seems to have become intractable because the Chinese want to be treated as equal partners and the US seems unwilling to do that. It’s a theme that China reiterated again over the weekend. Our friend Hu, EiC of the Global Times summed it up nicely on Twitter. 

Source: Twitter

That echoed the message in the CCP mouthpiece Peoples Daily newspaper which again took aim at the Trump Administration and its policy of “wielding a big stick” on tariffs.

The good news is that we know President Trump and Xi are meeting at the Osaka G20 meeting with China confirming he’ll be attending the summit on Sunday morning Beijing time. But, as usual, there is another wrinkle in the meeting with the US putting 4 more Chinese tech firms and a research institute on its blacklist Friday. 

Again, Hu had something to say on the matter.

Source: Twitter

Now, President Trump’s decision not to hit Iran with a strike last week because it was out of balance – given 150 people might die in Iran compared to one unmanned drone – suggests he really is one out of the box. And on that basis even given all of the above it’s not beyond the realms of possibility that he will find a way to do a deal with president Xi.

Source: ZeroHedge

For the moment though Goldman Sachs says the market is only ascribing odds of 20% to a deal getting done. And that is with US stocks at record highs.

What is next for stocks?

Fresh record highs for stocks in the wake of the Fed and other central bank promise of more monetary largesse. Again though it is worth reiterating what I wrote Thursday. That is: 

“There is naturally tension between an economy that needs stimulus and the fact that rates are going lower. And of course right now we still have the uncertainty about the trade war and the outcome from G20.

But, structurally if the Fed is cutting to get inflation going in an economy that it still thinks is growing at or around 2% say, then rate cuts can actually provide solid support to stocks – in the absence of a recession so many fear. This is after all all about extending the expansion.

So at the moment, my systems are pointing higher and I have no reason not to think we’ll see new all time highs. We’ll see what happens at G20 I guess now.”

S&P 500 (futures) Weekly – TradingView

Naturally we saw that record high already in the S&P and the question is whether traders run hot or sceptical into the weekend G20 meeting in Osaka. As it stands my JimmyR is pointing higher on the weeklies, and the MACD system is long on both daily and weekly time frames (or has orders to buy) on all the stock markets I watch.

But I am curious about the week’s end candles in the S&P (which of course I use as the global bellwether) and other markets. 

Stocks Daily – TradingView

Trump walks back on Iran, that’s a good thing – what’s next for oil

The conflict bid in crude oil took hold last week after the Iranians downed an unmanned US drone and the market priced US retaliation, That saw WTI rise from the previous week’s low a little more than $50.50 a barrel (and the intra-week low of $51.50) to close out the week the week at $57.60. 

That’s above the 38.2% level at $56.69 and on track for the 50% retracement level at $58.57.

WTI (futures) Weekly – TradingView

The question though is whether President Trump’s insistence he’d rather make friends than bomb Iran and whether his message over the weekend new sanctions are coming to Iran can take any of the conflict bid out of the price. With the G20 coming up that might be difficult but while $60.50 might be a possible short term target (my system is long WTI and Brent on the dailies) the overall bias remains lower unless medium/long term WTI (and Brent) can break back into the uptrend.    

95.50 looms large for the USD Index and thus forex markets

The reaction of forex traders this week’s strikes me more as a reaction to Trade Talk Glasnost than simply a reaction to the Fed’s effective promise of rate cuts to come.  I say that because with the fed’s promise comes trouble for the ECB, PBoC and other central banks as they too chase satisfaction with mandates and/or stronger economic growth. 

USD Index (daily) TradingView

To me it is as much that all the tourists were, or still are, on one side of the ferry.

Certainly overall forex positioning suggests the risk is of a wholesale USD long position liquidation should the greenback fall to appropriate levels against the Euro, Yen, in DXY, and other terms. In a rhetorical all of the above doesn’t change my structural USD bullishness. But tactically I am watching the 95.50 level closely as it is the intersection of the little uptrend (blue line) and the bottom of the recent range (red line) in the chart above.

A break of 95.00 though is likely to be the level which kicks off a wave of USD selling – or where the USD finds support. 1.1450 is the similar level in EURUSD which could open the door to a Pandora’s box of USD position squaring.  

Bonds hold key support

The dichotomy between stocks and bonds is best resolved with reference to the markets expectation that central bankers via TINA and FOMO will give investors and savers no choice but to put a bid in risk assets. In normalising these tools of QE and negative rates and in convincing themselves that the wealth effect of keeping stocks up is all that matters they have lead us down a path of increasingly negative rates and more to come.

And you can see in the lack of inflation that if that is what central banks are worried about they are making the classic mistake economics makes all the time – if the theory doesn’t work just assume it will in the long run.

But in this environment – for the moment anyway – to be structurally long of bonds remains the right trade. 

US 10 year Treasury yield weekly- TradingView

Price action wise though we can see in the US 10 year Treasury yield above and the US 2 year yield below that we are seeing important levels of medium to long term support hold on the weekly charts.

US 2 year Treasury yield weekly – TradingView

Likewise if you look at the German Bund rates (2’s and 10’s) in the chart below we can see that the bars on the 2’s and 10’s COULD be signalling a reversal in  yields. Certainly a break of the recent highs – or lows – would be the signal for the next move. Likewise US 10’s above 2.12/17 would signal a further increase with 1.90/1.94% the level to watch in the US 2 year Treasury yield.

German 2-10 spread (top), 10year (middle) and 2 year (bottom) Bunds – TradingView

It’s all very fluid at present.

The week ahead

The week kicks off with speeches from the Fed’s Harker and the RBA’s Lowe. The latter will be part of a panel at an ANU leadership forum so it may not be market moving.  We also get NZ credit card spending, Japanese leading and coincident indicators and then in the European session we get Germany’s ifo business survey results. ECB’s Lautenschlager will be giving a speech. The Chicago Fed activity index and Dallas Fed manufacturing index are out as well. 

Tuesday kicks off with NZ trade, and the minutes to the recent BoJ meeting and we get a speech from the RBA’s Bullock on Modernising the Australian Payments System which might be interesting as a follow up to the Facebook Libra initiative. ECB’s De Guindos speaks in Europe and the CBI distributive trade survey is out in the UK. In the US it’s Case Shiller house prices, new home sales, the Richmond Fed and then a raft of speeches from the Fed’s Bostic, Powell, and Bullard. API Crude is out at the end of the day.

Wednesday we get the RBNZ and the chance of another cut to kick us off and then its gfk confidence in Germany, and the non-MP meeting at the ECB. In the US it’s goods trade, durable goods, and EIA crude. 

Thursday is Japanese retail trade, Spanish CPI and EU business confidence. German CPI is out and then we have the latest read on US Q1 GDP, and PCE, as well as Kansas Fed manufacturing, and pending home sales. 

Finally Friday and its UK consumer confidence, Japanese jobs and Tokyo CPI as well as industrial production and the BoJ summary of opinions. The G20 meeting kicks off and we have private sector credit in Oz. German import prices are out, French PPI and CPI as well as Spanish trade and GDP for Q1. UK GDP is out too while Italy and the EU release CPI data. In the US it’s Personal income and expenditures, Chicago PMI. In Canada it is industrial production and monthly GDP as well as the BoC business outlook. 

Enjoy.

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 MckennaA tumultuous fist half of 2019 is drawing to a climax – McKenna Macro Markets Weekly

The Fed dominates the landscape this week with markets are important levels – McKenna Macro Markets Weekly

on June 16, 2019

Hi folks, welcome to my weekly newsletter. 

This is post is sponsored by SMARTMarkets 

To sign up for this report weekly click here

Here’s a bit of feedback from a subscriber recently:

“We deal with 20 Banks globally and I get more from your note and video than all of them”

Key Takeaway

An interesting week where President Trump lost control of the narrative as stocks failed to kick on the back of his mexico deal. Sure he waved around an apparent deal with the Mexicans in an attempt to buoy stocks, but traders were having none of it really in a clear sign it’s scepticism they are taking into G20 not hope. 

Indeed part of the reason he lost the narrative is China just won’t play ball. Another narrative that went a little bit awry was oil after an attack on 2 ships in the Gulf of Oman that the US says is Iran but others aren’t so committed too.

So it’s been a mixed week of moves across markets. Now for the week ahead which includes a potentially decisive FOMC meeting and press conference for Fed chair Jay Powell. 

The Week That Was…

Now for the week ahead, let’s dive in.

Key Themes driving markets

As we head toward G20 where do we stand in the trade battle

The price action over the past week has been reflective of caution about the outcome of the G20 meeting. A big part of that for me is the reality that President Trump’s ratcheting up of the rhetoric in his usual carrot and stick approach seems to have fallen flat when it comes to setting up a meeting with China’s President Xi. 

While Trump and his economic advisor Larry Kudlow waxed about the step up in tariffs if President’s Trump and Xi don’t meet on the Chinese side there is still no sign a deal is going to be done. Indeed, recently President Xi has been making nice with Russian President Putin and Turkish President Erdogan rather than responding to Trump’s taunts.

More troubling for the president, and the real risk for markets he has to follow through and jack up tariffs on the full amount of Chinese exports to the US, is that China continues to say the US has to treat it with equality – respect in other words – of there is little point in talking.

