Market Weekly

Oil to open the week with a bid after Saudi attacks, then it’s a big one for Central Banks – McKenna Macro Markets Weekly

on September 15, 2019

Hi folks, welcome to my weekly newsletter – This is post is sponsored by SMARTMarkets 

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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

That the rout in bond markets over the past week or so hasn’t really disrupted the more positive tone in stocks and other risk markets is remarkable on some levels but also an example that we likely saw a period of peak pessimimism and the associated FOMO in bond markets as traders and investors scrambled for yield before it disappeared. But the bond market sell off continues with US 10’s at 1.90% from a recent low around 1.4% – some move, do the math on that :S.

But stocks are still bid because there is enduring positivity about the chances of a breakthrough between the US and China. And you that this is the case because bonds are offereed, as is gold and silver, while copper has caught a bid. While prices in stocks rise toward resistance the fact that there is some sense an interim deal might get done will keep a bid in the market – at least until the FOMC possibly undertakes a hawkish cut mid-week.

And of course in what is a huge week for central bank decisions including the BoE and BoJ, not to mention many EM nations, the focus early doors Monday is going to be on the fallout from the weekend attack on the Saudi facility which has knocked out around half of the Kingdoms capacity in one fell swoop.  

The Week That Was…

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

Key Themes driving markets

Oil is going to open the week bid after weekend attacks on Saudi oil facility

On Saturday Saudi Arabian authorities confirmed that around 5.7 million bpd of productive capacity had been temporarily knocked out after – Houthi apparently – attacks on the facilities. Crucially though the new Oil Minister Abdulaziz Bin Salman said the Kingdom’s export customers would be supplied from inventories.

We won’t know the real impact of the attacks – in terms of how long this capacity is knocked out for – for a couple of days according to  Amin Nasser, CEO of Saudi Aramco who – according to Platts – emailed a statement saying, “work is underway to restore production and a progress update will be provided in around 48 hours”

So we have a window of uncertainty where sellers might be a little nervous and the bulls will have the whip hand. But in the same way where the financialisation of Crude Oil has seen a recent battle between those who believe a slowing economy will hurt oil demand and those who believe that the OPEC+ plan to continue to press inventory levels lower has lead to a broad range, so the same forces will now battle at some higher level at which oil prices seem ridiculous to the global growth slow down folk or those who understand how long the Saudis can supply from stocks and the rest of OPEC+ can step in to bridge the Saudi gap.

You’d have to think there are contingencies.  

The open Monday could be very interesting if we haven’t heard any timing from the Saudis and I have a sense of where the technical levels might be in WTI and Brent. But that said, the reality is where, how fast, and how high oil prices really go is going to be a function of how much information is available at the open and subsequent trade before things settle down. And how much emphasis traders put on the Saudi statements about supply from inventories or of the Trump Administration saying it can tap emergency reserves if necessary.  

I won’t pretend to know the answer to that, only to say this is a big outage, how long it last and how quickly OPEC+ can fill the void is going to be crucial to the outlook.   To the technicals then – using Brent for this week’s chart.

Brent Weekly

For Brent the range top comes in at $68.62 and old trend channel resistance at $70.62. That seems like the most natural places for sellers – if they are game – to get involved. In WTI terms the levels of resistance are $58.58/85, $60.90, $63.93 then similar bottom of old trend channel at $67.74.

You can see from the above that I’m looking to fade this rally at some point – but lets see how long the outage is going to be before I rush in.  

Could we be on track for an interim trade deal?

China is playing the thaw in relations that they have sought in the lead up to the 70th anniversary of the CCP on October one masterfully. They have pushed the Hong Kong protests from the front page, they have agreed talks, they appear to be buying more US soy – even as they finalise an agreement with Argentina to buy which will allow them access to the world’s biggest soymeal producer – and they have been able to get President Trump to delay tariffs by 2 weeks to avoid the clash of the anniversary and the new tariffs coming into place.

It may all come to nothing given the mercurial nature of President Trump. But, I have to agree with AGF’s Greg Valliere who wrote Friday that maybe there is now available a Plan B on the China Treade Dispute. Valliere said (his capitals): 

“Both sides agree that about 90% of a trade deal is completed; negotiators have made that assertion for the past few months. So why not sign a deal on that 90% and leave the remainder for additional talks that could last through the winter? That idea seems to be gaining traction as both sides look more conciliatory.

WE STILL THINK A COMPREHENSIVE DEAL is many months away, but real signs of progress are possible when talks resume in October. Beijing is buying soybeans again and has offered concessions in free trade zones in China, while Donald Trump is delaying some tariffs and considering other concessions”.

Now I can’t fall into the trap of thinking President Trump will do something because I would, or maybe most folks would because clearly he’s shown himself not to be that guy. But I’m with Valliere. This would be a very elegant way to de-escalate trade if President trump wants to. It’s a big IF and an important one for markets. But he did say last week he might be open to an interim deal – so we’ll see.

Critically China will probably require some reduction in tariffs for even an interim deal to get done. But, eithyer way, we can probably have a few weeks more where both sides are spinning positive messages.  

Correlations are almost back to normal – so things have settled down

There is still plenty of Green and a bit of red. That reflects correlations of greater than plus or minus 0.75 ove rhte past 30 trading days. But what you don’t see here is the universal panic of almost full green and red we did a few weeks back. Rather what we have is what we could term more “normal” correlations.

So, crisis averted thanks to China deciding to buy time on trade.  

That means the bond market rout isn’t having the impact it could have more broadly

This reversal in bond rates – bond prices – has been extremely aggressive and reminds me very much of 1994 when US and global bond markets came under intense upward pressure. back then US 10’s rose from the nadir in 1993 in the low 5% region to a peak around 8% in November 1994. As a young interest rate portfolio manager it was a trying time and I learnt a lot from great mentors – thank you Greg Michel and Peter Whitty.

Now I’m not saying this is the same thing and certainly not saying that we are going to see a reaction of that magnitude. But as I explained to paying subscribers early last week in keeping with my style as a FI portfolio manager I would want to keep the running yield on bonds bought last year (when I went bullish) and am using futures to hedge that position until the bond rout has run its course. At the time I said the current targets for 10 years bunds are a run toward -0.40% while for US 10 year Treasuries it is the 1.87% region. 

We’ve seen US 10’s move through that level and they are at 1.901% on Friday’s close while german 10’s are up at -0.45% now. But as I also told subscribers – and Twitter – I don’t want to make the easy mistake of prematurely extrapolating the recent reversal into something more pernicious. But there is a technical setup which suggests US 10’s may actually head toward 2.00/2.10%. 

Source: Twitter

2.10% is just the garden variety retracement as it represents the 38.2% Fibo of the of the move from around 3.24% last year. Bond rates in the US and across the globe have moved far and fast from the recent lows. But as I also told Subs last week my sense was we’d seen a pessimistic cresendo in bonds rally so hard on worries about trade and growth and that the rally was fuelled by FOMO when it comes to running yield – and a little bit of reach for capital gain.

Things never turn out well in global finance when bond managers are worrying more about the RETURN ON their capital not the RETURN OF their capital. 

Now, while the reduction in tensions has played a part in the bond market rout so to has the subtle shift in the german government’s position on the possibility of Fiscal stimulus. Last week that tack was signalled when the finance minister said there were many many billions which could be deployed to shore up the German economy. Then of course we had mario Draghi’s dovish surprise – to me at least – while he emplored the governments of Europe to get busy on the fiscal front.

Source: Twitter

And over the weekend Olivier Blanchard made the right case for the combo of fiscal and monetary policy. get off the pot Pollies. So of course we’ve seen European bond rates lead the global reversal in many respects and it doesn’t look done yet. 

German 2-10 spread (top), German 10’s (middle), German 2’s (bottom) – TradingView

Stocks still bid but nearing important resistance – a deal might be coming though

The rally in global stocks continued this week with more positive noises about trade and some signs in the data that the US economy is nowhere near as rubbery as some folks thought. It was an interesting weak where the small cap Russell 2000 well and truly eclipsed the performance in the bigger indexes by many percent and as there was a rotation from growth to value.

For me, though I recognise there was a bit of quant messiness in the relative performances, the moves represent a mild recognition that maybe things in the US might turn out a little better than investors had thought. So we had a self reinforcing positive loop for a changte in data, sentiment, and smaller cap stocks performance.

US Retail Sales YoY(blue) v US GDP Annualised(black) – TradingEconomics.com

Take retail sales for example, it’s no surprise with a still strong jobs market, relaitvely robust wages growth, that retail sales are still printing fairly solidly. Data released Friday showed a rise of 4.1% year over year in August after the month printed a stronger than expected 0.4% to follow the previous month’s outsized 0.8% growth rate. Of course I could cue those who will tell you consumers usually do better than the actual economic growth levels show and recession can still occur.

I’ll accept that and stay on guard because it’s clear the US economy is actually slowing. But it is also clear that the data fits the Fed’s entreaties the US economy is doing okay a little better than the handwringing recessionistas. You know my view, another rate cut this week and it will facilitate a mid-cycle positive tap on the economic accelerator which can keep the US expansion going a little longer still. And if the Fed feels the need to cut again in the future it can do it all again.

So we’ve got a more supportive backdrop for stocks and you can see in the weekly chart below the low last week was pretty much on the wedge trendline that the S&P broke down below and then has rallied back through last week. It is still below the top of what might be a giant megaphone so the 3045/50 region – not to mention the record high around 3026ish – could offer decent resistance.   

S&P 500 Physical Weekly – TradingView

In terms of the outlook it is worth reiterating that structurally the JimmyR still has a long signal on the weekly charts while the dailies are are now crossing and the MACD daily system has been long since August 28. The weekly MACD system went long last week – Monday – as well. So, my rhetorical expectation we’d head lower is in abeyance for the moment as 4 of the four methods I use to determine trend are all long. 

And, given the trade war is a handbrake on global growth and because in varying degrees where the US markets – especially the bellwether S&P 500 – drive overall global stock market sentiment then that has also seen my systems and sentiment long global stock indexes individually as well.

The result of course, is that the DAX and others have run higher and hit my 12400 target I was talking to Subs and mentioned here last week on the break of 11850. It’s not all beer and skittles though because as Subs know I reduced positioning in the DAX when it hit 12400 Thursday. Doh, as Homer would say. Overall net long though still and the DAX looks like it is running back toward recent highs around 12660/80. Though there is some resistance in the 12600 region from the old trend channel bottom.  

USD Index (DXY) Weekly – TradingView

The USD looks like it’s heading back to support, perhaps much lower

Whereas we had a month or two of the USD (in DXY terms) trading up and down last week’s down week was the first back to back down weeks for the DXY since the weeks ending the 20th and 27th of May. That in itself is only an interesting statistic if we can glean any insight from it – either technically or fundamentally. 

For me the important point is that while folks are getting a bit more excited about a trade deal – interim or otherwise – the USD suffers for a time because that would in effect mean the US Administration is taking its foot off the throat of the Chinese and other EM economies and currencies – which is what we saw last week with USDCNH down at 7.0454, around the 38.2% retracement of the last leg higher from 6.81back in June/July.

USD Index (DXY) Weekly – TradingView

So, as I look at the DXY below it seems this correction may continue so I’m looking at the set up and watching the bottom of the channel which at present is still just around 96.00. And, as I’ve been saying for a couple of weeks it’s not beyond the realms of possibility that we see a ratchet down toward that level. The 15 week ema is at 97.50/55 and the 30 is at 97.20. They should offer some support on the way lower. 

Turning to the the Euro now and the ECB eased, the Euro fell out of bed – aggressively so – but then bounced – also aggressively – from the recent low at 1.0925 and ended the week at 1.1073. For me it still needs to get up and through 1.1111 to really kick but that is possible given mario Draghi seems to have stepped beyond what many of his senior colleagues thought prudent. That suggests no more stimulus from the ECB unless their is a crisis – notwithstanding 20 billion Euros a month of QE is continued stimulus.

So over to fiscal policy and in that regard it would be supportive of growth, European bond rates, and thus Euro positive. IF, if, it happens.