Maybe President Trump has got the message because on Friday he told Fox News, “If he shows up, good. If he doesn’t — in the meantime, we’re taking in billions of dollars a month.” Before he added,  “eventually, they’re going to make a deal, because they’re going to have to. Look, they’re paying hundreds of billions of dollars.”

The question for markets, for traders and investors though is does that mean President trump IS going to put tariffs on the remaining Chinese exports to the USA. Or, does it mean he’s backing down and will NOT put them on because he realises it’s harder to push China around than he thought.

Honestly I’m not sure. But if I had to bet it would be that he wacks China with more tariffs. That’s particularly the case given he also told Fox, “they subsidize their industry, so our people are not paying. There’s this big thing about tariffs, ‘Oh, our people pay.’ It’s a lot of nonsense. You know what happens, really? Companies move back.”

Which of course has been the game plan from day one. The question is how much he jacks up the tariffs and what China does in response. In the interim between now and the end of the Month’s G20, markets appear more cautious than hopeful about a positive response. 

Is the Fed setting us up for the signal a cut is coming?

I have two podcasts that I listen to religiously – it used be three but hey, Colgo and Scutty have moved on from Business Insider so Devils and details is no more. Anyway the two podcasts are Bloomberg Surveillance daily, and MacroVoices weekly. Recently however MacroVoices has broadened its offering and does an Energy week podcast as well as short “all star” podcasts.

The reason I like both these Podcasts is because I found when I used to wonder the world doing the currency strategy thing for Westpac and NAB even though I always formed my own view interacting with the many bright minds I was able to converse with improved my own thinking – it’s why I set up the “Pantheon” list on Twitter of the folks who are indispensable to me in terms of the info I gain from them daily (you can subscribe to that list and run it through your Tweetdeck, its open).   

Anyway, the point is while walking the dog yesterday I listened to the latest MacroVoices episode with Danielle DiMartino Booth (@DiMartinoBooth on Twitter) where she talks about the language changes at the Fed (arising from the recent Chicago conference papers) which suggests it already knows rates are going into negative territory at some point in the future. Among a few subtle changes, she highlights that what used to be called the zero lower bound is now the effective lower bound.

Why does that matter? because it means the Fed is thinking zero is not the lower bound anymore.

Probably not at this week’s meeting. But with a dot plot being issues this week we’ll know if the shift in Fed rhetoric lately that it will do what’s needed when needed on rates is shifting to a belief that time is coming soon for rates to fall.

As it stands at the moment the CME Fedwatch tool says there is about a 25% chance rates will be lowered this week but an 87.5% chance of 1 or more cuts by the July 31 FOMC meeting. So this week should be the week the Fed and it’s chair sets the scene – but this is Jay Powell folks :S

Bonds are getting back near important support levels for yields

With that backdrop, US and global data still printing weaker than expected in most jurisdictions is it any wonder that Germany issued 10 year bonds last week at a record low of -0.24% or closed the week at -0.256%. Is it little wonder the Australian government 2 year government bond closed the week at 1% – itself a record close – or that US rates are back down toward the recent lows.

Source: Refinitiv

Readers know I am a structural bond bull and that I think we’ll see rates down at the record lows in the US 10’s. Increasingly I’m thinking the rate will actually trade lower. Timing I have no idea, but the outlook is for lower rates in time.

At the moment the 1.97/2.01% region I identified as the critical support hasn’t even been effectively tested let alone broken. But if breaks my target is for a run toward 1.30/40%, maybe even 0.75% over the long run. 

US 10 year yields weekly – TradingView

It’s the right trade to be long bonds structurally. The question is if it’s the right time to be long bonds now tactically. As every it is always an everywhere a question of time frames when trading/investing and I always suggest matching your time horizon with the trade because there is this:

Source: Twitter

US stocks held their ground – what’s next

Of course in a world of TINA and FOMO, in a world where corporate share buybacks have supported stocks, and private equity funds have reduced the outstanding shares available to a growing pool of global investment funds looking for a home the promise of more cuts by the globes central banks – absent the Bank of England at the moment –  is still seen as supportive of stocks.

That the global or US economy that can’t cope with Fed funds of 2.5% or the promise the ECB will move off negative rates is not a world of strength. But that is an otherwise wasteful insight because the market just doesn’t care.

It’s much easier being a macro interest rate, commodity, or currency trader most times than it is stocks.

Anyway, no choice, we must bat on. So, to that end the important point is that the the S&P 500 (using it as the global bellwether) held its 50 day moving average last week and my system is long on the daily and weekly MACD stance as well as the weekly JimmyR – in fact JimmyR crossed on the dailies as well.

S&P 500 futures weekly – TradingView

So here I sit, long because my systems tell me too and with a sense that hopes for monetary accommodation in the months and year ahead trumps any real concern about the global economic outlook.

That will work for a while folks, then we’ll be selling again.

Wrong – US dollar recovers

So, in a world where the US CESI score is the worst in the table above the US dollar can still rise it seems. That’s a difficult one to fathom unless you look at the absolute level of US interest rates and the absolute level of say German, or Australian, or Japanese rates, and then look say at the euro 2 year bond yield forward 2 years.

It’s all USD supportive. And lets be honest right here right now if I was given a clean fund and told I could allocate it where ever I want a fair chunk of it would go straight into US Treasuries – scaled and timed of course, but you get the drift. 

Equally, when you look at the relative attractiveness of stocks where do you want your cash? Might as well be in the bellwether.

So I guess maybe I just want the USD to go down so I can buy it with my ears pinned back. So again we get to the question of time frames for the USD, for the Euro, for the Aussie and others. I wrote during the week something i noted a month or so ago – that is, the AUDUSD will trade with a 5 handle, below 60 cents, again at some point. And readers know I have a 1.03/04 view of Euro at some point with the corollary of a USD index above 100 with gusto.

How soon all that happens is something I’ve never really been good at – I’ve always thought of it as a Schrodinger’s Cat or kind of Heisenberg’s Uncertainty Principle kind of thing.

What I do know at the moment though is that the failure of the Euro below it’s 200 day moving average – it hasn’t closed above it since May 2018 – and the corollary with the 200 day moving average in the DXY has kept recent trends intact.

And on the weeklies the reversal and push back above the 15 ema makes my expectation that we’d get a chance to buy the DXY at 95.60/80 wrong – last week’s low was 96.45/50, right on the 200 day ma.

USD Index (DXY) Weekly – TradingView

And as you can see on the weekly chart above last week’s low was right on this weekly 4, now 5, touch trendline – something I missed in last week’s piece. So I was wrong and it seems unless or until that trendline/moving average/level gives way the US uptrend remains intact. However mild that may be. Like wise the Euro, Aussie and many other pairs downtrend.

And of course we are all on alert for the moves in USDCNH/Y should the trade talks actually break down in a more formal manner.

Oil, after a tumultuous week

It was a big week for oil traders as the API and EIA data confirmed there is plenty of oil around at the moment in the US, and as OPEC and the EIA both downgraded their outlook for demand growth this year.

That saw prices fall out of bed and back toward the lows of the previous week before the attack on the ships in the Gulf of Oman put a conflict bid into oil. Not much of one mind you. I say that because despite the war drums building, despite the US and UK saying they think the Iranians did this, traders seem sceptical despite the US CentCom video purporting to show a limped mine being taken off the side of the ship, WTI and Brent still had down weeks. 

That feels amazing complacent on a Macro and rhetorical plain. But price action is price action and we must respect it.

For me the message is that only a break below the lows of two week’s back now will materially open up the downside. My sense is it comes in time but for the moment the conflict bid in oil will hold it up- for a little while as we all wait to see what – if anything – the US does in reaction to these attacks. Iran is not Syria though folks.

The parameters I put around WTI this week would be $50.50/56.20 a break either side will really get things moving. Interestingly my daily MACD system has a buy order for Monday in both benchmarks.

WTI (CLc futures basis) Weekly – TradingView

And just quickly, the CFTC data

The USD holds primacy in the hearts, minds, and portfolios of the spec traders it seems still even with a little position trimming across a number of pairs. WTI position was pared back a little as was the short in US 10’s.

Overall the key takeaway is the USD is a little vulnerable but we need to see a catalyst for reversal. Likewise the market is less short 10’s which does give some room for reversal while gold’s increase shows partly why it may have been so easy for longs to get chased back from the highs Friday. 

Source: CFTC

The week ahead

The Fed is the standout this week with the announcement and Press conference from 2pm Wednesday Washington time. As you can see from the narrative above it is in so many ways the key to everything. Dovish, Hawkish, or as neutral as Jay Powell may try to be it will move markets from bonds, to currencies, and commodities because there is so much expectation embedded in market pricing.   

Before that though on Monday we have quiet start with Rightmove House prices in the UK, a montly report from the Bundesbank, the New York Fed’s Empire manufacturing index and the NAHB housing market index. 

Tuesday kicks off with a Westpac consumer sentiment survey in New Zealand, Australia’s house price index and RBA minutes (should be interesting in providing some colour as to next moves) and then we get German PPI and ZEW sentiment. We also get EU trade, CPI, and ZEW. In the US it is housing starts and building permits as well as Redbook sales, and the API crude data after the bell.

Wednesday is the big one with Kiwi current account data, Japanese  trade, Euro current account, and UK and Canadian inflation data. EIA energy stocks and data is out and then the Fed is in the block with a 25% expectation it will cut this meeting and an 87.5% chance by the July meeting setting up the chance for a decent market move regardless.

Thursday is Kiwi Q1 GDP, a speech from RBA governor Lowe, and we also have a BoJ policy meeting and announcement. In the European session the BoE MPC is up and I wonder if it will wax hawkish given recent speeches from Haldane and others – surely not? Jobless claims and the Philly Fed are out in the States.

Friday is “flash” PMI daya as Markit milks the marketing value of release the one piece of data twice a month. Japanese CPI is also out and we’ll get UK CBI trends and a BoE bulletin along with existing home sales in the US

Enjoy.

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 MckennaThe Fed dominates the landscape this week with markets are important levels – McKenna Macro Markets Weekly

Mexican Tariff backdown to drive risk recovery – McKenna Macro Markets Weekly

on June 9, 2019

Hi folks, welcome to my weekly newsletter. 

This is post is sponsored by SMARTMarkets 

To sign up for this report weekly click here

Here’s a bit of feedback from a subscriber recently:

“We deal with 20 Banks globally and I get more from your note and video than all of them”

Key Takeaway

Short and sweet this week because it’s a long weekend in New South Wales and I’ve been away (I’m actually posting this while Mr 16 is driving the car – it a good distraction). But, I thought given that I’d generated a buy signal for the S&P and other indexes last week for subscribers I’d update where we are in light of hopes for a Mexican tariff break through and the dismal non-farms in the US on Friday night.

To recap, the worst week of the year for US stocks was followed by the best week of the year ending Friday. Of course it was driven by the hope of the Mexican deal, promises of Fed rate cuts, but also the reality that many markets pulled up at or around important technical support zones. That reality negated a lot of the bearishness of the previous week for the moment.

And of course the better tone in stocks helped other risk assets like the Aussie and Kiwi dollars, junk bonds, and it helped – along with some solid Russian and OPEC jawboning – WTI and Brent crude oil recover from perfect tests of Fibonacci support.

Bonds too tested and held support, gold resistance. So with President Trump announcing a deal with Mexico to avert the tariffs and the G20 meeting looming on the horizon it might be the time for the bulls to let the rabbit run.

The Week That Was…

Now for the week ahead, let’s dive in.

Key Themes driving markets

President Trump does it again. Again!!!!

The Mexican threat, as real as he probably thought it at the time he decided to impose tariffs, was a real risk to President Trump’s political standing given the two nations supply chains are so integrated and given US business and Republican Senators finally started to push back against the continued overreach.

It was a real risk also because of what it did to stock prices which President Trump continues to have as his number one KPI. He’s probably surprised that 5% tariffs on Mexico knocked stocks over in a way the China trade war had not.

Source: Twitter

But he’s got the message, found a way to agree that Mexico has done what he wants though it seems they were doing all the things anyway, and so markets – having preempted the “deal” are now likely to take this as an indication Trump may fold on China – or at least find a way to do a deal – when he meets President Xu at G20 later this month.

If that is the case, either the expectation or reality of deal, then there is a real chance we’ll see new record highs for the S&P and other US stocks. Which of course has serious positive consequences for bourses across the globe.

A BUY signal for stocks.

I alerted subscribers on Wednesday morning my time (COB NYC Tuesday) to a buy signal for the S&P 500 and a couple of other markets then and during the week. As I wrote, it was the first buy signal since May 1 and I was taking it. I also noted the DAX pulled up almost exactly in the convergence of the 200 day moving average and Fibo support and that many other indexes had fulfilled similar retracement patterns.

That’s important because if I use my weekly JimmyR indicator as the overall trend direction then the reversal off support is a signal the uptrend is still intact and I shouldn’t get too bearish.

S&P 550 (futures) Weekly – TradingView

Price has primacy in trading. Rhetoric is a luxury unless it lines up with price. Then we have a powerful synergy to harvest profits.

That’s not to say I’m convinced a deal will be done between Presidents Trump and Xi – in fact almost the opposite.

Source: Twitter

But two things are clear, price follows its own path of least resistance and President Trump is prone to whims and swings of emotion. So as he intimated with comments on Huawei this week, maybe a deal can be done.

S&P 550 (futures) Daily – TradingView

So for the moment the weekly JimmyR still points higher, my daily MACD system was s long, and the weekly has generated a buy signal. And that means I’m running with this till price tells me otherwise.

And it’s a similar story for the DAX and other indexes where my daily and weekly systems are either long or have but orders. Here’s the daily DAX.

DAX Daily – TradingView

Bonds still suggest caution – but rally resistance held

I highlighted the long term resistance in US 2 and 10 year Treasury yields last week because they represent points of extension or exhaustion for the recent push lower in bond yields, push higher in bond prices.

Last week we did see a test of the 3 decade trend line in the 2’s and an approach to the bottom and of the range in the 10’s – both of which held.

US 2 year Treasury yield – TradingView

But given the weak non-farm payrolls print of just 75,000 against expectations of an increase of 185,000 during May, even with a still robust 3.6% unemployment rate saw bets the Fed will be forced to ease and that other central banks will follow suit.

So bonds around the globe are plumbing lows in outright’s and in spreads. And as you’ll see in the CFTC data below, the market appears to getting my short 10’s. So there’s a risk of reversal if these levels in US markets continue to hold.

US 10 year Treasury yields – TradingView

In the long run I expect a deep run lower in US and global bond prices. One that is eventually incompatible with higher stocks. But for now we live in a Goldilocks land of hope and she’ll be right.

Just quickly on the Fed

It is pretty clear the Fed is ready to cut rates when necessary. We heard as much this week from Powell, Clarida, Brainard, Evans, and Bullard.

But the comments I took most seriously where the ones from Dallas Fed President Robert Kaplan who provided the context around when the Fed will change both its rhetoric and actions. Kaplan effectively said there were a number of thinks to play out over the next few weeks and the the Fed could see where things land.

That is, the meeting between Presidents Xi and Trump at G20, and the implications for the trade war will decide the Fed’s reaction function.

US Dollar breaking down

For the first time in 18 weeks the US dollar index (DXY) closed below my 15 week ema. That’s an important signal of a pullback. It closed the week at 96.56 and I have 95.60/80 pencilled in as a target for this move at a minimum.

I put out a thread on Twitter which summarises my thinking – it goes along these lines.

The risk is rising of a counter trend reversal in the USD, DXY, Euro and other pairs against the USD at present.

A big part of this is weak US data with the Citibank Eco Surprise score (CESI score) continuing to be the weakest of the major markets – by a long way.

As you’ll not below the CFTC data shows overall USD positioning still very high making markets vulnerable to this reversal if it gets a wriggle on. That begs the question of what’s a wriggle on? My best guess is a break of the Euros 200 day moving average at 1.1365/70.

EURUSD Daily – TradingView

Euro hasn’t been above 200dma since May 2018

That means EURUSD is nearing what could be an important extension or exhaustion point at this 200 day moving average. Then we have 1.1450 is 23.6% retracement of the big fall, 1.1625/30 is 38.2%

That would be the maximum extension I’d expect from this move at present. But as ridiculous as that sounds rhetorically right now, the set up is growing for a counter trend reversal of the US dollar which could cause ructions across many markets.

And just quickly, the CFTC data

As noted above the market remains very long US dollars and US Treasuries. Both these trades are vulnerable to a thawing in the trade war – as remote as that seems. That would have implications for other shorts like those in the the Aussie and Euro – among others.

Enjoy.

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 MckennaMexican Tariff backdown to drive risk recovery – McKenna Macro Markets Weekly

I-N-T-R-A-C-T-A-B-L-E, that’s the trade war and it’s spooked markets – McKenna Macro Markets Weekly

on June 2, 2019

Hi folks, welcome to my weekly newsletter. 

This is post is sponsored by SMARTMarkets 

To sign up for this report weekly click here

Here’s a bit of feedback from a subscriber recently:

“We deal with 20 Banks globally and I get more from your note and video than all of them”

Key Takeaway

For the fourth week in a row market price action has been dominated by President Trump’s trade wars – Plural now with the latest Mexican developments which sent stocks and risk assets down at week’s end.

But it’s more than that now too. With China hardening its rhetoric around economic terrorism, threatening rare earth supplies, and responding with a White Paper on trade which essentially said “it’s not us, IT’S YOU”, it’s clear the Chinese now think fighting back is increasingly the right way to play President Trump.

And given what he’s done with the fresh Mexican tariffs after the USMCA deal has been agreed you’d wonder why China would even bother to do a deal when President Trump as he’s done with Iran, Mexico, and China itself changes the goal posts and playing field to suit himself.

It means a slower global growth backdrop, more earnings pressure, and lower rates. No wonder we got the moves we did last week.

The Week That Was…

Now for the week ahead, let’s dive in.

Key Themes driving markets

President Trump does it again

It’s hard to get a read on Donald Trump.

On the one hand he seems to view the level of US stocks as a measure in f the success of his Administration yet on the other hand he does his very best to undermine sentiment, prices, and the economic outlook.

Just look at the impact of the new Mexican tariffs announced this week for June 10. Stocks fell out of bed, bonds found a solid bid, while oil and copper cane under heavy pressure.

China’s CCP tabloid Global Times Trolling President Trump – Source: Twitter

All because traders and investors are really now worrying about the trade wars President Trump is pursuing. 3 or 4 weeks after I warned that it was indeed time to take the battle seriously, but nonetheless serious they are now.