Techically though, a break of 1.1111 opens 1.1150, then 1.1200/20 then 1.1280. Much wood to chop given the strength and persistence of this downtrend. 

EURUSD Weekly – TradingView

Sterling had another wild week week breaking up and through the recent break down level at 1.2435. Given the run under 1.20 recently this is a powerful rally. As well it might be as a chastened BoJo seems to actually be working toward a deal once more.

Nothing like the scent of a terminal premiership to get one focused on policy not oneself hey Boris????

Anyway, as the chat continues of the hope of a deal and BoJo’s hands are tied on a hard Brexit by the parliament then the Pound can continue to rally. Especially given it’s broken resistance. 1.2600 seems a reasonable target now and if that breaks we might even be talking about 1.28. What a roller coaster ride.  

GBPUSD Weekly – TradingView

CFTC Data 

A nice time for specs to get long Oil it seems with a big uptick in WTI longs shown in the CFTC data Friday. As noted above there is still plenty of limit available for more longs, so that can drive prices even higher still if the Saudi facility is out for a bit. Currency markets strike me as vulnerable if this USD move gets a wriggle on. We have seen a small diminution of AUD shorts, though specs seem to dislike the Pound immensely. So if the USD keeps falling we may see some squaring after the decent bouces. AUDUSD likely needs to get above 69 cents and run toward 70 though. 

US 10’sshorts were reduced which I find interesting in the extreme. But there is still room for further selling as positions are opened up for any dips to be offered (yield terms).   

 The week ahead

The week kicks off Monday with China’s Triple treat of fixed investment, retail sales, and industrial production. Indian wholseale prices are out we get speeches from the ECB’s Coeure (which could be very interesting) and Lane. Italian inflation data is out along with Russia’s insdustrial production. And in the US we get the release of the NY Empire manufacturing index. 

Tuesday we get the RBA minutes to the latest meeting which might be interesting if they reflect disqueit with the lack of fiscal spending and what happens to lower rates. But the board probably won’t let that out even if they did discuss it. Chinese house prices are out and in Germany we get the next update of the ZEW data. The Euro Area version is also out. In Canada we get manufacturing sales, Russian PPI is out and then in the US we get industrial production, manufacturing sales, and the NAHB housing market index. And of course Tuesday late we get the API inventory data.

Wednesday is South Korean export and import prices, Japanese trade, and in Australia Westpac releases the leading index of growth. Italian industrial orders are out along with South African inflation with inflation data also released for the UK and Euro Area. ECB Guindos is speaking and then its South African retail sales and Canadian inflation. In the US it is building permits, housing starts, and the EIA inventory data. Russia releases its GDP and unemployment.

And of course the big one Wednesday is the FOMC decision and Fed Chair Powells press conference. 2pm Washiington and then the presser is at 2.30pm. 

Thursday kicks off with Asia reacting to what the Fed does and Powell says and then forex and rates traders will move onto the Australian employment data and then the BoJ interest rate decision. With the ECB gone, the Fed going, the BoJ might get busy too. If for no other reason to ensure the Yen doesn’t catch a bid. Indonesia also has a rate decision while the Saudi Arabian and Brazilian central banks release their decisions between the Fed and the Asia open. 

Also out Thursday is the Euro Area current account, UK retail sales, Italian construction and current account, another speech from the ECB’s Coeure, and then the BoE interest rate decision and associated minutes and vote cut. Canada’s ADP employment data is out, the Philly Fed is released in th US along with jobless claims and existing home sales. South Africa has an interest rate decision to be announced and Argentinian GDp is out at 3pm New York time – might be interesting for the ARS.

Finally Friday and we get Japanese inflation, or lack there of. Germany release its PPI, the BoE’s quarterly bulletin is out, as are Canadian retail sales and Euro Area Consumer confidence. 

Central Bank week, HUGE – especially the FOMC. 

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.
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Greg MckennaOil to open the week with a bid after Saudi attacks, then it’s a big one for Central Banks – McKenna Macro Markets Weekly

Hope springs eternal as China buys time ahead of CCP anniversary – McKenna Macro Markets Weekly

on September 8, 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

The better tone in markets was again a reaction to positive noises about trade. This time it was the Chinese who sought to clearly impact sentiment by announcing the next round of trade talks had indeed been scheduled. That along with the market believing British PM Johnson’s political reversals meant the chances of no deal Brexit had been reduced, together with a range break in a number of stock markets across the globe,  combined into a broadly more positive tone in markets.

It will likely prove ephemeral in time.

But for the moment traders want to continue to hope that President’s Xi and trump will see sense and stop putting downward pressure on global growth through their trade battle. time will tell – I’m skeptical.  

The Week That Was…

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

Key Themes driving markets

China is OBVIOUSLY trying to buy airtime for the CCP anniversary – but traders like it

It is easy to be cynical about the constant whispering of sweet nothings into traders ears from the US side and this week the Chinese side. That’s particularly the case when big trade agreements have always been complex and usually come with long lead times and when even Larry Kudlow, Director of the United States National Economic Council, admits it could take years to sort this out.   

We were 90% done in May he says, we want to go back their and finalise the last 10%. A forlorn hope perhaps given the President’s ramp up of tariffs and China’s response since May.   

But this week it was China’s turn to clear the decks to try and change the narrative. First Carrie Lam said she’ll withdraw the contentious expedition bill which set of the last 3 months of marches and riots by Hong Kong citizens. Mt cycnical take was China wants to deescalate the Hong Kong issue by the October 70th anniversary celebrations for the CCP.

Likewise when – the following day – China’s Ministry of Commerce announced the restarting of talks in October with a preliminary meeting later this month I suggested in my Daily Newsletter that this too is an attempt to buoy markets and thus generate clear air for the propaganda opportunity that the CCP’s anniversary affords President Xi and his regime. 

Maybe I’m too cynical, but I don’t think so. equally though it’s easy to be skeptical about a positive outcome anytime soon when you see Global Times EiC Hu Xijin talk about the possibility of a deal because the US is “worn out by the trade war” rather than because he is hearing his side is ready to deal. If Twitter is any guide then President Trump doesn’t seem worn out at all. Indeed he seems energised by this trade war and his battle with the Fed and Democrats (not to mention CNN over the latest hurricane projection kerfuffle). 

Source: Twitter

But the real reason I’m skeptical this next round of talks is aimed at doing anything other than buy President Xi airtime in October – and his propagandists the ability to talk positively about the trade talks between now and then – is that the Chinese State press has been so belligerent about the need for the US to step back since the next round of talks were annoucned this week.

Take this Editorial in the CCP’s China Daily on Thursday – It said “the US administration has to not only adopt a sincere and constructive approach but also take concrete steps to make good the promises it makes”.

It then went on, “only if the talks are held on the basis of equality and mutual benefit, and only if Washington refrains from using “maximum pressure” tactics and respects China’s core interests can “substantial progress” be made in Washington…However, if the US continues to impose tariffs on Chinese goods, the two sides cannot even reach an understanding, the lack of which has prevented them from agreeing a final deal”.

And, the China Daily concluded, China will under no circumstances sacrifice its national interests to meet US demands. The ball, as always, is in the US’ court.”

Hardly encouraging – but at least consistent with China has required for months.

It’s a message Hu Xijin’s Global Times echoed saying, “the trade war is a drag on the US and Washington will never win such a conflict with China. Time, now, is seemingly on China’s side. The headwinds that have been battering the Chinese and the global economy are washing up on US shores and forcing the Trump administration to change its course”.

A deal will get done eventually. But right now China seems to be saying the US needs to adjust and President Trump seems to continue to imply China needs to bend to his demands.  That said though, with a meeting in two week’s before the higher level meeting in October the trade talk flow for the next few weeks is likely to be supportive of risk appetite and stocks.

So too, the ECB and Fed meetings. 

The US economy is still doing okay – even after a weaker than expected non-farms.  

Yes, the US economy is slowing, blind Freddie can see that. It’s the degree of slowing which is the point of argument. Some at the Fed (Bullard and Kashkari for example) believe the economy needs a quick 50 point easing while others (Rosengren) aren’t convinced any easing is necessarily needed at this month’s FOMC easing.

Personally I’ve asserted since last year that the Fed lowering rates would help extend the expansion longer than many folks believe – that’s a point Fed Chair Jerome Powell made in his speech Friday. 

And Friday’s US employment data certainly supports both an easing but equally you could argue a continuation of the expansion. Non-farms was a miss at 130,000 but unemployment stayed at 3.7% despite a surge in the labour force as shown in the Household survey. There are now more Americans working than ever before at close to 158 million. More Americans working, more Americans earning, more Americans spending. We saw this in Australia for many years of the expansion before the recent hiccup emerged. 

And for me the average workweek suggests both the slowdown and continued expansion at the same time – as you can see in the chart below. The work week suggests a slowing toward the latest Atlanta Fed GDPNow projection of 1.5% for Q3 – but so far no collapse.     

US Work Week (hours, orange) v USD GDP YoY (blue) – Refinitiv

So we’ll get a rate cut from the FOMC in two week’s time and I’m sure the debate will be robust with Kashkari, Bullard and a few others arguing for a 50 pointer instead of a the more cautious 25 in order to kick the economy along. 50 points wouldn’t hurt though – indeed even with my positive tone on the outlook I’d probably have a pop at it because the history of the past decade or so shows it’s harder to restart an economy slowing than it is to slow an economy expanding too quickly.  

But we play the man not the ball in Central Bank Land these days and to that end a cautious tone from Powell that he’ll act as appropriate means he’ll do whatever it takes to keep the expansion going – but not saying it so explicitly, it’s not the same thing is it?  

Things have settled as risk appetite has lifted  

This table, and the lack of green this week is a clear sign that markets are settling and fear is receding. You can still see that gold and the 10 year are correlated – that makes sense as a risk on/off switch as well as TINA subsitutes. And you can see the Yen (JPY) is in that space too, which again makes sense in the risk on/off space.  

30 day correlations – Price – Green = >0.75, Red = < -0.75

But the near universality of correlations either above or below 0.75 which has been in evidence over the past 3 to 4 weeks has subsided. And that’s the best evidence that since the news on trade started to change the week before last traders and investors are willing to give hope and positivity another chance. 

Reflecting that, and a better tone for risk appetite, bond rates have started rising again.

You can see though that any reversal is nascent. the key for me is 1.60/61% in teh US 10’s. If that level gets broken with a close above that level we could see rates another 15 points higher in yield for the US 10’s. 

US 2-10 spread (top), US 10’s (middle), US 2’s (bottom) – TradingView

An quick update on my medium term base cases

There was a shift during the last week in my near term sentiment. It wasn’t just that the S&P broke higher – up and through the top of the 2822/2955 range but a day after the DAX. Rather it was technical in nature with some decent pin bars in a number of markets. And then of course we got the trade news which reinforced those candles and the break in the DAX spread to other markets.

I jumped on tactically lest I be wrong strategically. As I said to my video viewers during the week – I could look stupid tomorrow but that’s what the charts are suggesting.  

So I adjusted the rhetoric in the daily just before the moves and the break, that’s what course-correction Macro is all about. But in that vein it is easy to get confused in time frames. For example the USD is in an uptrend but reversed off the top of a channel and fell from around 99.30/40 to end the week at ~98.00. Depending on the time frame being traded both moves are important – and tradable. 