China too is serious it seems and digging in. Calling the US economic terrorists, threatening to restrict rare earth exports, generally allowing state media to dial up the rhetoric, and the release of the weekend White Paper laying the blame of the collapse of recent talks on the US makes the chance of the G20 meeting between President’s Trump and Xi turning into an agreement remote.

Indeed Global Times take was along the lines of  “Chinese officials have stated that for talks to continue, the US must demonstrate its sincerity in the talks and must correct its recent wrongful actions, including raising tariffs on Chinese goods and targeting the Chinese tech company.”

And drawing up their “unreliable” list as retaliation over Huawei and then going after FedEx is only going to make the trade battle more intractable.

Markets have taken note. This week’s data is a genuine near term risk in the current environment if it takes a tilt lower. There is a certain asymmetry in that regard to the outlook.

Small Editorial: Just remember though folks. You may dislike President Trump’s tactics, but someone had to bell the cat on China. On it’s industrial and business practices, on its attempted hegemony over the entire South China Seas, and on much which was clearly and attempt to build influence globally for the Chinese Communist Party and its authoritarian policies.

Indeed to extend another metaphor, President Xi jumped the shark himself with his ruler for ever move and his push for China to dominate global industries…it was a wake up call folks. 

Now, back to markets. 

Bonds still leading the way – but nearing important resistance for this rally.

I’ve banged on about this in the weeklies and in the daily Newsletter for some time now. But you can see the leadership role bonds are playing in the chart below of US 10 year Treasury yields, WTI oil, the S&P 500, and Junk bond ETF prices. It’s a simple analog so it’s not necessarily saying the S&P should fall back below 2200 but we have to consider if the preconditions for bonds to keep rallying are really there then stocks will remain pressured.

US 10’s (black) v Oil (WTI red), the S&P 500 futures (blue), JNK ETF (purple) – TradingView

It feels very late 2018 doesn’t it?

But both the 10’s and 2’s are facing important resistance levels to their rallies. Looking first at the 2 year Treasury in the monthly charts you can see that the yield is now back close to the old multi-decade downtrend line yields broke up and through in 2018. 

US 2 year Treasury yields Monthly – TradingView

It would be a significant game changer for the 2’s and thus global cross assert markets if the yield breaks back below this 1.85/90% region. That’s especially the case when uber-dove Neel Kashkari says it’s not yet time to move policy, nor when the Dallas Fed says underlying inflation rose last month to 2% – as happened Friday.

It would be a clear signal market are worried and that the time for a Fed cut is near. 

For the moment the price action suggests there may be some element of short covering in this move lower. Indeed as I highlighted last week – rates, 10’s in this case, wet vulnerable due to an increase in shorts and the CFTC chart below shows there has been some position squaring as at last Tuesday – late week it likely took on added urgency

That short covering could accelerate if we see any further data deterioration as the next round of new monthly data updates kicks off this week in the US and elsewhere.

US 10 year Treasury yields Weekly – TradingView

But as you can see this 1.97/2.00% region in US 10 year Treasury yields looks like an important level as well. As I highlighted in my newsletter and video this week a break would suggest a very long term run toward 1.33%.

Such a break, if it was to occur and I am respecting support unless or until it breaks, would usher in a very different market and economic reality.

How low can stocks fall?

A bounce in bond yields would be good. But late to the game stocks still look like they have further to go even if bond rates stabilise.

To that end in S&P terms a move to 2714 would be a simple garden variety 38.2% retracement of the rally from the 2018 lows. So that is the minimum target. Below there the 2670/80 region looks important and the 50% retracement comes in at 2638.

S&P 500 (futures) Daily – TradingView

As you can see in the S&P chart above we’ve had a triple cross on the daily system and my MACD system as paid subscribers know from the daily notes and position summaries.

Certainly the weekly JimmyR has not crossed bearishly yet but the moving averages have flattened out, dipped a little. That’s a warning when taken in conjunction with the daily charts.

The question of where the circuit breaker will come from is an open one. 

Naturally President Trump can reverse his tactics and tariffs just as quickly as he put them on. But that would appear to to be entirely conditional on the Chinese, Mexican, and no doubt soon European and Japanese doing exactly as they are told by him.

Chances of that? Lowish I’d say anytime soon if his Tweets celebrating the expected impending move of companies back to the US is any guide.

The second of a three Tweet thread on Mexico and Trade – Source: Twitter

So that leaves the Fed or the data as a circuit breaker. This week and next’s data will be important in impacting sentiment too. Good or bad, it will move markets.

Naturally I’ve used the S&P as the global bellwether, other markets will move around with that through the weeks ahead. 

Oil traders may have over reacted – but the technical break is ugly

We had a little intra-week head fake in oil. Using WTI as an example price in the front contract fell to $56.88 Wednesday only to close at $59.06 the same day. Yet by week’s close WTI was almost $6 lower at $53.22 while Brent is at $64 and change.

That ugly price action was a result of worries about global growth and thus the supply demand balance hitting a long speculative market and breaking significant technical levels.

WTI (CLc continuous contract futures) Weekly – TradingView

When you look at the weekly chart though you see a break of the uptrend, attempt to retake that break and then reversal. That’s poor price action folks and suggests potential significant downside – even from here.

What’s important also though is if Oil does start to really fall out of bed then we could see Junk come under pressure once again. The relationship is very strong as this chart below of WTI and the Barclays HY ETF shows. 

SPDR Series Barclays High Yield ETF (orange) v WTI (Blue) Weekly – TradingView

The USD needs a decent retracement if it can’t hold above 98

For a while it looked like the US economy might stand above the rest of the globe as it slowed down. But, if the Citibank Economic Surprise Index is any indication the US is in as much strife economically as everyone else.

Of course that’s not exactly what the CESI scores reflect. Rather the US score of -32.3 is a relative score compared to what was expected in terms of economic data and outcomes. SO the US may still have a much stronger labour markets than most nations, still have relatively healthy economic outcomes – as the Fed keeps telling us.

But the fact the CESI score is so weak relative to other nations. Or at least that it is the weakest save for the BRIC’s means the narrative that the US would skirt global weakness is a non-starter.

And that seems to be continually undermining the USD’s ability to rally as you can see in the weekly DXY chart below. 98.80/90 looks like significant resistance anyway (analogous to 1.1030/40 in Euro) so being short term bullish through there is a stretch. But the uptrend remains solid in so far as it has been 17 weeks or so since the DXY closed below the 15 week ema.   

USD Index (DXY) Weekly – TradingView

97.00/10 is the level to watch on the DXY. A weekly close would signal a deeper run lower.

But we can’t talk about the USD, about forex markets more broadly, without taking China’s plans for and attitude toward the Yuan into consideration. And to that end it is worth noting that offshore markets are putting pressure once more on authorities to test their resolve to holding the recent highs in USDCNH just under 6.95 with 7.00 not that far away.

USDCNH Daily – TradingView

The question is whether authorities decide to hold 6.95/7.00 firm as a high water mark. It’s the most important question in forex, perhaps all of global markets. Watch this space. FX rates are a powerful economic balancing tool – just ask the RBA as it cuts rates this week and no doubt hopes the Ausie falls a cent or two. 

And just quickly,  the CFTC data

The passengers are still very much on one side of the ferry across many markets. Short Euro, Aussie, CAD, long USD, WTI, and gold, shortish VIX and less short but still reasonably short US 10’s.  

Source: CFTC

It’s a recipe for account balance disaster if something happens to trigger stops and a move the other way. We are not far from that – indeed it may already be happening in Oil and Bonds. But it doesn’t appear to have happened yet in forex which has been quieter than some of the other markets.

But can it last. Keep an eye on Junk folks, while low rates are a slave for zombie companies look out for notions the economy is slowing as a real test of the “she’ll be right the central banks have got this” mantra.

The week ahead

HUGE, it’s a big week.

Monday is manufacturing PMI day and if the NBS China data Friday is any guide we need to don the tin hats. Australia opens the batting and then we have Japan, Korea, China, and the globe’s manufacturing PMI’s. Australia also releases some more partials to Wednesday’s Q1 GDP with business inventories, company gross profits both out along with ANZ job ads. Naturally Europe’s PMI dump will be important as will the US and Canada. We also get speeches from the Fed’s Quarles, Daly, and Bullard.

Tuesday we get NZ terms of trade, South Korean GDP (canary meet coal mine) while in Australia we get Q1’s current account, retail sales for April, and off course the much anticipated RBA rate cut – or at least the Board meeting and governor’s announcement. RBA governor Lowe is speaking 5 hours after the announcement so he’ll be able to tell us why he did, or did not, cut rates.

Europe has inflation data out Tuesday, NYC Fed boss John Williams is speaking, as is Fed Chair Powell, and the Bundesbank’s Balz. US factory orders will get a bit of attention too as will the global dairy auction for Kiwi traders and then API crude data as the US exits and those of us in Pacific pick up the cudgel.

Wednesday is services PMI day globally which should be a little better than the manufacturing data to kick off the week. Services just seem to have less variability. As the globe turns we’ll get the data starting with Australia and then rotating through. China will naturally be important as will China, Germany, EU, and US data points.

Here in Oz we also get Q1 GDP – yes the day after the RBA meeting :S The EU has PPI and retail sales, UK has new cars sales and a speech by Ramsden who was a little bearish on the outlook last week and then – it being the first week of the month – we get the ADP employment data in the US as an appetiser to Friday’s US non-farm payrolls. EIA crude and other data is out and we get speeches from the Fed’s Clarida, Bostic, and Bowman. The Beige Book is also out.