So here are my underlying positional thoughts right now:

  • Forex – US dollar to be structurally dominant for some time and ultimately take out the top of the broad 95/99 range in DXY terms. But we’ve seen a reversal off that this week and the chance of a move to 96.00 is there and would offer a structural buting opportunity. Euro to head significantly lower toward 1.03/04 eventually and drag other pairs with it in time. But perhaps USDJPY to surprise.
  • Bonds –  I am a structural Bond and rate bull still even after this big rally in recent months. As such I can see the beauty in buying negative rates – but only as a trade not to hold. I am long of bonds and will use reactions to buy more. Rates across the globe are headed lower and QE is coming again because central banks are not yet ready to admit the cupboard is bare. But for now we may get a reversal as risk goes bid – watch 1.61% in US 10’s as a bellwether for the reaction to gain traction. 
  • Stocks –  After this bounce, I am looking for a drawdown of between 10 and 20% from the high in the S&P in the coming months to get long US stocks. Likely hedged depending on where forex markets are but ultimately I will hold this position unhedged. I’m macro but at a company level I like service company stocks more than anything, especially in the US. 
  • Commodities – I like gold and silver significantly higher as TINA really drives them in a low/negative rate environement with increasing QE, but for the moment the run looks like it is consolidating and may dip further before it recommences. Indeed I like hard assets generally in this environment. So while industrial metals will suffer as the globe slows down and the trade wars continues there’ll be a point where I dive back in. Oil I think is being buffetted by macro economic factors as the Saudis try ever so hard to keep it bid. That will work for a time but ultimately my sense is the range will slip lower for a time before grinding higher in the years to come.
  • Trading –  For me this is an active management traders market. Targets hit, positions reduced (gold, bonds at the moment for example, USD too off the channel top) – wait for the next swing – within an overall and overarching environment I highlihgt above. Trade the daily time frames but with an eye to the longer term. 

Now, as you can see from the above my short term thoughts within my overall structural underpinnings have changed – so I promised to make noise. I did that in the daily newsletter and I’m doing it here in the weekly. BUT, it is worth highlighting I see the current moves as tactical opportunities rather than a requirement for an asset allocation change. So my overall macro view hasn’t changed.

If you want to have a trial of the daily subscriber service to get any changes in this in real time plus the 3000 odd words I write with tonnes of charts on markets each day you can sign up here for a trial.    

The S&P followed the DAX higher with a range break – what’s next

The DAX went first last week and then the trade news drove the S&P up and through the top of the 2822/2955 range. It’s not the biggest break ever with the S&P sitting at 2978 after Friday’s non-farms troubled traders a little – or at least the headline did. 

S&P 500 Physical Weekly – TradingView

But it was still a very solid week of trade for the S&P 500, US stocks, and the bulls. In S&P points terms the close was almost 100 points above the lows of the shorter week’s trade. And while it’s probably right for bulls to wonder if the trade war hype and non-farm’s miss undermine last week’s rally – especially up near the record highs now while above 2950/55 a run to those highs looks a good chance. 

Structurally the JimmyR still has a long signal on the weekly charts while the dailies are are now crossing and the MACD daily system has been long since August 28. So, my rhetorical expectation we’d head lower is in abeyance for the moment as 4 of the four methods I use to determine trend are all long and the fourth – weekly MACD system – has a buy order this week. 

And, as I always says in varying degrees where the US markets – especially the bellwether S&P 500 – go so will the globe. And to that end the DAX is running higher – indeed as noted above it broke a day earlier than the S&P and other global stock markets during the week. The break of 11850 was the first sign and then the retest twice of that break before this week’s rally ignited is a positive sign for the DAX which has a target around 12400 on the break of 11850. That level remains support.  

DAX 30 Index Weekly – TradingView

The USD has drifted back as the long term channel top held again

The DXY has been in a mild but clear uptrend for a number of years now. Last week price within 5-10 points of the top of that channel at 99.45 and then reversed away to close the week back near 98.00. That’s some reversal but not to be unexpected given the strength of that channel for the past few years – as both tops and bottoms. 

USD Index (DXY) Weekly – TradingView

The bottom of the channel at present is just above 96.00. So it’s not beyond the realms of possibility that we see a ratchet down toward that level. More realistically though might be a move back to the 200 day moving average which comes in around 97.00/10 at the moment.  97.50/55 is a little trendline ahead of that which should act as support. 

Turning to the the Euro now and the ECB is expected to ease this week although like the Fed there seems to be some conjecture between different figures on the Governing COuncil about what and how more easing should be implemented. Problems with negative rates and the fallout for the banking system are foremost among these concerns.

But central Bankers aren’t yet to be disabused of the notion monetary policy at these sub-optimal levels is indeed sub-optimal. Personally I believe it has crossed the Rubicon of efficacy. But central bankers are going to have one last tilt at even lower rates and more QE in time – In Europe and across the globe.

Automatically under this scenario we’d expect the ECB to follow though and the Euro to weaken as a result. But the change in leadership from Mario Draghi to Christine Lagarde complicates things a little. Not so much in terms of what will happen – they both seem to believe more stimulus is necessary. But the timing is uncertain given the handover and the disquiet growing arounf the Governing Council table. Will Draghi force things through or leave Madame Lagarde to put her own imprimatur on proceedings?

I’m going to go for Draghi moving on rates .

Techically though, Euro is still finding support on this weekly trendline going back a couple of years. The low last week was around 1.0925/30 and that is now to be viewd as important resistance I reckon with 1.0875/80 below that. Below 1.1111 though Euro is still biased lower near term. Indeed I’d argue I’d need to see EURUSD above 1.1220 to get too excited about a decent rally and try be looking to sell strength. 

EURUSD Weekly – TradingView

Sterling had a wild week. What’s bad for PM Boris Johnson seemed to be positive for GBP against the Euro, USD and other pairs. The resignation of Amber Rudd over the weekend is another twist ini what’s become a complete mess. As she said in her resignation letter – it does seem the PM is not trying to use no-deal as a ploy to get a better deal from Europe but rather than the PM is now pursuing no-deal Brexit.

It seems the UK is on track for a general election and how that happens and then plays out is going to be important. Current polls – which we naturally take with a grain of salt of course – suggests the conservatives plus Nigel Farage’s Brexit party have above 48% combined – so there is plenty of water to flow under the bridge still. For me while below 1.2435 GBPUSD still has a downside bias even though it bounced from LT support last week below 1.20. 

GBPUSD Weekly – TradingView

CFTC Data 

Not a big number compared to 12 weeks ago but EURO shorts are building again with a 25% increase in net speculative short positions. Yen longs were pared a little and are likely further down after the risk on tone while the market is happy to be short Pounds right now it seems. Whether that move under and reversal from below 1.20 will have changed that we’ll have to see – probably not though. So the market is .

US 10’s have attracted more shorts again which is interesting and given there were 756k shorts about a year ago there is plenty of limit available to get even more short for these accounts if the market keeps moving in their direction.  

 The week ahead

The week kicks off Monday with Japan’s latest read on Q2 GDP before Australia’s home loan and investment lending data. Germany trade data is out and then we get UK trade and industrial production and associated data as weel. BoE’s Vlieghe is speaking and we also get the monthly GDP for the UK and the 3 month rolling average. Mexico’s inflation is out and we have a speech from ECB’s Hakkarainen. Russian Q2 GDP is out and then in the US it is consumer inflation expectations and credit.

Tuesday we get the NAB business survey in Australia and Chinese infaltion data. French employment is out as is its industrial production along with Italy’s production data. UK employment is out while in the US we get the NFIB index along with Canadian housing data and the JOLTS data for the US. And of course API crude data is out after the bell – early my wednesday.

Speaking of Wednesday South Korean unemployment is out then Japan’s BSI large manufacturing index, and in Australia Westpac’s consumer sentiment index. Chinese vehicle sales may be of interest and then its US mortage applications, PPI, wholeseale inventories, and the EIA energy data is out.

Thursday is ECB day, but before we get to that Reuters has its Tankan for japan, machinery orders are also out  as is Japanese PPI. German inflation is out too along with French inflation data. China’s total social financing will be itneresting and then it’s the ECB announemenbt and mario Draghi’s presser. US CPI data is out as well.

Finally Friday and we should be able to cruise into the weekend before the big event the following week with the FOMC decision and statement. Friday sees the release of Japanese industrial production, German wholesale prices , Spanish inflation, Chinese money supply and loans data, as well as EA trade and wages data. In the US retail sales is out , as are import and export prices along with business inventories.

Another big week – especially the ECB. 

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 © 2019 gregmckenna.com.au, All rights reserved.

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Greg MckennaHope springs eternal as China buys time ahead of CCP anniversary – McKenna Macro Markets Weekly

Stocks just won’t let go of trade war hope even as the evidence stacks up against it and the global economy – McKenna Macro Markets Weekly

on September 1, 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

It’s kind of weird the markets reaction to the trade war. The correlations across markets tell you folks are worried right now. But, the selling and panic on real events such as increased US tariffs and Chinese retaliation seems to wash away with soothing words from either Trump or the Chinese side whispering sweet nothings into the stock markets ear.

All the while the tariffs ARE ACTUALLY BEING IMPOSED and the global growth, earnings, and interest rate cycles are pointing down again. On top of that, the inverted US yield curve suggests to many that at best the US economy is slowing materially and at worst that the recession count down has begun. 

That soothing words acted as a circuit breaker for last Monday’s funk against this reality of continually escalating tensions is remarkable given all that is going on and the headwinds to risk assets and growth.

But the market is the market and this price action sends a strong message.

JM Keynes said the market can stay irrational longer than we can stay solvent.  But here’s the thing, does the promise of more monetary largesse from central banks and collapsing bond yields – even continuing in those markets below Zero –  render what might otherwise be an irrational persistence of stock strength actually a rational response?

Like gold recently perhaps There Is simply NAlternative – TINA folks, TINA. 

The Week That Was…

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

Key Themes driving markets

The TINA trade is real

August was a volatile month. In S&P terms half the days saw moves of more than 1% and there were three 2.5%+ moves. We came close to the edge a couple of times with aggressive selling finding buyers coming back into the market or soothing words from either the US or China on the trade war.

All the while bond rates across the globe plumbed multi-year or record lows as the global economy continues to slow and expectations of further monetary easing in Europe, in the US, and elsewhere was driven by the continued deterioration in the global growth backdrop.

You wouldn’t think against this backdrop that the S&P – as usual I’m using it as the global bellwether – could be sitting at 2926 just a little more than 3% below the record high set in late July. But then again, if TINA is really a thing – which I think it is – and with bond rates plummetting around the world where else would you put your money right now? 

Source: FT.com

So collapsing bond yields actually make risk assets as well as safe havens like gold look attractive. That is the TINA trade folks, just check out the chart above. You can now buy stocks for yield and increasingly folks are buying bonds for capital gain not capital return :S – Danger Will Robinson. 

Anyway, while China and the US are still talking, while both sides are making comments to smooth traders fears, while it is evident that traders and investors still want to believe a deal will eventually get done, risk assets can remain more elevated than they should be given all the global headwinds.

It’s one of the reasons I want to buy this next big dip when it comes. And clearly it is one of the reasons gold has been so well bid lately too.   

I don’t know when the music stops, with central banks readying for another tilt at aggressive monetary easing the band may play for another year or three. But stop it will, it always does – especially when bond raders are chasing capital gains.   

The global growth slowdown is about more than just the trade war.  

It’s easy to blame President Trump’s Trade War for everything that ails the global economy right now. But the reality is there were signs of economic slowdown globally before the trade spat escalated. 

Certainly the trade war has likely accelerated and magnified the slowdown that was occuring. But as Laksham Achuthan – the co-founder of Economic Cycle Research Institute in the US – told Bloomberg Surveillence Friday and Harald Malmgren noted on Twitter,  the slowdown was already in evidence. 

Source: Twitter

Why am I banging on about this? Because as Harald says above a trade truce if it breaks out won’t cure what ails the global economy. China is and was slowing already, Germany and Europe too.

China’s NBS PMI released Saturday was below 50 forthe 4th month – TradingEconomics

Indeed as Daniel Lacalle tweeted over the weekend Central bank policies such as low, zero, and negative rates, as well as quantitative easing have had limited efficacy in sustainably lifting growth outside QE1 in the United States.

Source: dlacalle.com

Why does this matter?

Because it means lower rates for longer folks. It means even with a trade truce that may come eventually the globe will still be facing headwinds.

And you may think it strange but I’d argue the the TINA trade may persist longer than many think. I know that’s contrarian and a different conclusion that most folks come to. But it’s clear central bankers are going to have one last big try to goose the global economy. That’s going to show up in markets.