Thursday is trade day in Australia, Factory orders in Germany as well as EU employment and Q1 GDP. We also have speeches from BoE’s Carney, Boj’s Kuroda, and of course the ECB meeting, statement, and Mario Draghi’s press conference. In the US we get the Challenger jobs data, jobless claims, trade, and productivity data as well as a speech from the Dallas Fed’s boss Robert Kaplan and another from John Williams.

If you aren’t already exhausted by Friday we have the big event in the US with the release of US non-farms.  Before that though we get home loan lending data in Australai for April, so not the election bounce data, Kuroda is speaking again, and then we get German trade and industrial production data (HUGE) along with the Bundesbank’s semi-annual forecasts :S. Canadian employment data is also out with that in the US and the Fed’s San Fran boss, Mary Daly, is speaking. 

Enjoy.

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 MckennaI-N-T-R-A-C-T-A-B-L-E, that’s the trade war and it’s spooked markets – McKenna Macro Markets Weekly

The bond rally is starting to freak traders out – Macro Markets Morning 29th May 2019

on May 29, 2019

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

In a rush? Here’s the key takeaway

  • There is so much going on right now and with stocks going offered and bonds bid I thought I’d open this morning’s newsletter to the wider weekly audience in the hope that can aid in getting some clarity from the fog at the moment – NATURALLY, PAID SUBS YOU ALREADY HAVE THIS FROM THIS MORNING. 
  • The bond bull is in the house and it is rocking. US 10’s are down at 2.27%, the 2’s are at 2.13%. Both have a downside bias and these moves are going global and scaring the heck out of a few folks.
  • So stocks were down with the S&P closing right on support at 2802 for a 0.85% loss, the other big US indexes were down as were Europe’s.
  • That funkiness helped the USD a little though with the DXY back near 98, the Euro at 1.1160. It’s not exactly “risk off” but traders will be alert and a little alarmed I’d suggest as China digs in with threats about “rare earths”. 

Now,  let’s dive in to this morning’s newsletter

——————–

MARKET SUMMARY (As at 8.30amish Sydney after NY close)

So, not such a good start to the holiday shortened week for US stocks, though the bond bulls had a cracking day and have the whip hand at present. Italian and Chinese 10’s bucked the trend to lower global rates but there is a real sense that the trade war is becoming entrenched and intractable now.

Without a circuit breaker the roll over in stocks, the rally in bonds, and the offer in risk assets more broadly will continue.

To the price action then and besides the 0.85% drop in the S&P 500 the Dow dipped 0.93% to 25347, the Nasdaq was only 0.3% lower at 7278, and the Russell 2000 was 0.67% lower at 1504. Europe fared a little better with losses ranging from 0.15% for the FTSE in London to 0.5% for the FTSEMIB in Milan. Australia’s SPI futures lost 0.66% and Nikkei futures dropped 1.1%. 

On forex marekts the US dollar was up by about 0.3% in DXY terms and that was roughly the gain against many other currencies. Euro is at 1.1165, GBPUSD is at 1.2654, USDCAD is at 1.3491, USDSGD is at 1.3797, and USDCNH is at 6.92 having been above 6.93 in European trade at one point. Incongruously the Aussie and Kiwi did a little better than most and are basically flat on the day at 0.6923 and 0.6542. USDJPY has attracted a small bid at 109.30. 

Also curious is gold’s dip of 0.45% to $1279, silvers collapse of 1.7% to $14.34, though copper’s dip to $2.70 is understandable but also slightly resilient. Brent was flat at $70.07 while WTI is up 0.65% at $59.01. Bitcoin is at 8700.

Wednesday the RBNZ opens the batting with a financial stability report for New Zealand. German unemployment is the next big thing in an otherwise quiet Asian session before we get a speech from Bundesbank President Jens Weidmann and then the ECB’s own financial stability. Mortgage Lending and Richmond Fed along with API crude are also out in the US. The big ticket item of course is the BoC interest rate decision.   

Macro stuff that affects everyone and everything – either today or eventually

INTERNATIONAL 

Bonds are leading the way lower in recognition of multiple US and global headwinds

I’ve been a structural bond bull for some time as you know and the rally is continuing as traders across the globe recognise this trade battle has moved from rhetoric to entrenched. That has to have impacts on global growth and as I highlighted recently on US growth too.

It certainly made me revise my sanguine outlook on US growth and the Fed. 

US 10 year Treasury yield Weekly – TradingView

So it is no surprise then that US 10’s are rallying toward the recent target articulated around 2.10% and the 2’s seem on track to test that multi-decade trend line around the 1.90% region.

Now we can argue about the market being way out in front of the Fed in this bearishness about the economy, bullishness on yields. But teh trend here is clear. 2.00% might actually trade rather than my 2.10% target when I look at that chart.

And if that is the case then watch out risk asset holders – except Bitcoin of course which marches to its own goosed drum. Bonds are leading folks, and they are sending a big signal. The data will have to turn around or a trade deal done to change the sense in markets that a slowing is upon us. 

US 10’s (black) v Oil (WTI red), the S&P 500 futures (blue), JNK ETF (purple) – TradingView

Morgan Stanley issues recession warning 

I haven’t read the report but CNBC says that Morgan Stanley says economy is on ‘recession watch’ as bond market flashes warning.  It’s not exactly a revelation given the price action we are seeing above. But the price action I’ve noted in bond and other markets is reflective of this thinking so it is noteworthy in that regard.

Specifically, “numerous leading companies may be starting to throw in the towel on the second half rebound–something we have been expecting” the bank wrote. And associated with that is “recent data points suggest US earnings and economic risk is greater than most investors may think,” wrote Michael Wilson, the firm’s chief U.S. equity strategist.

A drum I have been banging folks as the risk that was growing.

Source: MS Cross Asset Research via CNBC.com

A  point Wilson also makes is that the economy was weakening before the re-escalation of trade tensions. That’s troubling folks, something I’ve noticed as well and why you may have noticed my rhetoric changing recently.

Both these ideas can be tied together in this tweet

This pretty much says it all…

Source: Twitter

So is it anywonder stocks are under pressure again

Here’s a few charts, no real commentary necessary the narrative and technical outlook remain the same. My system is short on daily and weekly time frames and if last week’s lows break then we are belting lower again. 

S&P 500 Futures based CFD – 2800 the level to watch

S&P 500 (futures based CFD) Daily

China A 50 futures based CFD – watch out if 12,200 goes

China A 50 (futures based CFD) Daily

Nikkei 225 futures based CFD – watch 20,750

FOREX 

The European basket case is troubling traders

Italian deputy prime minister Salvini, fresh from solid results in the EU elections, is now calling on the ECB to guarantee government debt and pushing his nation into a direct confrontation with the EC.

At the same time France and Germany are arguing over who will be the next leader of Europe with Mrs Merkel backing Axel Weber and Mr Macron other candidates. It’s a typical EU mess with Donald Tusk saying the good news out of the election is that the centre held while those on the fringes are also emboldened because their vote increased as well.

Throw in the fact that the arguments won’t help solidarity about the way forward to fix the EU’s moribund economy and we have a Euro that can really only benefit if the US dollar or other pairs stumble on their own. So that reinforces the overall EURUSD downtrend.

So to that end I agree with my Twitter mate Marc-Andre Fongren who put the following on twitter as to why he sees the single currency have a downside bias.

Source: Twitter

Indeed what’s really interesting about that consumer confidence figure was just how buoyant consumers are about the jobs market. It’s very Australia during the soft patches we’ve had over the years – jobs is a good salve. Though no guarantee the USD goes up.

EURUSD Daily

Looking at the Euro one hour yesterday it looked like it was setting up for a run to 1.1135. The daily supports that after the failure at the trendline I mentioned yesterday. 1.1190 and 1.1220 need to break to open the topside again. A slip below 1.1100/35 opens up 1.1030. 

Elsewhere yesterday the USDCNH rallied at one point but reversed back from 6.93 and change. These are tiny moves in the grand scheme of things but important signals to markets and traders of China’s intent. And slippage in the Yuan will reverberate across markets globally. For now the line is still holding. I still expect that to the be the case for a while yet.

USDCNH Daily

USDCAD and USDSGD were very interesting yesterday in that they have rallied hard and held – though only in line with the overall USD Index move in percentage terms. That they underperformed the Kiwi and Aussie is interesting and something to watch

I’ll cover the full gamut of currencies in the video this morning

COMMODITIES-Oil, Gold, and Copper  

OIL

I had a bit of a rhetorical commentary yesterday about the differences between the focus on the front contracts we all trade and the signals the market is giving more structural, the drivers, grades of oil and so on. Then yesterday afternoon as I was moving a pile of wood into the wood shed I .listened to last week’s energy week on the MacroVoices podcast. It touched on what I was trying to say neatly and I recommend a listen if you want to understand a bit more about crude markets – it’s here.

Price wise the outlook is still for lower levels with the recent foray to the $57.27 region simply reflecting that the easy money is made. Price hasn’t been able to get back above the break down levle around $60.00/20 so any chance of a further advance is negated unless that happens. Now it’s a question of when the price breaks breaks lower – down and through $57.27 toward the 50% retracement. I’m not sure when, but a break would be a big move and signal. I’m still short but any moves back toward $60/61 could reward as sell zones for those not already in the market. 