Oh and one other thing on the trade war, China won’t change the structure of their economy, or their authoritarian ways. They’ll still be belting the Uighers, oppressing thier own citizens, trying to do the same to their neighbours in the South China Sea, readying to take Hong Kong by either attrition or force. So any trade deal we get at best won’t change things materially and that makes a trade deal hard to agree to from the US side I think.   

So with all the uncertainty correlations are a tiny bit lower but still show cross asset markets are vulnerable to one way moves 

Uncertainty is poison in the economy and in markets (unless you are a bear of course). It changes peoples behaviour, makes them more cautious, and less willing to take risk. In market terms it pushes them toward cash and out of risk assets, it sees them buy bonds and gold, to reduce risk asset exposure. In the economy it means consumers and businesses put of purchases and investment. 

And you can see that uncertainty in the continued persistence of relatively high cross asset correlations at the moment. What you see is continued fear of the global slowdown and the trade war and the other side of that trade which is the continued hope some sort of resolution will come.  

30 day correlations – Price – Green = >0.75, Red = < -0.75

You can see that in centrality of Gold, the Yen, and the S&P 500’s strong  correlations with other assets. As I highlighted last week, this is the type of market we had last October folks so be careful.

An quick update on my medium term base cases

When you write a daily newsletter it is always necessary to deal in the here and now but equally important to keep an eye on the macro backdrop. So in this note with weekly publication schedule and in my own money management I am interested in the big picture and asset allocation swing opportunities. That’s what course-correction Macro is all about. 

So here are my underlying positional thoughts right now:

  • Forex – US dollar to be structurally dominant for some time and ultimately take out the top of the broad 95/99 range in DXY terms. Euro to head significantly lower toward 1.03/04 eventually and drag other pairs with it in time. But perhaps USDJPY to surprise.
  • Bonds –  I am a structural Bond and rate bull still even after this big rally in recent months. As such I can see the beauty in buying negative rates – but only as a trade not to hold. I am long of bonds and will use reactions to buy more. Rates across the globe are headed lower and QE is coming again because central banks are not yet ready to admit the cupboard is bare. 
  • Stocks –  I am looking for a drawdown of between 10 and 20% from the high in the S&P in the coming months to get long US stocks. Likely hedged depending on where forex markets are but ultimately I will hold this position unhedged. I’m macro but at a company level I like service company stocks more than anything, especially in the US. 
  • Commodities – I like gold and silver significantly higher as TINA really drives them in a low/negative rate environement with increasing QE. Indeed I like hard assets generally in this environment. So while industrial metals will suffer as the globe slows down and the trade wars continues there’ll be a point where I dive back in. Oil I think is being buffetted by macro economic factors as the Saudis try ever so hard to keep it bid. That will work for a time but ultimately my sense is the range will slip lower for a time before grinding higher in the years to come.
  • Trading –  For me this is an active management traders market. Targets hit, positions reduced – wait for the next swing – within an overall and overarching environment I highlihgt above. Trade the daily time frames but with an eye to the longer term. 

These views have remain consistent for a while now and obviously there is a point where I will make an asset allocation change. But for now this is where I am. If however I end up wrong, I will make as much noise on that change of view as I do on my other views.

If you want to have a trial of the daily subscriber service to get any changes in this in real time plus the 3000 odd words I write with tonnes of charts on markets each day you can sign up here for a trial.    

The range is holding in the S&P – that’s going to drive global stocks

Paid subscribers know I often talk about my rhetorical self and my trading self. That’s really a distinction between what I think will happen and then what the charts or my system tell me do. I’m not precious, when I’m wrong I’m wrong and I move with the market (mostly, no one is perfect :S)

I say that as a backdrop to the current outlook for the S&P 500 – and thus stocks and pretty much everything else globally – which is that we still have a clear range the market has been trading.

That range, 2822/2955 remains critical to the outlook for the US and global stock markets. Last week was an incongrously good week for stocks given the trade war tariff escalation. I thought Monday the chance of underreaction was the risk. But the buyers held sway within the range and I was wrong.

That said though as you can see in the top chart below – daily S&P 500 Physical – Friday saw a bit of an ugly reversal even though it was a tiny up day. That’s a reflection that the range is still holding for the moment. So I respect that range unless or until it breaks. A topside break could see a run back toward the highs while a downside break opens 2744.

S&P 500 (physical) – TradingView

Looking at the lower chart above you can see just how important this curent range top has become on the weekly charts. A break would take price back above the trendline that the S&P broke down and through during August.

Structurally the JimmyR still has a long signal on the weekly charts while the dailies are pointing down. But the recent range is flattening out both trends presently. So as it stands if I’m wrong and we break higher through the top of the range before we head lower it could be a powerful move as lots of folks might be looking the other way like me. 

And, as I always says in varying degrees where the US markets – especially the bellwether S&P 500 – go so will the globe. 

The USD move has been going on for months and continues to defy President Trump and USD bears

The chart below is a monthly look at the USD versus the Euro, Yen, GBP, AUD, NZD, SGD, CNY, and the DXY itself. What is clear here is that for all the calls of USD weakness we’ve heard the trend to a stronger dollar is evident in everything in this chart save for USDJPY. 

Long terms currencies – Trading Views

So with US Treasury Secretary Steve Mnuchin saying last week the US isn’t planning intervention for now and acknowledging that unilateral intervention doesn’t often work (when he noted it would need to be coordinated) the chance of the Trump Administration doing something concrete about the USD has to be reduced.

So, as they say, the trend is you friend.

Of course trends are not normally straight line as you can see in the weekly Euro chart below. The presistence of the downtrend is clear. But there are periods of bounces and consolidations before the next new low is formed and other recovery or consolidation ensues.

What’s interesting about that right now is that the trendline I drew in months ago when I thought EURUSD might be forming a head and shoulders pattern has continued to hold and was touched as the approximate low last week.       

EURUSD Weekly – TradingView

Indeed I’ve been saying for a few weeks my view remained selling rallies with a move toward 1.0950/80. We’ve seen that now so the question is whether we see another reaction higher or this support breaks and Euro runs lower. As you saw in the positioning above I remain a Euro bear. Tactically I’ll see if last week’s lows hold. 

Naturally the corollary of a Euro and other pairs moving lower has been the DXY moving higher. It’s been a bit of a wild 4 or 5 weeks for the DXY and while it remains in an uptrend it has what looks like pretty solid trendline resistance on the weekly and monthly charts around 99.30/40. That’s the level it would need to break to really kick hard right now.   

USD Index (DXY) Weekly – TradingView

And of course we couldn’t be talking foreign exchange markets right now and not be talking about the Yuan. Last week’s move was a strong gap on Monday and then the rest of the week was spent back filling that gap but trading below the opening highs. In many ways this is as soothing for global markets as the sweet nothings that Trump ad the Chinese spokespeople are whispering into the markets ear.

What I argue is that China is comfortable letting the Yuan weaken with August a huge move as you can see in the monthly candle above. But China wants any weakness to come without causing a panic, capital flight, or dislocation. To that end this 12 month rate of change chart could be instructive as to why China is only slowly adjusting the daily fix and keeping the Yuan slightly stronger than the implied level markets expect. It’s not the weakness they are worried about. It’s how quickly the Yuan loses altitude and USDCNH/Y soars. 

CFTC Data 

The fall in US 10’s positioning on the rebound of 1.4% or thereabouts is interesting and suggests room being made to reload on any weakness. Other than that there are not too many moves worth noting. Though I would say we can see the seeds of reversal if a catalyst comes – in many markets. But we need a catalyst, elsewise the trend is your friend and these moves and positioning will persist.The week ahead

The week kicks off Monday with global manufacturing PMI day with Australia, South Korea, Japan, and of course China all out before we move round the globe into Europe – note the US is out for Labor Day. Australia also has the monthly inflation gauge, Job Ads, and more partial indicators for Q2 GDP with the release of Business Inventories and Company Gross profits. 

Turkey’s Q2 GDP is out  and we have 4 ECB speakers on the hustings which might be interesting given their seems to be a little battle about whether further easing in Europe will actually happen – Mersch, Lautenschlager, Guindos, and Coeure are the speakers. 

Tuesday kicks off with South Korea’s Q2 GDP, Australia’s retail sales and current account, as well as the RBA decision with rates expecting to be held at 1%. Turkey’s inflation is out, UK construction PMI will be released and EU PPI. South African Q2 GDP is out as well while the US and Canada catch up with the manufacturing PMI releases, ISM manufacturing, and the IBD/TIPP optimisim index. US vehicle sales are also out. 

Wednesday is services PMI day with Australia opening the batting, before Japan, China, and Europe – among many other countries as well. Australia also has the release of Q2 GDP which could be materially weaker than folks thought just a week or so ago. But we’ve still got more partials to be released as well as the consumption piece in teh actual data release. 

Retail sales are out in Europe and Canadian trade is due to be released along with the BoC interest rate decsion – rates are expected to be at 1.75%. Trade data in the US is out and then we get inundated with Fed information with speeches from Williams, Bowman, Bullard, Kashkari, and Evans as well as the release of the Beige Book for the Fed meeting in a couple of week’s. The ECB’s Mersch and Guindos are speaking as well and API crude data is out a day later than usual.

Thursday Australia’s trade data is out along with German factory orders, another speech by Guindos – he’ll be horse by the end of the week. In the US it is very busy with the release of Challenger Job Ads, ADP employment data, jobless claims, Markit services and composite PMI, factory orders ISM non-manufacturing and the EIA crude data. Russia’s inflation is also out.

Finally, Friday’s fare includes the construction PMI in Oz, household spending data in Japan, the leading and coincident indexes for Japan as well as German industrial production. Then things get real interesting because we get EU GDP for Q2, EU employment, another speech by Guindos, Russian interest rate decison, Brazilian inflation, then Canadian and US employment data.

Huge folks, huge. 

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 MckennaStocks just won’t let go of trade war hope even as the evidence stacks up against it and the global economy – McKenna Macro Markets Weekly

No circuit breakers for markets as the trade war escalates – McKenna Macro Markets Weekly

on August 25, 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

Where are markets going to open Monday now that both CHina and the US have up the ante on the trade escalation which President Trump reingnited a couple of weeks back. Sure the S&P dipped 2.5% Friday, but it could have been, may be, a lot worse if the recent low of 2822 gives way on the physical. That’s a high probability event now that the chances of a trade deal seem the most remote they have been since this trade battle started.

Intractable is a word I’ve been using for months now, the question is what traders do about it. Copper is breaking lower as traders reprice growth, oil prices too are dipping despite OPEC’s best efforts, while gold, USDJPY, and bonds are seriously bid. The correlations show a market in a real funk and at risk of heading over the cliff.   

The Week That Was…

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

Key Themes driving markets

This is what a complete breakdown in the global order strats to look like – tit for tat trade wars

I’ll see your puny increase in tariffs and raise you again and up the rhetoric.

That’s the clear message from US President Donald Trump Friday when he not only reacted to Beijings counter-measures and tariffs on US goods after his recent uptick to tariffs but also took aim at the Fed and Chair Jay Powell once more.

Source: Twitter

To say that is business as usual from the President when it comes to Powell and the Fed is probably right. But to move President Xi from friend to enemy list is a seriously big move and though he’ll say very little it would have angered the Chinese leader I would guess.

That the President then upped the ante again after the bell with more tariffs is just another sign of how intractable this trade battle has become.

As I have written recently one of these leaders needs to back down for the trade war to end. And as mercurial as Presidnet Trump is I doubt it would be him. Likewise with some of the new tariffs coming in on the anniversary of the Communist Party in October Xi would be unlikely to see his own esteem within the CCP undermined by folding to President Trump.

This implies the absence of circuit breakers for a market troubled by global growth.  

Pretty much ince the trade war started markets have held out hope the US and China would eventually do a deal. Certainly the US Administration has continued to hold this out as an option even in the past few months and couple of week’s when the chances became increasingly remote.

With the prospect hope of a deal there in the ether somewhere and with long rates rates falling, with the prospect of more monetary accomodation globally, and with signs that some governements were finally floating the idea of fiscal stimulus traders have been able to step back from transacting on the outright fear and worry the recent cross asset correlations spoke to.

But, as Germany and the Bundesbank push back on fiscal, as the hope of President Trump getting anything through recede, and as any China stimulus impact would be diminished against this background this pillar of support for risk assets is crumbling. Likewise the pillar of trade war settlement is crumbling to dust, which leaves central banks and monetary policy once again as all there is to support the global economy and markets.

Increasingly my sense is traders and investors see that as simply not enough. Indeed RBA governor Phil Lowe said as much at Jackson Hole this weekend.   

So, the question for us all right now is where is the circuit breaker for a potential market funk going to come from. 50bps from the Fed in three weeks? It’s already priced in. A trade war step back? yes, but that seems remote. A pick up in global growth? Certainly, but that seems more remote still.

And that means if the S&P 500 breaks 2822 and USDCNH takes a tilt through 7.14 things could get very funky.   

Jay Powell is a terrible communicator – but the Fed will be cutting

When you think of the word appropriate what do you think of? For me I think that conveys a message that you’ll be pragmatic and do what is necessary and if I extrpolate that a little it is not too far to suggest that when you say you’ll do whatever it takes to hit your goal.

And if you heard any interviews with the Doves and the hawks on the Fed at Jackson Hole you would have been struck by the pragmatism. At worst these Fed decision makers might be a little behind where the market thinks they need to be but they made it clear – Clarida, George, Mester, Kaplan, Harker, and Bullard – that if the outlook changes they will adjust their view.

Sure, before the trade war escalation during US trade Powells speech was taken as mildly dovish. But all he has to say is the Fed will do whatever it takes to buttress the US economy from the trade war and he might have a chance to get in front of market sentiment. And in doing so slow or halt the spread of negativity hitting main street which till now has only been mildly impacted relative to market expectations     

Correlations show markets are still in panic territory

That’s doubly the case when you look – again I know – at this Christmas Tree cross asset correlation matrix which fairly screams market funkiness

30 day correlations – Price – Green = >0.75, Red = < -0.75

As I noted last week and the week before what we see in the cross asset correlations right now is a general fear that the trade war is slowing the global economy to the extent that central bankers will continue to cut rates to try and fight the slowdown all the while failing to ignite animal spirits for anything other than safe haven assets like gold, positive yileding bonds, the Yen and Swissie.

This is the type of market we had last October folks so be careful.

An update on my medium term base cases

When you write a daily newsletter it is always necessary to deal in the hear and now but equally important to keep an eye on the macro backdrop. So in this note with weekly publication schedule and in my own money management I am interested in the big picture and asset allocation swing opportunities. That’s what course-correction Macro is all about. 

So here are my underlying positional thoughts right now:

  • Forex – US dollar to be structurally dominant for some time and ultimately take out the top of the braod 95/99 range in DXY terms. Euro to head significantly lower toward 1.03/04 eventually and drag other pairs with it in time. But perhaps USDJPY to surprise.
  • Bonds –  I am a structural Bond and rate bull still even after this big rally in recent months. As such I can see the beauty in buying negative rates – but only as a trade not to hold. I am long of bonds and will use reactions to buy more. Rates across the globe are headed lower and QE is coming again because central banks are not yet ready to admit the cupboard is bare. 
  • Stocks –  I am looking for a drawdown of between 10 and 20% from the high in the S&P in the coming months to get long US stocks. Likely hedged depending on where forex markets are but ultimately I will hold this position unhedged. I’m macro but at a company level I like service company stocks more than anything, especially in the US. 
  • Commodities – I like gold and silver significantly higher as TINA really drives them in a low/negative rate environement with increasing QE. Indeed I like hard assets generally in this environment. So while industrial metals will suffer as the globe slows down and the trade wars continues there’ll be a point where I dive back in. Oil I think is being buffetted by macro economic factors as the Saudis try ever so hard to keep it bid. That will work for a time but ultimately my sense is the range will slip lower for a time before grinding higher in the years to come.
  • Trading –  For me this is an active management traders market. Targets hit, positions reduced – wait for the next swing – within an overall and overarching environment I highlihgt above. Trade the daily time frames but with an eye to the longer term. 

Naturally I could be utterly wrong. But if I sense that I’ll make as much noise on that change of view as I do on my other views.

If you want to have a trial of the daily subscriber service to get any changes in this in real time plus the 3000 odd words I write on markets each day you can sign up here for a trial.    

A long term look at gold and bonds  

In this note in recent week’s and in my daily newsletter I’ve been highlighting the relationship between gold and the movements in the stock of of negative yeilding debt and – more particularly – moveements in US 10 year yields.

What I wanted to do this week was highlight the long term relationship between US 10 year levels and the price of gold using the monthly chart back 10-15 years. What is clear is that there is a long standing analog which I am comfortable also conveys both a correlation and causality. 

Gold (XAUUSD, black) v US 10 year note futures (blue) Monthly

The result, of course is that if you believe US rates are going to conitune to rally (price up, yileds down) as I do then you are also likely to be bullish the price of gold – structurally.

And given the 10’s (yields in the chart below) are leading bonds, and conicndent with the moves in the CNYJPY rate then you also know that bond rates are reacting to the trade war and growth as well as rates. And of course the trade war is filtering into expectations of growth which in turn are driving expectations about inflation, growth, and rate cuts. 

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

Correlations suggest we are risk of a late 2018 style funk and if that is the case the CNYJPY rate, US bonds, and gold (if I had it in the chart above) suggest some big dips ahead for the price of stocks, junk bonds, oil, and other risk assets. 

And that’s troublingly as I highlighted during the week in my newsletter on August 21 when I noted that this chart from Nordea Bank’s research team via the excellent Andreas Larsen’s twitter feed shows the curve inversion has been synonomous in the past with increase in the VIX measure of equity market volatility. 

Source: Twitter

So grab a tin hat folks, get some gold too, and get ready to trade the volatility that is likely to rise in the year or so ahead. It will through up a lot of opportunites. 

If the Yuan blows then the next leg begins 

One of the reasons marekts settled recently was that the CHinese authorities managed to convince the market they were in no mood for theYuan to weaken materially. So the peak in USDCNH was 7.14 in early Asia a couple of weeks back before the price fell back to support just last week.

Now it is not certain that China will let 7.14 break in USDCNH or CNY. But last week’s subtle shifts higher in the official USDCNY fix suggest the PBOC and SAFE are becoming more comfortable withthe weaker Yuan.

USDCNH Weekly – TradingView

And from a technical point of view when you look at the chart above you can really see the Cup and Handle I suggests a couple of weeks back which suggests a move toward 7.60/70. I’ll keep my intial target of 7.25/30 but the outlook is for a higher USDCNY and that implies a lower CNYJPY – and you know what that means for market.

Looking at the Euro, safe haven flows buoyed it at week’s end and may continue to in the days ahead. Overall though the downtrend remains intact. And even with Bundesbank President Jens Weidman pushing back against the need for German stimulus – no seriously he did this week – the overall weakness in the European economic outlook and move toward even lower ECB rates and eventual QE relative to where the US sits will weigh on the Fed.   

EURUSD Weekly – TradingView

Overall my view remains selling rallies with a move toward 1.0950/80 where it seems to be headed to retest the longer term trend line and the USD may continue to pressure both the Yuan and emerging markets forex such that another leg of the global market funk.

Naturally the corollary of a Euri rally was the reversal in the USD – for the 5th week in a row. Lower levels and support beckon, but I am a buyer of USD weaknessas noted above. 

USD Index (DXY) Weekly – TradingView

In many ways forex is quiet and rangy relative to other markets right now because of the competing headwinds in so many jurisdictions. But the current trends remain intact and are the overriding themes. 

Still watching 2822 in the S&P – if it goes, stocks are gone

We still have a tradeable bottom in the S&P 500 (physical) after the trade in the past 3 weeks saw 2822, 2829, and 2834 as the lows each week. It is this region which is now critical to the outlook for the US and global stock markets. 

S&P 500 (physical) – TradingView

As it stands the JimmyR is pointing higher on the weekly charts but the daily trend is down and the moving averages, 15 and 30 ema’s, are pointing lower on the weekly charts as well. I expect 2822 to break and have a target of 2744 – and have had for weeks – as my minimum expection in this period where I am expecting the 10-20% drawdown from the S&P’s recent high. 

And, as I always says in varying degrees where the US markets – especially the bellwether S&P 500 – go so will the globe. And overall it’s worth repeating again what I’ve said for the past three weeks – I’ve been anticipating a dip to buy in the months ahead. It feels like it has begun.

CFTC Data 

You can see where the power of the Sterling rally came from toward the week’s end in that heavey positioning which had started to unwind by COB Tuesday when the data was collated. Yen longs a re naturally building as you’d expect in the current funky environement as well. 

Elsewise, WTI looks vulnerable as positions increased before the end of week marekt funk but gold is natually building longs and there is still room historically in US 10 longs to build further.

The week ahead

Price action is going to be key as we kick off the week in Asia and then it will be all about whether and how much US markets follow through Monday. A USDCNH through 7.14, maybe 7.20 will make things interestating. And an S&P 500 through 2822 opens up the downside.

But on the data front side of things Monday kicks off slowly in Asia with just the Japanese leading and coincident indexes. IN Germany though we get Ifo business while in the US we get durable goods and the Chicago Fed National Activity index as well as the Dallas Fed manufacturing index. For those us in Australia there is an interesting paper being released Monday – it may impact the AUDUSD – called, “MARTIN Has Its Place: A Macroeconometric Model of the Australian Economy”. I know, stupid title reference RBA head office in Sydney – economist joke folks. No really it’s very funny :S

Tuesday South Korean consumer confidence is out before Chinese industrial profits which should be interesting. We also get a speech by Guy Debelle, RBA Deputy Governor on Australia’s Balance of Payments – might be interesting.  Later on Tuesday we get the latest German GDP for Q2, French business confidence and unemployment data, the ECB’s Guindos is speaking and in the US we get Case Shiller, Richmond Fed, the4 Redbook, and API crude data after the bell. 

Wednesday we kick off with the first partial for Australia’s Q2 GDP with the release of COnstruction work done, germany releases Gfk confidence and import and export prices, EU loan growth is out – watch that – as is Italian busines and consumer confidence. In the US it’s mortgage apps and EIA energy data.

To Thursday then and South Korean business confidence is out before Australia’s Private CapEx data for Q2, German unemployment for July is out with Spanisgh inflation data and Italian industrial production and sales data. Euro Area confidence data is out, Brazilian GDP for Q2 will likely get more attention than normal in the current circumstances, and German inflation is also out. In North America Canada has current account and average earnings while in the US it is Q2 GDP growth, goods trade, corporate profits, and initial and continuing jobless claims. Naturally PCE data anis out. So too are pending home sales. 

Friday we get South Korean retails sales, construction and industrial production, before we get the next BoK decision. Japanese unemployment, housing starts, retail sales, and Tokyo inflation are also out. In Australia it is HIA new home sales, building approvals and then private sector credit data. Retail sales are out in Germany, French inflation and UK credit and mortgage data are also out.

Euro Area inflation and unemployment are out as is Italian inflation and Q2 GDP. Canada also has Q2 and July GDP data out while in the US it is PCE income and spending along with the PCE price indexes.

LORD, what a 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 MckennaNo circuit breakers for markets as the trade war escalates – McKenna Macro Markets Weekly

Panicky markets still on the edge – McKenna Macro Markets Weekly

on August 18, 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 few week’s we’ve had in markets. Italian 10 year bonds in the mid 1.30% region, German 10’s below -0.7%, US 10’s all the way down at 1.5% and US 30 year bonds making fresh record lows below 2%.

We’ve had stocks collapsing then recovering when it looked liked they were on the precipice of capitulation as President Trump seemed to get cold feet about pushing so hard on tariffs – he just might have a glass jaw when it comes to stocks.

We’ve got data in Europe looking awful, so much so the ECB’s Oli Rehn essentially promised shock and awe on rates coming to an ECB meeting soon. But you know things are getting really serious on the economic front when Der Spiegel floats the idea that Germany will abandon its balanced budget mantra.

About damn time central bankers and we all scream. But a sign of trouble if ever there was one.