WTI (CLc terms) Daily

GOLD, SILVER, COPPER

Copper futures had a bearish engulfing day Tuesday suggesting the downside is opening up again. Of course the fact that the S&P and other indexes across the planet went offered didn’t help the recovery which peak a little below $2.72. The system went long which might catch it out given the downtrened is reinforced again with this reversal. Rhetorically I’m still looking for $2.55ish eventually. 

Copper (HGc terms) Daily

Gold and silver are conundrums though. They both came under pressure again Tuesday reinforcing for Silver my view that the lows of last year are likely to be approached again. It’s a purely technical view looking at the chart and one I’ve articulated a number of times over the past month. The 1.6% fall in silver reinforced that last night.

Silver (XAGUSD) Daily

Gold is a bit more interesting. By that I mean difficult. You’d be forgiven for thinking that with bonds bid, worries about global growth, and stocks a little offered gold would be better bid. Yet it fell slightly more than than the DXY rose or the Euro fell Tuesday with a 0.4% loss.

Maybe it’s the growth/deflation dynamic? I’m not sure. But even as the S&P fell toward the 2800 level gold was offered. And it failed in the cluster of moving average resistance. That suggests the recent range trading is continuing with a chance of a run back to the lows.  But at present gold is not really going anywhere. 

Gold (XAUUSD) Daily

AUSTRALIA 

AUD, marching on the spot fails to break the 15 ema for the third day

This is not a good environment for the AUDUSD nor AUDJPY if bonds are right and stocks do end up breaking lower again.  Looking at the setup with the MACD it looks like the Aussie is trying to build a base but for three days now we’ve seen the AUD failed to get up and through the 15ema. That’s one of my key trend indicators so it suggests the down trend on the dailies is still intact.

Of course with another day without domestic catalysts the Aussie remains hostage to the USD which seems to be benefiting from the European malaise. But the reality is the moves this week for the Aussie have been tight.  For me at present the range is 0.6860/0.6940 and a break topside is need to negate the chance of a break lower. Above 0.6940 and the 30 ema at 0.6975 comes into play and if that’s bested then 70 cents is back in the frame. 

AUDUSD Daily

ASX Indexes – not drowning, waving

We didn’t get filled on the sell signal yesterday as the ASX and SPI rallied. Such is the nature of the system that that signal has now been negated and we’ll have to wait another day. But when I look at the analog between the ASX and the S&P 500 I see a 200 point divergence which suggests to me the ASX has got some downside catching up to do – or the 2800 region is going to remain firm.

As an FX bloke the easy way to play that is a risk matched pair trade of buying the S&P and selling the ASX and waiting for the gap to close. Or of course there is the opportunity to sell outright if you believe the tractor beam of the global economy will eventually hit Australia and the ASX – once this post-election sugar hit is out of the way that is.

On a purely technical point of view when looking at the SPI my view remains the same. The post election gap to 6409 needs to be filled. If that gives way then a big fall is on the way as that would also take out my 15 ema. If the system was run on the SPI it would be short now. 

SPI200 (futures based CFD) Daily

Positioning Thoughts

System signals and positions as 6.05am Wednesday Sydney time, 4.05pm NYC Tuesday. 

As at 6.05am Sydney 29052019

And here is a link to my latest positioning thoughtsI send Monday morning.

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.

Caution: Trading is risky and carries a risk of loss. Leverage trading such as CFD’s could result in losses that exceed deposit. Any decision to place trades is at the sole discretion of the trader and it should be clearly understood that in any decision to trade there is a risk of loss. CFDs are complex instruments and come with high risk of losing money rapidly due to leverage.You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Copyright © 2018 gregmckenna.com.au, All rights reserved.
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Greg MckennaThe bond rally is starting to freak traders out – Macro Markets Morning 29th May 2019

Bonds rally, stocks swoon, and gold catches a bid, This Is Serious Mum – McKenna Macro Markets Weekly

on May 25, 2019

Hi folks, welcome to my weekly newsletter. 

This is post is sponsored by SMARTMarkets 

Don’t forget the Daily Newsletter and Video are behind a paywall now. But if you’s like a trial subscription let me know – it’s not for everyone. But if you want a guide thorough the daily and weekly tumult of markets, someone who’s done it for decades and successfully then I’m sure you’ll benefit. 

Here’s a bit of feedback from a subscriber recently:

“We deal with 20 Banks globally and I get more from your note and video than all of them”

Key Takeaway

The last two week’s Weekly column titles have been “It might be time for markets to take this trade war seriously” and “Digging in, the US and China are on the brink” and it seems finally that traders are starting to take this reality seriously.

Of course Donald Trump did his best to rescue the market from the worst of its fears by on the one hand belting China over the head with Tariffs, sanctions on Huawei and others, and mocking the nation in speeches and on twitter while all the while whispering sweet nothings into the ears of traders and investors lest they exercise the worst of their fears and really start selling stocks.

It’s a strategy with diminishing returns of course – until the digital payoffs of utter capitulation if the talks finally fail or complete euphoria if a deal is done. But till then the president will keep himself business manipulating emotions if things get too troubling for traders. It’s one of the things he does best – manipulating others emotions – and why wouldn’t he keep at it he’s still having some success as Friday’s stall in the stocks and risk moves showed.

But actions speak louder than words and as we head toward another month of weakening data, or worries about the outlook for the global economy, the US economy, and company earnings failure to do a deal at the June G20 meeting might be the tipping point.

Till then though, like this week markets have a troubling tilt and that will keep the President and his Cabinet ready with Tweets and soothing words to try to buy them time to force China to bend the knee…but things might well have gone beyond that.

The Week That Was…

Now for the week ahead, let’s dive in.

Key Themes driving markets

TISM – Markets are finally less complacent

“So, how about those Magpies”, he said as he shuffled uncomfortably and looked at his feet. He wasn’t yet ready to discuss the elephant in the room, the bogey-man behind the door, so he contented himself with small talk.

I just made that paragraph up as if it was from one of the trashy novels I like to read each week when I need to NOT THINK about markets. Jack Reacher, Vince Flynn, John Puller, Amos Decker, or any number of popular but still non taxing reads I use to distract me from markets.

But, like the market over the past week, you have to put down the novels and get back to reality. And it’s clear the reality that markets are finally waking up to is one of slower growth in the globe and increasingly it seems in the US. And from that thought process flows concerns about earnings, expectations about central bank policy moves. And of course ultimately thoughts turn to actions and we’ve seen stocks selling and bond buying – among other asset class moves. 

Source: Refinitiv data

What’s interesting about the moves in the past week is they have been not only fuelled by fears of the outlook but also by a weakening in US data flow which remains the weakest of the major nations I watch through the Citibank Economic Surprise Index – what I call the CESI scores.

Source: Twitter (not sure who’s stream I sourced it from, apologies to the tweeter).

Durable goods order in the US Friday were another big miss, and this weakness in data flow is undermining the US dollar and giving further credence to worries about earnings as the chart I shared with Subscribers during the week shows.

So it is no surprise that stocks had a bad week and bonds ended at the lowest levels in years.

The games Trump plays

But markets averted a Friday dump because President Trump, after the bell Thursday and with stocks staring into the abyss said, “it’s happening, it’s happening fast and I think things probably are going to happen with China fast because I cannot imagine that they can be thrilled with thousands of companies leaving their shores for other places” .

Passive aggressive in the extreme folks.

But it was what traders wanted to hear. In Trump We Trust they seem to continue to say as they HOPE that this recent escalation in the trade battle which stepped up again with Huawei rhetoric – on both sides this week – is just the Art of the Deal and not actually a reflection of Trump’s true aims.

Personally I reckon he’s happy either way, a deal he can claim victory on, or a trade battle he can prosecute.

We need to be as flexible as he is folks. Neither a bull or a bear be, just follow the price action is the only way to trade a world influenced by President Trump if you are trading.

For the moment that’s the Chinese attitude as well. Ina  very Trumpian passive aggressive stance Chinese Foreign Ministry spokesman Lu Kang said US officials “fabricate lies to try to mislead the American people, and now they are trying to incite ideological opposition” over Huawei while the Chinese envoy Cui Tiankai told Bloomberg China wants to keep working toward a deal but added “trade is about mutual benefits, war is about mutual destruction. How can you put these two very different concepts in one term?” 

Passive aggressive, that’s how. 

So trump slowed stocks fall, but it was another bad week

As you can see in the chart at the start of this week’s not the S&P had a poor week, the Down has now had a streak not seen since 2011 on the weeklies, and the Nasdaq is looking incredibly wobbly.

The arrows on the chart below represent the buy and sell signals generated by the triple crossover of my 3 main moving averages I use in everything I do and you’ll see we have recently had another bearish cross on the Nasdaq futures. A break below last week’s low opens 7063, perhaps another 100 points below that if that breaks too. We have to break last week’s low of course.

Nasdaq 100 Futures (continuous front contract) Daily

It’s not just the Nasdaq of course I have bearish crosses for and a negative outlook. Apple turned a while back, Alphabet too, the Philly Semiconductor index to is pointing lower, as is Netflix , and Intel among others . Amazon looks like it might be the next to join the bearish party with a crossover, though Microsoft stands alone. 