So no surprise the Euro had it’s lowest close since May 2017 on Friday. And while there is much talk of Trump, of Trade Wars, of global growth the correlations tell us we are in the midst of a mini-market panic which is still at risk of heading over the precipice.   

The Week That Was…

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

Key Themes driving markets

This is what a panic looks like

When markets get funky correlations tnd toward +1 or -1 (depending on the asset). That’s a truism of markets and has been for many decades and it is the situation we find ourselves in at the moment if you refere to my little cross asset matrix below.

I’ve been talking about this for a few week’s now and the “Christmas Tree” effect you can see with correlations either above +0.75 or below -0.75 is testament to markets across the globe being driven by a similarity of catalysts.

At present that catalyst is fear and it is being riven both by the trade war and what seems to be a lcak of belief that central bank action can really circuit break in a meaningful way to help the global economy recover. 

30 day correlations – Price – Green = >0.75, Red = < -0.75

Indeed what we see in the cross asset correlations right now is a general fear that the trade war is slowing the global economy to the extent that central bankers will continue to cut rates to try and fight the slowdown all the while failing to ignite animal spirits for anything other than safe haven assets like gold, positive yileding bonds, the Yen and Swissie

Gold and Bonds are still trading together with fear 

To extent the fear analogy a litle further to highlight that the column of red in the gold correlations above is a sign that this market really is on tenterhooks we can that gold has a negative with most things in the table you might consider a “risk” asset of some type.

The Euro and DXY are marching to their own drum but the ASX200 and Copper correlation at -0.74 and -0.71are only a few points off themselves printing red.

Gold (XAUUSD, black) v US 10 year note futures (blue)

And so while these correlations are so high rght now the question remains what the circuit breaker will be. But equally it is an opportunity to remaind ourselves that risk and volatility are two way 

So as we saw with the stocks funk the last two week’s, with crude oil’s fall and little recovery, even bonds little rise from their lows Friday on speculation Germany might open its fiscal horde the risk of of swift bear market rallies.  

And I characterise them as such because I ask you to ask yourself a question about what is different now to the funk we had in late 2018 and why wouldn’t any funk simply bounce back in a manner we saw in 2019 with record highs and the S&P 500 wth double digit returns still.

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

The answer of course is that US 10’s have halved amid a persistent global bond market rally, but the data that has accompanied that halving around the globe – outside of the US – is what has fuelled that rally in global rates and bonds.

US 2-10 spread (top), US 10’s (middle), US 2’s (bottom) – TradingView

In many ways it’s not the trade war that is driving the fear itself – though it is part of it. Rather for me the slowdown in global growth is being brought into harsh light by the ongoing trade battle. And given neither the trade war nor the global slowdown look likely to to end soon it remains difficult to be overly excited about the outlook for risk assets.

That in turn feeds into my medium term views.  

This is my medium term base cases

As a daily newsletter writer I am obviously and acutely interested in the short term timeframes that my susbscribers trade and invest in. But equally in this note with weekly rests and in my own money management I am interested in the big picture and asset allocation swing opportunities. That’s what course-correction Macro is all about. 

So here are my underlying positional thoughts right now:

  • Forex – US dollar to be structurally dominant for some time and ultimately take out the top of the braod 95/99 range in DXY terms. Euro to head significantly lower toward 1.03/04 eventually and drag other pairs with it in time. But perhaps USDJPY to surprise.
  • Bonds –  I am a structural Bond and rate bull still even after this big rally in recent months. As such I can see the beauty in buying negative rates – but only as a trade not to hold. I am long of bonds and will use reactions to buy more. Rates across the globe are headed lower and QE is coming again because central banks are not yet ready to admit the cupboard is bare. 
  • Stocks –  I am looking for a drawdown of between 10 and 20% from the high in the S&P in the coming months to get long US stocks. Likely hedged depending on where forex markets are but ultimately I will hold this position unhedged. I’m macro but at a company level I like service company stocks more than anything, especially in the US. 
  • Commodities – I like gold and silver significantly higher as TINA really drives them in a low/negative rate environement with increasing QE. Indeed I like hard assets generally in this environment. So while industrial metals will suffer as the globe slows down and the trade wars continues there’ll be a point where I dive back in. Oil I think is being buffetted by macro economic factors as the Saudis try ever so hard to keep it bid. That will work for a time but ultimately my sense is the range will slip lower for a time before grinding higher in the years to come.
  • Trading –  For me this is an active management traders market. Targets hit, positions reduced – wait for the next swing – within an overall and overarching environment I highlihgt above. Trade the daily time frames but with an eye to the longer term. 

Naturally I could be utterly wrong. But if I sense that I’ll make as much noise on that change of view as I do on my other views.

If you want to have a trial of the daily subscriber service to get any changes in this in real time plus the 3000 odd words I write on markets each day you can sign up here for a trial.    

Currencies might be all that’s holding this together

When you take into account all of the above so far, of the strong correlations right now, of markets on the precipice of a real funk, of President Trump doing his darndest to talk soothingly when stocks are offered (and belligerently when they are bid), and when we think about why markets stepped back from the brink in reality there is only one answer – USDCNH/Y stopped rising.

USDCNH Weekly – TradingView

Of course a big part of that was China signalling it wasn’t yet ready to loose the Yuan completely to the vagaries of bearish market sentiment. But the fact that EM forex remains under pressure, that Euro closed at it’s lowest level in more than 2 years, and that USDCNH is still bid and officials comfortable with USDCNY official sets above 7.00 suggests that perhaps traders need to continue to look to forex markets for guidance.   

EURUSD Weekly – TradingView

Indeed Euro down near 1.0950/80 where it seems to be headed to retest the longer term trend line and the USD may continue to pressure both the Yuan and emerging markets forex such that another leg of the global market funk.

USD Index (DXY) Weekly – TradingView

As you can see in the ranges of the weekly CNH, Euro, and DXY above, outside the recent break in the Yuan there has been a grinding persistence to the USD’s strength rather than a surge. That seems likely to be the enduring scenario until there is more information.

Watch USDCNH’s range of 6.96/7.14 – a break either side would be a clear indicator for forex and risk assets. 

Watch 2822 in the S&P – above that stocks are okay

We have a tradeable bottom in the S&P 500 (physical) after the trade in the past 2 weeks saw 2822 and 2829 as the lows each week. It is this region which is now critical to the outlook for the US and global stock markets. 

S&P 500 (physical) – TradingView

As it stands the JimmyR is pointing higher on the weekly charts but the daily trend is down and the moving averages, 15 and 30 ema’s, are pointing lower on the weekly charts as well. But, while above 2822 the S&P 500 could bounce back into the mid-2950’s.

That said though it is worth asking the same question as the one I posed above in the bonds section. What’s changed between the market funk last year and now – besides that we’ve seen new records or multi-year highs for a number of indexes.

The answer again is that now the market is vulnerable from global economic weakness, a signal from bonds that even with monetary easings bond traders aren’t convinced monetary policy will gain any traction, a loss of faith that President Trump actually has an agenda, valuation multiples, and real signs of a global economic slowdown. 

And of course in varying degrees where the US markets – especially the bellwether S&P 500 – go so will the globe. And overall it’s worth repeating again what I’ve said for the past two weeks – I’ve been anticipating a dip to buy in the months ahead. It feels like it has begun.

Copper is down near recent lows, the Aussie dollar too. And another way to guage that outlook is to look at the relative perofmance of metals and mining shares to the total market and that’s at the lowest ratio in almost a year. Throw it all in the mix and you end up with an Aussie dollar and fair value calculation that are still in a downtrend.

AUDUSD v AUDUSD Fair Value

And these downtrends are both a symptom of and evidence that global markets, traders, and investors are still worried. It is not a great backdrop for risk assets. 

CFTC Data 

The overall USD positions hasn’t changed that much in percentage terms other than a push further into AUD shorts. WTI longs remain solid, gold too, and the remarkable positioning of US 10 year bond shorts

Perhaps when we see the next week’s positioning some move to a reduction in shorts after the run down to 1.5% in US 10’s this week. But the short position is certainly building toward the recent peak. But that level is nowhere near the peak of last year when there were more than 700000 net shorts…so there seems to still be some position limits and possible selling on rallies. 

The week ahead

It’s not the biggest week in data releases but with the markets correlating such that they confirm a funk anything and everything is a possible catalyst for a decent move. That makes the RBA minutes Tuesday, FOMC minutes Wednesday, “flash” PMI day Thursday, and Powell’s opening at Jackson Hole Friday of great import. Elsewise its Trimp rhetoric and Trade War chatter.

Specifically Monday kicks off with the week with the Reuters Tankan index along with trade data in Japan. The Euro area current account is out as is the monthly report from Buba. Russian GDP is out for those interested while the US has nothing of note.

Tuesday is fairly quiet with the RBA minutes in Asia beofre the german PPI and EA construction data, UK CBI industrial sales, and Canadian manufacturing sales,  while Italy’s PM is speaking. That might be interesting.  Naturally API crude data at 4.30pm New York rounds out the day.

Wednesday sees the release of South Korean PPI, a speech by the Fed’s Quarles early doors Asia, Westpac’s leading indicator of growth in Oz, South African inflation, US mortgage applications, and Canadian CPI. Existing home sales are out in the US along with the EIA energy data and of course the FOMC minutes at 2pm Washington, 4am Sydney.

Thursday is the day Markit has its first bite of the marketing cherry by releasing a “flash” version of their PMI data for the month which will be relelased very early next month – so in a week or so. Yes I am cynical about this because it adds needless volatility for the sake of media coverage – UGH!!!. So anyway, flash PMI;’s will be out all over the globe.

We’ll also get he Indonesian interest rtae decision, Mexican inflation, the notes from the last ECB meeting, EU consumer confidence, and the Kansa City Fed index.

Friday it is Japanese inflation, Mexican Q2 GDP, Cnadaian retail sales, US new home sales and off course Jackson Hole kicks off with an opening speech from Fed chair Powell. There will be lots of speechs worth keeping an eye on over that weekend. 

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 MckennaPanicky markets still on the edge – McKenna Macro Markets Weekly

Gold the big winner as markets get funky on trade war escalation, what’s next – McKenna Macro Markets Weekly

on August 10, 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

The week started off with a bang as China let the Yuan weaken above 7.00. But the fact that they then didn’t actively act to drive USDCNY and CNH higher seemed to quiet the nerves of startled traders by mid week. So we got a reversal in stocks, in bond yields, and in oil.

But the fact the Yen and gold remain bid suggests folks are still quite nervous about the outlook and the situation is still very fluid as you see in the body of this week’s note.  

The Week That Was…

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

Key Themes driving markets

China lets the US see its armoury, Trump signals less likelihood of a deal? 

Last week I wondered what “necessary countermeasures” actually meant and hypothesised it could mean letting the Yuan go as a first step. And within the first few hours of trade Monday China had let the Yuan go and signalled it was not in a hurry to buy any more Agricultural products from the US.

With those two moves the Chinese showed the US it’s not willing to back away from the fight and it it knows how to goad president Trump just as well as he does. I say that because he’s had a bee in his bonnet over the Fed and the USD for a while now and China knows that. Equally in hitting farmers, again, the Chinese know they are playing with Trump’s 2020 election chances.

So it was no surprise that the Administration then called China a currency manipulator, nor that Huawei is again front and centre of the battle with licences to trade with the company being denied.

But you know all that. As Miss Du from China’s SAFE used to say to me, “what now mr McKenna?’.

It’s a good question because I’m surprised on one level that President Trump thinks that through force of will and personality he can change the approach of the CCP and President Xi to their economy and hegominc goals – at least in China’s sphere of influence. It’s clear though that President Trump still thinks Art of the Deal can defeat the Art of War (among many texts from Chinese history) that President Xi is clearly using as his play book.

The result is an intractable battle that would require compromise from one or both of the protagonists to step back. Something neither side seems inclined to at the moment.

The easiest short term fix – without threatening its long term goal to wait Trump out – means China could buy Ag goods to forestall the September imposition of the new round of tariffs. For President Trump though it feels like he is becoming increasingly isolated and belligerent.

Indeed Friday he said, “We’re talking with China. We’re not ready to make a deal – but we’ll see what happens“. But he followed up with “China wants to do something, but I’m not ready to do anything yet. Twenty-five years of abuse – I’m not ready so fast, so we’ll see how that works out”

As to Miss Du’s question on what next, the primary answer I’d give is more fear and worry from investors will lead to more cash being held, more volatility and skittishness in markets, and ultimately lower levels for stocks and risk assets in the week’s and months ahead.

AGF’s Greg Valliere says there may be a Plan B both Presidents can live with which will de-escalate the tensions in the short term but leave the big questions unanswered. During the week he wrote:

“The U.S. could declare a truce on new tariffs, agree to relax curbs on Huawei, and not enforce restrictions that come with the designation of China as a currency manipulator. In exchange, China would finally make huge purchases of U.S. agriculture and other products, would refrain from currency manipulation, and would pledge to open up parts of its economy to American businesses, such as financial services”.

This is absolutely on point. But Valliere also says such a face saving agreement would be a “best case scenario” and I agree with that as well.

The trade war has become intractable and has moved into the Thucydidean hegemonic battle between the US and China. With so many different agendas now part of this battle I wonder if either President has the capital to make the necessary accommodations to bring the battle to a end anytime soon. 

To the markets then – here’s my medium term base cases

As a daily newsletter writer I am obviously and acutely interested in the short term timeframes that my susbscribers trade and invest in. But equally in this note with weekly rests and in my own money management I am interested in the big picture and asset allocation swing opportunities. That’s what course-correction Macro is all about. 

So here are my underlying positional thoughts right now:

  • Forex – US dollar to be structurally dopminant for some time after the current dip to 96, 95 maybe lower plays out. Ultimately to trade above 100. Perhaps significantly so as the “isolated” US economy and markets outperform through time. Euro to head significantly lower and drag other pairs with it in time. But perhaps USDJPY to surprise.
  • Bonds –  I am a structural Bond and rate bull. As such I can see the beauty in buying negative rates – but only as a trade not to hold. I am long of bonds and will use reactions to buy more. Rates across the globe are headed lower and QE is coming again because central banks are not yet ready to admit the cupboard is bare. 
  • Stocks –  I am looking for a drawdown of between 10 and 20% from the high in the S&P in the coming months to get long US stocks. Likely hedged depending on where forex markets are but ultimately I will hold this position unhedged. I’m macro but at a company level I like service company stocks more than anything, especially in the US. 
  • Commodities – I like gold and silver significantly higher as TINA really drives them in a low/negative rate environement with increasing QE. Indeed I like hard assets generally in this environment. So while industrial metals will suffer as the globe slows down and the trade wars continues there’ll be a point where I dive back in. Oil I think is being buffetted by macro economic factors as the Saudis try ever so hard to keep it bid. That will work for a time but ultimately my sense is the range will slip lower for a time before grinding higher in the years to come.
  • Trading –  For me this is an active management traders market. Targets hit, positions reduced – wait for the next swing – within an overall and overarching environment I highlihgt above.

Naturally I could be utterly wrong. But if I sense that I’ll make as much noise on that change of view as I do on my other views.   

Correlations are telling us folks are still REALLY worried 

Now, it is no revelation when you look at the price action in forex, stocks, bonds, and commodities over the past 7 trading days to say traders and investors are toward the outer edges of their comfort zone.

Last week I highlighted that reality with reference to the 90 day correlations between risk and safe haven assets. It’s fair to say the 30 day correlation was less troubled – no doubt partly driven by recent stock index highs. But the mini-funk traders and markets experienced since has really lit up both the 90 and 30 day correlations.  

Why is that important you ask? Because it informs the market we are in.

Volatility begets volatility, volatility is often driven by fear, and the tables above speak to enduring worry if not outright fear in markets right now. That in turn informs my tactical apporach – especially when talking about the linkages in markets in my Daily Newsletter. It helped me call the funk and they say it might bounce during the week. 

And as you know a big part of the tactical approach is my MACD system which is published as part of the daily note. Here’s the update as at CoB NY Friday. 

As at 9.24am Sydney Saturday August 10

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

Forex sets the scene as USDCNY/H heads above 7.00

You can see the linkage through USDJPY and the 10’s in the correlation tables above. But it was the Yuan that set the scene for the week.

USDCNH traded to a high around 7.14 this week after the US Treasury called China a currency manipulator. That Chinese authorities waited a couple of days to let the official USDCNY fix hit 7.00 was a signal that there are no plans for a Yuan free for all. Indeed while China showed the US its gun it also signalled to the market it’s not keen on a fast or destabilising move in USDCNY/H.

Still scarred from the 2015/16 devaluation experience officials in Beijing, at the PBOC, and at SAFE know a controlled crash is better than a swift depreciation in the Yuan.  

USDCNH Weekly – TradingView

So I retain a medium term 7.25/30 target for USDCNH but believe the Chinese will act to make a move to this level both orderly and slowish.  

But in DXY terms at least the USD is doing it tough right now with a big reversal back to 97.00. I oftern write and say in my video that one or two candles can be an important indicator of price and as I highlighted last week ‘Down and through 97.80 this week and we could see a run toward 97.00 again, perhaps even 96.00ish. But overall the USD remains in an uptrend”. That remains my base case for the moment /95.85/96.00 is critical support at present.  

USD Index (DXY) weekly – TradingView

That DXY naturally – given the weights – has a corrollary in the EURUSD move. Interestingly though it is clear the 1.1100 region has emerged as a very important level on the weekly closes we have to watch. Above that and Euro has resistance around 1.1270/80, 1.1320, and 1.1450 which is the range top.  Support is 1.0975/1.1000. 

EURUSD Weekly -TradingView

It’s clear that money increasingly goes home to Europe, or at least bets funded in Euro are unwound, when things in markets get funky. That’s a big part of the setup to USD weakness in the immediate termeven if I hold a more bullish outlook going forward for the USD over the intermediate time frame.

And here’s is a chart that got my attention given the above correlations in the tables right now. Monthly USDJPY could open up all the way down to 100ish if we take out the mid-104 region. It’s a warning not a certainty, but that rejection of the old trendline is telling. Respect the range bottom unless or until it breaks though folks. If it does though markets will be in a funk too. 

USDJPY Weekly -TradingView

What to make of stocks this week – down but far from out

During the week in the daily I noted that when you make a call for a market move on the basis of the monthly or weekly charts – as I did with the S&P to 2800 a week or so back – and it happens really quickly, as in a few days, then maybe things have come too far too fast. 

So we caught the down draft and the move back up from the futures low around 2795ish and the physical low which I think was about 2822 before the physical S&P 500 closed at 2918 Friday. Again Miss Du’s words are ringing in my head – what next?

It’s a darn good question with the answer really that it depends on your time frame. You can see the JimmyR is still pointing higher and the candle from last week’s lows saw price finish in the top third of the week’s range. So, as Bill Williams would have said, the bulls won that one.

On the dailies it looks like 2950/55 is decent resitance above which the outlook could change. But my MACD system is short on both the daily and weekly rests as you can see in the table above. So, on that basis I have a sell rallies bias unless one of the President’s steps back or price charges above 2967. 

S&P 500 (physical) Weekly – TradingView

And of course in varying degrees where the US markets – especially teh bellwether S&P 500 – go so will the globe. And overall it’s worth repeating again what I’ve said for the past two weeks – I’ve been anticipating a dip to buy in the months ahead. It feels like it has begun.

Gold and Bonds 

This chart of gold prices and the US 10 year note futures is one of my favourite in all of markets at the moment (second only to the ASX v S&P analog). One reason I have so many analogs of charts and relationships in my writings and videos is that it’s like a visual version of a correlation table.

SOOOO POWERFUL – as an orange haired President might say. 

Anyway, You can see clearly the realtionship and it’s also easy to understand why that relationship is there. It is both a safe haven flow as well as a TINA flow emanating from the move into both Treasuries and gold as the volume of negative rates grows across the globe. So we have correlation and causality. 

US 10year TT-note futures price (blue) v Gold price (XAUUSD, black) – TradingView

Interestingly though, and not unrelated to stocks bounce naturally, was the big turn arouond in US Treasury yields during the week. You can see the volatility just in the last few days. Take the 10’s for example, traded down to 1.60% before closing at 1.71%, the next day traded up to 1.80% before closing at 1.72% and then ended the week at 1.74%. UGH :S

The 2’s had a wild ride as well. A break of 1.70% in the 2’s and 1.80% in the 10’s could get things moving topside.  

US 2-10 spread (top), US 10’s (middle), US 2’s (bottom) – TradingView

It all depends really on where sentiment and stocks go in the weeks ahead really. Bloomberg’s John Authers implied a relevant question though in a column this week – This Might Be the Bond Market’s Dot-Com Moment. Authers highlights something I agree with in that “the bond market’s odds on a recession look overdone at present, but there are certainly reasonable scenarios that suggest the current trade impasse between the U.S. and China could lead to something terrible”

He also highlighted:

“…before the turnaround in afternoon trading on Wednesday, 30-year Treasury yields almost fell below their all-time lows set in mid-2016 after the Brexit referendum, while parts of the U.S. yield curve reached its deepest inversion since the Great Recession. In both cases these were emphatic, and probably extreme, signs of deep pessimism about the prospects for growth, and showed a great fear of looming deflation”

If the trade war continues, if Europe’s malaise deepens as it seems it will then the trend to lower rates and higher bonds looks intact. But it’s always good to rember what happens when everyone is on one side of the ferry. The risk is of a reversal. But only a break out of a real trade deal would threaten to derail the recent trends – elsewise the reversal that will inevitably come is a buying opportunity for bonds and gold.

CFTC Data 

Gold traders are getting longer, Aussie traders mildly shorter, WTI longes don’t seem to have been threatened by the collapse, nor 10 year bond short – but in truth both these moves happened and then reversed after the data was comiled Tuesday. Markets remain ripe for a reversal and position driven move – but the catalyst remains absent for the moment. 

Please Note: I have rounded the AUD number slightly as I had a curropt cell

Sterling is interesting though as price falls and short positions build. Who can argue though. Bojo clearly is of a mind to take the UK out of the EU deal or no deal so the chance of hard Brexit are growing. Europe seems disinclined to change tack that the deal on the table is THE deal and now the Irish government appears to be a little spooked.

Hard Brexit is now a clear and present danger. And so GBPUSD is down and EURGBP has hit the 0.9300 target I tagged a few week’s back.  I’ve had 1.17 tagged as the eventual target for GBPUSD but highlighted the importance and likelihood of the run below 1.20 to the 1.1950 support zone. If that breaks 1.17 seems a certainty and if you play a very, very, long game could we see 1.1 or below? Maybe Parity folks, just maybe. 

GBPUSD Weekly – TrqadingView

The week ahead

On the data front Monday kicks off the week quietly with little other than vehicle sales in China and US inflation expectations.

We get a speech from RBA assistant governor Kent who is at the Finance and Treasury Association – so we might get some interesting questions. Japanese PPI is out and then the NAB business survey for Australia before German and Spanish inflation data in Europe. UK jobs data is out then the ZEW prints for Europe and Germany along with the NFIB business survey in the US where CPI is also out. API crude data is out a little after the bell in New York, early my morning.

Wednesday we get South Korean employment and import/export prices. Westpac consumer sentiment is out in Australia along with the Wage Price Index. Then it’s China and the Triple Treat of retail sales, industrial production and fixed asset investment. A few hours later we get German GDP for Q2 and then French and UK inflation data. Loan growth in China is due as well while we get EU employment as well as US import/export prices and EIA crude and associated stocks.

Thursday kicks of with the RBA’s deputy governor Guy Debelle speaking on his old hobby horse of conduct in forex markets. Then we get employment data for Oz, japanese industrial production, UK retail sales, and then in the US it is also Retail sales Philly Fed, NY Fed Empire manufacturing and jobless claims. Unit labour cost, non-farm productivity, business inventories, production and NAHB data is also out.