And of course Chinese stock markets themselves are under pressure. While it is easier for those of us in the West to trade the China A 50, it is probably more constructive to keep an eye on the Shanghai Composite index to see what’s going on in China. And to that extent the weekly charts have hit the skids. Or should I say more correctly we’ve had two week’s inside the down candle from three weeks back and if that low breaks all heck could break loose in Chinese stock markets.

Don’t worry you say, the China “State Team” won’t let that happen. And perhaps that is correct, they haven’t let the Yuan weaken through 7 in USDCNH/Y terms either. But if 2835 breaks in the SSEC stocks will hit a gap, a potential airpocket, and if they don’t find support at the bottom of that gap around 2800 then global markets will come under pressure. 

SSEC Weekly (black) versus S&P 500 (pink), DAX (orange), Nikkei 225 (blue), FTSE (light blue)

And not just the S&P, FTSE, DAX, or NKY you can see in the chart above. But bonds, commodities, forex, and risk assets more broadly will get moving. And as you can see in the CFTC section below the set up is there for some serious tree shaking in many markets. 

Bonds have been leading this

US 10’s have had their lowest weekly close October 2017. That close and the break of 2.34% as I noted last week opens up the way for a move toward 2.10%, perhaps lower. The 2’s are also rallying and look on track for a run toward 2%, perhaps the long term – decades old – trendline which sits somewhere around 1.90%. 

US 10 year yields weekly

You’ve seen my comparison chart endlessly so I wont belabour it again here. But the message is, bond traders are saying that risk assets need a reset lower – junk, oil, stocks to name a few.

Oh, and on that front – BAML has slashed its year end German 10 year Bund forecast last week from +30 basis points to -10 basis points. Reuters reported the bank said in a note, “crucially, we see Bund yields at risk of reaching new lows of minus 25 bps in Q3 as we approach crunch time on accumulated event risks”.

Not a good risk environment folks.

The USD is running out of a bit of puff as China resists Yuan weakness.

And not a good environment for the Euro either. But as I highlighted above the US is the fulcrum of weak data at the moment, China too, but the US data flow is deteriorating. So the USD is under pressure and the Euro has caught a tiny bid.

But it’s a bid that might have legs.

As you know I like analogs of markets running together. Not the 2019 is like 1987, or 1937 style of analogs. But rather when i can see that two markets, indicators, or relationships have a decent co movement and kind of mean reversion when they get out of whack type arrangement.

So to that end this rough chart above tries to highlight that the rate of change on the USD Index and S&P 500 does tend to be influenced by the CESI score for the US. Which is just a way of showing that the data deterioration in the US does indeed matter. 

USD Index (DXY) Weekly

Looking at the USD Index itself the key takeaway is that it has again found the air too thin above 98.00. Of course it’s not exactly a big reversal yet and it hasn’t closed below my 15ema (on the weekly charts) for 16 weeks – 97.22 the level to watch next week. .

So we have a very strong uptrend in the USD, downtrend in the Euro and other pairs. But for me – something I have been banging on to Subscribers about all week – the key is that the Chinese don’t seem to have any appetite at present for a weaker Yuan.

USDCNH Daily – TradinigView

Chinese authorities have halted the rally in USDCNH, they have signalled with the daily fix since it started moving their disquiet, and they have succeeded in turning it around. I target 6.88 and 2.84 as a garden variety kind of pullback.

There is this too on the Yuan.

Source: Twitter

And if we see that reversal and US data continues to underwhelm feeding notions of a weak economy and Fed cuts then the USD will be under pressure.

That means even the Pound with no-deal Boris as the putative next Preime Minister won’t yet knock the GBPUSD back to 1.24. But the charts suggest EURGBP might be in for a gallop higher. Or, should I say, further gallop.

EURGBP Weekly – Trading View

And just quickly,  the CFTC data

The USD stalled near week’s end. One Particular Elliott Wave legend I follow reckons we may have seen the wave one peak in the USD Index. If that’s the case then CFTC position data in total USD long exposure and short the pairs which make up that aggregate offer a genuine opportunity for a counter trend dip in the USD to shake the bulls out of their trees and cause some serious surprises for forex dealers…its a risk case, not base case, but it is a genuine risk if the Yuan’s selloff reverses.  

Source: CFTC

The rally in bonds is intriguing, shorts are getting shorter even as the backdrop deteriorates for the global economy and new lows are made. A ll we need is a stocks funk and their could be a massive short squeeze and of course VIX shorts are at it again, while gold is less long. 

In Trump we trust seems to be the story of the latest CFTC data. 

The week ahead

Monday kicks off with China’s industrial profits which, given everything that’s going on will be closely watched. Japan has a speech from governor Kuroda, and the release of the leading and coincident indicators of the economy. ECB’s Couere and Bundesbank’s Buch speak. Of course it’s Memorial Day in the US so we can ease into the week hopefully. 

Tuesday is quiet too with Korean consumer confidence and Gfk version of same in Germany along with the EU’s version. Confidence is out in the US as well and we get a speech from the Bundesbank’s Wuermeling. In the US we also get the Dallas Fed manufacturing survey, and Case Shiller house prices. 

Wednesday the RBNZ opens the batting with a financial stability report for New Zealand. German unemployment is the next big thing in an otherwise quiet Asian session before we get a speech from Bundesbank President Jens Weidmann and then the ECB’s own financial stability. Mortgage Lending and Richmond Fed along with API crude are also out in the US. The big ticket item of course is the BoC interest rate decision. 

Thursday we see another partial indicator of GDP in Australia with the release of Private Capital Expenditure, we also get building approvals. Spanish inflation is out, Brazil releases its GDP for Q1, and Canada and the US release trade data. In the US we’ll also be watching the GDP 2nd estimate for Q1 and the PCE and other data that flows from that. Pending home sales and EIA crude and other energy data are also out. Fed vice-Chair Clarida is speaking as is BoC’s Wilkins.

Finally Friday sees the release of South Korean manufacturing and retail sales data, Japanese CPI, unemployment, retails sales, and industrial production are all out, and the highlight is the China NBS PMI data. Australia has private sector credit, Turkey’s GDP is out for Q1, as is the final read for Italy, along with its inflation and German retail sales. german inflation is also out as in Indian and Canadian GDP for Q1 along with US PCE income, prices and expenditure data. Chicago PMI is also out. 

Enjoy.

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 MckennaBonds rally, stocks swoon, and gold catches a bid, This Is Serious Mum – McKenna Macro Markets Weekly

Digging in, the US and China are on the brink – McKenna Macro Markets Weekly

on May 18, 2019

Hi folks, welcome to my weekly newsletter. 

This is post is sponsored by SMARTMarkets 

Don’t forget the Daily Newsletter and Video are behind a paywall now. But if you’s like a trial subscription let me know – it’s not for everyone. But if you want a guide thorough the daily and weekly tumult of markets, someone who’s done it for decades and successfully then I’m sure you’ll benefit. 

Here’s a bit of feedback from a subscriber recently:

“We deal with 20 Banks globally and I get more from your note and video than all of them”

Key Takeaway

Last week’s title of my weekly was “It might be time for markets to take this trade war seriously” and for a day it looked like that might be right. But the mid week recovery which saw the losses in evidence Monday erased and some ephemeral sense of hope feed through markets seemed to me to smack of a real complacency.

Bloomberg’s John Authers put it best Friday with his headline “Irrational Equanimity Has Taken Over the Markets“. And I couldn’t agree more with his strap line, “Any number of metrics show investors are too relaxed about the potential for the trade wars to escalate”. And escalate they have as China said there is no point the US sending envoys at the moment, as it cancelled Pork shipments from the US even though the Chinese people desperately need the meat given problems at home, and as President Trump clears the decks by making nice, or at least less horrible, with allies in Mexico, Canada, Europe, Japan, and Turkey so – me and plenty of others are betting – he can focus on China.

Why else would he escalate with this week’s telecommunications bans aimed at Huawei and ZTE and buy time on these other issues like automobiles if he wasn’t going to have a laser focus on China.

Things are escalating and markets are showing irrational equanimity. Next week could be huge. 

The Week That Was…

Now for the week ahead, let’s dive in.

Key Themes driving markets

Too calm by half…complacency or equanimity

I mentioned the John Authers’ article above because I think it perfectly sums up what a lot long term traders and investors are probably thinking – or at least wondering right now. That is, how is it after the very thing that markets and economists had feared – the escalation of tariffs between the US and China – that the initial weakness Monday morphed into the following three day’s rally.

There are some, who say that markets overreacted last Monday and the wipe off of valuation was excessive in relation to the actual cost of the tariffs. It’s clearly an idea that resonated with many in the market as Monday’s losses were wiped away with rallies in the S&P 500 and global benchmarks over the following three days trade.

But to me that Panglossian take makes little sense given the escalation in the trade war the market feared is finally upon us. The escalation that has the real chance to disrupt relations between the world’s biggest economies for more than just a few months and many seem still to think.

It’s as if we’ve moved from the Powell Put, to the Trump Put, to the G20 Put – as I heard someone refer to it on Bloomberg Surveillance Friday. That is the market has moved its expectation that it will be saved from the Fed, to President Trump’s desire to do a deal, to now a hope that the sidelines meeting between President’s Xi and Trump at the G20 will miraculously deescalate tensions.

Source: Twitter

It’s been Hope, hope, and now more hope. Complacency or equanimity, it doesn’t matter the outcome is the same. I agree with Peter Atwater who John Authers quoted in his article when he says, “Investor complacency is staggering. Forget Beyond Meat; we are now beyond words. This risk, however, is existential. If one of the risks identified above becomes real, it will be game over. When it comes to investors’ binary decision-making, it will be all or nothing. This is a market without a net. Back through Monday’s low a cascade could easily take hold. In the meantime, party on”.

Party on indeed, she’ll be right. Until it’s not. 

Huawei and the lifting of North American tariffs signal Washington’s intent

I’ll get to the stocks and other market outlooks below. But before that I want to simply highlight that the US imposition of 25% tariffs on the existing list, the threat to the further $300 billion, the Chinese imposition of 25% tariffs on $60 billion, and then the US President Trump signed an order allowing U.S. to ban telecom gear from foreign adversaries. It was a measure aimed at China’s Huawei and ZTE and even though Reuters says the US Administration U.S. may scale back Huawei trade restrictions to help existing customers, it’s a clear escalation.

And it’s ignited a growing nationalistic fervour in China .

Source: Twitter

in many ways though it is China cancelling US and Canadian pork orders which goes to the nub of my view this is a genuine escalation and swiftly becoming an intractable one. 

Source: Twitter

By any sense of the imagination it’s self harm on the Chinese side give there are estimates the Chinese pork herd has collapsed in such a spectacular fashion recently under the weight of the swine flu. But, if the New York Times story on How Xi’s Last-Minute Switch on U.S.-China Trade Deal Upended It has any semblance of truth then as I suggest in one of my daily notes last week President Trump too may have miscalculated China’s resolve.

Recall I recently wrote I thought the Chinese were backing away so as to not be seen as kow-towing? This from the NYT (my bolding):

“Several sources said the changes were discussed with other Communist Party leaders, which brought into focus worries that the proposed deal could make Mr. Xi and the party look as if they were bowing to pressure.

Soon after, the Chinese negotiators sent their American counterparts a version of the draft agreement in a Microsoft Word document, speckled with cuts and changes”.

So where does that leave us and the G20 put?.

I think the last two paragraphs of that New York Times article above sum things up nicely:

“Mr. Trump said Monday that he would meet Mr. Xi during a Group of 20 leaders meeting in Osaka, Japan, next month. But such a meeting would probably at best pave the way for more talks.

“It is very hard to think China will cave in or surrender to these pressures,” said Wang Yong, the director of the Center for International Political Economy at Peking University. “Public opinion definitely matters.”

Just like Brexit – almost intractable. Thucydides folks, his trap!

Stocks still had a down week after all

Using the S&P 500 as the global benchmark it’s fair to say markets dodged a bullet with the bounce back from last week’s lows which was coincident with my 30 week moving average. That suggests the upside is holding for now. It’s also consistent with the Jimmy R still pointing higher.

That’s important because a bullish biased JimmyR on the weekly S&P’s and other stocks and markets means the strategic or structural bias is still up but that tactical moves can be driven by the daily and weekly MACD systems – and on that count I’m short the S&P 500 on both time frames of the MACD system and have generated sell orders on the weekly Nasdaq 100 and Russell 2000.

S&P 500 (futures) Weekly – TradingVIew

Here though too you can see a different, harder, Chinese approach. Certainly I’d bet if the trade battle extends China will add fiscal stimulus and infrastructure spending to the economy. But they have used state mouthpieces to suggest they are ready and willing to weather the storm the battle would cause economically.

On this front it is worth noting the narrative always seems to come from the Western side of the discussion which suggests China is “emboldened” by its economic recovery…blah, blah and has only stood up and pushed back against teh USA and President Trump because of this economic recovery…blah, blah. But I don’t buy it. China is pushing back because it feels it needs to to be the nation and the People President Xi and his CCP envision.

Shanghai Composite Index Daily – TradingView

And nowhere is that more starkly obvious than in the reality they’ve continued to let the Shanghai composite and other markets slide. It may not continue and the difference between the CNH and CNY rates at the moment are reflective of the market taking the Yuan weaker. But watch Chinese authorities and their approach to Chinese markets as an indicator of this trade war and where it’s headed. 

Forex markets are backing a long battle and the USD is catching a bid.

The Yuan moves last week, along with that of the Aussie and Kiwi, not to mention the pulse lower in copper are all indicative of a move by forex and commodity traders to take a more nuanced view of the outlook for and impact of the escalating trade battle between the US and China than the one stocks traders seemed to take.

USDCNH (futures) Daily – TradingView

Not for forex traders is the notion of the G20 put. Rather forex markets seem to be pricing the intractability of this battle and a general impact of Chinese and global growth prospects. The most obvious recognition of this was both the vertical rise of the USDCNH rate and the impact this had on other EM forex markets. Equally though the big miss on China data last week also saw the CESI score for China and EM collapse, utterly. 

That’s an almost 50 point turnaround in China and 40 point turnaround in the EM CESI scores on the back of weak data flow in the past week. That’s a big miss and reinforces the notion that China and its economy is under pressure.

The corollary of that thought, the one that flows instantly to top of mind for many traders and investors, is that China may let the Yuan weaken as a strategic initiative. It’s analogous to the bond market traders and investors fears China could weaponise it’s bond holdings by liquidating some or all of its $1 trillion horde.   

So far while traders push the offshore Yuan rate (USDCNH) higher authorities are dragging their feet on the official (USDCNY) fixes over the past week. So a break and hold above the psycholgically important 7.00 isn’t guaranteed. But if we do see I’ve got 7.3 pencilled in as the next target. Remember the McKenna mantra though – respect levels unless or until they break.

But gee whiz this one looks like it is going to break – my system has been long USDCNH since April. 

Turning to the USD Index and the Euro now. 

USD Index (DXY) Weekly – TradingView

It’s clear we are approaching very important levels. The DXY is back at 98 and the Euro at 1.1150ish. That’s a reflection of the reality that the uptrend in DXY and downtrend in Euro remain firmly intact. The big levels now in the frame are 98.90/99.00 and 1.1050 respectively.

EURUSD Weekly – TradingView

That’s the levels I’d expect the probability of a reaction in the other direction to grow. But the trend is you friend and in that regard DXY 103/104 and Euro 1.04/05 seem only a matter of time.

EURUSD Daily (inverted, clack) v  USD Index (DXY, orange) – TradingView

These moves when they come will impact all forex and many other asset markets. 

Bonds still heading lower

It’s the weekend so I don’t want to prattle on too much. But this chart of the US 10’s is worth noting. A break of 2.34% would usher in a very big rally into the 2.10% region. The level has to break first though and last time we saw a bounce back into the high 2.5% region. But watch the price action in teh 10’s closely – it’s important for other markets like USDJPY, gold, and risk assets. 

US 10 year treasury yield Weekly – TradingView

And just quickly,  the CFTC data

A big cut in the level of Yen shorts and a smaller reduction in Euro shorts were the primary driver of the fall in net USD longs over the past week. Pound shorts were cut as well which gives plenty of space for fresh GBPUSD selling now the cross-party talks seem to have broken down in the UK. Also noteworthy is the AUD position is getting shorter and close to recent cycle lows.   

The market is still long of oil, and gold longs would have been hosed at the end of the week as the USDCNH/Y move likely caught some on the hop. Interestingly you can see that volatility shorts have closed a material portion of their positions too. That means there is less ammunition for a capitulation. 

The week ahead

Monday kicks off the week with NZ services PMI and Japanese Q1 GDP. In Germany we get PPI while the EU current account along with the bundesbank Monthly report and in teh US we get teh little watched but still inflauential Chicago Fed national Activity Index. There are also speeches from the Fed’s harker, Williams, and Clarida while the Boe’s Broadbent is also speaking. 

Tuesday is South Korean PPI, a speech by Fed chair Powell at 9am my time, teh minutes to the last RBA meeting as well as a speech from RBA governor Lowe at Lunchtime – while he reposition the RBA’s outlook, or give reasons why it is holding fire? Should be interesting. We also have a number of speeches from ECB, and Bundesbank members as well as Rosengren and Evans from the Fed. US existing home sales are out as well. API crude is out at the end of trade. 

Wednesday sees the release of retail sales in NZ, Reuters Tankan, exports, imports, and machinery data in Japan. In Australia its the Westpac leading indicator of growth and the first of the partial GDP indicators with the release of construction work done. We get speeches from BoJ’s Harada along with the Fed’s Bullard and Bostic, and ECB president Draghi and chief economist Peter Praet. UK inflation data is out, along with Canadian retail sales, US mortgages applications and the EIA crude and other data.   

Thursday is flash PMI day around much of the globes with the first estimate of Markit’s PMI data for the month of May. Final German Q1 GDP is out as well as the Ifo business data. The minutes from the last ECB meeting are out as are jobless claims, new home sales, and Kansas City Fed manufacturing index. There is also a speech fest around the middle of teh day NYC time when we hear from the Bundesbank’s Wuermeling, as well as the Fed’s Kaplan, Barkin, Bostic, and Daly.

Friday kicks off with Kiwi trade, Japanese inflation, before a couple of Bundesbank speeches, along with retail sales in the UK. In teh US we get durable goods to round out the week. 

Enjoy.

Greg McKenna
@gregorymckenna on Twitter
In collaboration with SMART Markets

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Greg MckennaDigging in, the US and China are on the brink – McKenna Macro Markets Weekly