Friday morning my time is TIC data fro the US as well as Japanese and Chinese flow data. Elsewise it’s EU trade and US building permits as the week winds down slowly on the data front. 

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 MckennaGold the big winner as markets get funky on trade war escalation, what’s next – McKenna Macro Markets Weekly

A quick thought on markets reactions as USDCNH breaks 7.00

on August 5, 2019

Hi folks, welcome to my quick follow up thoughts now that the market is testiing China’s resolve on the Yuan

USDCNH has cleared 7 as the market tests China’s resolve

The big question as I asked in the weekly is whether this is the start of the “necessary countermeasures” China has promised as retaliation for the trade war escalation or just the market getting ahead of itself.

In the end where USDCNH and USDCNY settle is as much as political decision – perhaps more so – than it is a market based decision.

Link to weekly here

Markets never go one way but this is a big technical break.

Daily blew through 7.05/07 138.2% Fibo projection of recent highs in May and approached the 161.8% before running into selling

USDCNH Daily

Weekly Fibo projection after consolidation back to 61.8% of up move is of 6.98 + 19 big figures = 7.17

USDCNH Weekly

Monthly is similar, perhaps bigger move though 7.25ish

USDCNH Monthly

What matters more than the move this morning is where we close at the end of Monday’s trade.

But if Chinese authorities allow this move to stay above 7.00 (appreciating that the percentage move isn’t that great) it will be a signal to Washington and the President will likely come back in a tweet or more after Saturday’s effort. 

Source:Twitter

Gold, Forex, USDJPY, and Stocks

Naturally the move in the Yuan has found its corrollary in other markets.

Gold and US 10 year note prices are rising. XAUUSD is at $1449, just a couple of dollars an ounce below the recent high, while the rise in T-Note prices reflects the fact the 10 year Treasury yields in Asia is currently trading at 1.804% as I write at 11.50am Sydney on Monday, 10.50 Tokyo, 2.50am London and 9.50pm Sunday New York. 

Gold (black) and US Tnote futures (blue) – TradingView

Naturally risk currencies like the Aussie and Kiwi are getting belted and are down 0.45% and 0.6% respectively at 0.6770 and 0.6500 while the Yen and Swiss have caught a bid and sit at 106.00 and 0.9795 up 0.5% and 0.25% against the USD.

USDJPY in particular has 103.50/104.00 written all over it both technically and against the fundamantal backdrop for global markets right now.

USDJPY Weekly

And remember as I highlighted in my weekly – the correlations suggested traders were already troubled.

This could be an Asian market headfake. But traders seem primed to panic. USDCNH above 7.00 is the only nudge they need it seems.  

Remember I’m looking for 2800ish in the S&P eventually.

All the best

Greg McKenna
@gregorymckenna on Twitter

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

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Greg MckennaA quick thought on markets reactions as USDCNH breaks 7.00

Trade war escalations questions hopes of a central bank rescue – McKenna Macro Markets Weekly

on August 4, 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

Would the stock market have reacted as negatively to President Trump’s decision to up the ante in the trade war if Fed chair Jerome Powell hadn’t have fluffed his lines as poorly as he did after the FOMC cut rates last week? We’ll never know because he did and we got he worst week for US stocks for the year. That so far into his tenure at the helm of the Fed Powell still can’t handle unscripted conversations with the press is an indictment on his leadership. So when the President then caused a market jump scare the calming hope of the Fed being ahead of the curve, or at least attuned to the curve, and thus it’s ability to soothe market nerves is absent.

I’ll get into that more in the body of this week’s note. But the key here is that Trump belled the cat on valutaions of stocks, of junk, and of the outlook. Unfortunately he’s pushed traders and investors more deeply into chasing fixed income assets – sovereign and corporate – which continue to head to and through that quaint notion of the “zero lower bound” – German 10’s finished the week at -0.49% for goodness sake.

As you’ll see below the correlation over the last 90 days really speaks to concern and anticipatory fear as a driver of fianancial markets even though US stocks (not to mention Australian ones) made record highs just recently. It makes risk assets vulnerable. As President Trump’s decision revealed this week. 

The Week That Was…

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

Key Themes driving markets

Necessary countermeasures!!!

Last week I highlighted that “we know we’ll have periods of market funkyness – I’M EXPECTING ONE IN THE NEXT FEW MONTHS AGAIN” and I said “I want to buy it”.

Not for a second though did I think US stocks would lose 3% during the week and President Trump would up the ante by slapping China with an additional tariff hit of 10% on the remaining ~$300 billion of imports into the US. But while others wonder about Trump’s motivtion there is really only one thing that matters.

What exactly are the “necessary countermeasures” that Chinese Foreign Ministry spokeswoman Hua Chunying suggested would be coming at a press briefing Friday and whihc the new Chinese Ambassador to the UN Zhang Jun echoed in using the exact same language?

In many ways now that we know the trade war has become increasingly intractable nothing else matters. What will these countermeasures be, how will they be implemented, and what will the knock on effects on global markets be.

USDCNH?

Naturally the most significantly dangerous countermeasure – outside liquidation of Treasury holdings – China could deploy for traders and investors at present is the so far iron-clad decision of Chinese authories to keep USDCNY and USDCNH under 7.00. So far my bet’s been they have left this line in the sand intact as they sought to work through the trade dispute. But should they decide there is little use negotiating with President Trump and they want to hurt him – via stocks and other US asset markets – it would be easy fro them to step back and let the Yuan slide .

USDCNH Weekly – TradingView

Personally it’s a course of action I’d be seriously thinking about. And if the August 2015 devaluation proved anything it is that it is the nuclear option only just short of the full strike of selling China’s vast array of US Treasury holdings. So maybe it’s too soon to let USDCNY/H run.

But a break and close above 7.00 on a day, and especially on a week, for USDCNY would suggest an ultimate run to 7.25/30. That’s only a little more than a 4% move which for some currencies – like the Aussie, or commodities – like crude and gold recently, is increasingly usual volatility. But for the RMB it would be a very strong signal Beijing has taken the gloves off.

Of course, there are other countermeasures available and we’ll have to wait and see where things head. But it is certainly more likely than not that China follows its own language, hits back and tries to harm President Trump. What has it rally got to lose now?  

A break down in the trade spat reinforces negative sentiment toward the global economy

There is no getting around the reality that the manufacturing side of the global economy is in real strife and that the impact of this and the slowdown in the rest of the economy has been that investors and economists have contiued to downgrade their outlook for the economy – both this year and next.

Source: Markiteconomics.com 

While Monday will give us a look at the latest Services PMI’s to see if they are still holding up and balancing out the overall economic outlook the latest global manufacturing PMI’s last week showed continued contraction. In many ways this is proof it was only hope of monetary stimulus that was indeed holding stocks up.

President Trump’s 4 tweet storm to annouce the increased tariffs was in many ways a relatively respectful escalation in the trade battle in terms of the language he used. Larry Kudlow made this point to Jonathan Ferro on Bloomberg Friday. But the reality is he stilljacked up tariffs and the Chinese are clearly not happy about. It will impact global growth both now and into the future. Especially if the battle drages on as it appears it is going to.

As I wrote Frida in my newsletter, I don’t know how President Trump sees this as a tactic, but he seems to. It’s weird because the Chinese for months have been saying treat us as equals, take the tariffs off, and we can talk properly. That’s never going to happen and the President has been goadung China to wait for some other “stiff” after the 2020 election which seems to be where they are now at.

As our old mate Hu Xikin at teh Global Time has tweeted, China will simply dig in now. And as China digs in, as the US side stands pat so the chances of more and significant monetary stimulus from central banks will be assumed by traders. But my sense is also markets may think now that monetary authorities won’t be able to do it on tehir own. 

 

Correlations are telling us folks are worried, and have been for some time – (Bit of Ad)

Part of my process is to trade the market or markets in front of me but to keep an eye on the macro backdrop and correlations.

A good example of that right now is the correlations you can see through the Yen with bonds and risk assets. It fairly screams caution on teh part of the traders and investors – concern if you will. And it informs the views that go with the technicals and the outlook I write and talk about each day.

Take the current correlations for example. You can see in the table above the frame work of concern even as Us stocks made fresh record highs recently. No wonder it didn’t take much to tip markets this week. It’s one of the reason I asked is it time to sell teh fact in last week’s weekly.

And as you know a big part of the tactical approach is my MACD system which is published as part of the daily note. Here’s the update as at CoB NY Friday. 

As at 9.47am Sydney Saturday August 3

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 are lower but is this the start of something big?

Should the Chinese decide to let the Yuan go then all heck could break loose in stocks and other markets. I say that because if the last couple of days trade proves anything it is that sentiment is the key to the recent rally and it remains fragile – as the correlations highlight in teh table above.

Whether or not the Chine let 7 go only the future will hold, but in the here and now the reversal of the S&P from the overhead resistance and the big fall suggests further downside. Indeed last week I wondered if it is time to sell the fact?. That was the big question on my mind as the S&P was banging up against this overhead resistance that had been constraining the rally. 

That’s the way the charts look but if sentiment is a factor then down is also the path of least resistance given that the circuit breaker for stocks selling – end to the trade war or some Fed accomodation – would seem to be absent right now. One may argue any circuit breaker could be at least 5% or more below the current market. Indeed I doubt the trade war will be solved anytime soon. But notions of the Powell Put will rise again as stocks hit 10% or so off their highs.

Looking at the S&P 500 you can see the JimmyR is still pointing higher but that otherwise prices look to be pointing lower. As I suggested in my daily newsletter last week, looking at the month charts I could easily envision a move back toward 2800 while I highlighted first support in the weeklies is 2876. And of course you can see the trend line at…

S&P 500 (futures) Weekly – TradingView

What’s important about this is the bellwether impact that prices dipping in the S&P will have on other indexes. Naturally the Russell, which has underperformed for some time, is reversing again from a significant resistance level while whether it’s the ASX or DAX, FTSE, or Nikkei in the chart below the swoon in the S&P will find its corollary elsewhere.

S&P 500 v DAX(blue), UKX(light blue), and NKY(blue) – TradingView

So back to where I started with last week’s comment – I’ve been anticipating a dip to buy in the months ahead. It feels like it has begun.

Gold and Bonds 

And with stocks swooning, the trade war escalating, and global growth looking relatively parlous so then are bonds rallying again. New life time lows for German 10’s, increasing dollar value of sovereign and corporate bonds with a negative yield, and US rates rallying hard.

These trends look set to continue with the very circuit breaker required to turn stocks around also needed to change this bull market for bonds.

US 2-10 spread (top), US 10’s (middle), US 2’s (bottom) – TradingView

As you can see in the chart above US 2’s had the faintest flirtation with a topside break last week before – refreshed – the bond bulls sprang back into action. Like wise the 10’s. Both bonds look to be headed substantially lower. Indeed I’d hope for a sell off in bonds to get longer for new record lows in US 10’s eventually – but the sell off never really came.

And of course I’ve shared the chart previously of the gold price and the volume of bonds with negative yields. Perhaps an easier way to think of things is simply invert the gold price against US 10’s – it’s a pretty strong analog at present as you can see below.

US 10year Treasury Yield (black) v Gold price (XAUUSD) inverted (orange) – TradingView

So the washup is lower bond rates and higher gold prices.

The USD’s rally stalled as it reversed sharply at week’s end – really?

I’m not sure rhetorically I agree with the reversal of fortune in the USD which accompanied the announcement of the new Trump Tariffs. That’s because to me the US economy is in a far better position to weather the storm than most other economies – just look at the data out of Europe and the renewed deterioration recently.

Of course rhetorically I get the repricing for Fed cuts and that the US has much further to cut than do other jurisdictions. But only kind of. Yes the Fed can take rates down to zero, yes the Bank of Japan is constrained by 20 years or failure and not many bullets left, yes European rates are already deeply negative, yes the BoE can’t take rates much lower – but that doesn’t mean these central bankers won’t try to stimulate.

And for me the key is the US is likely to retain a policy and bond rate pickup and relatively better asset returns going forward.

USD Index (DXY) weekly – TradingView

But price is an important guide and the DXY has reversed while the Euro has rallied for two days after making what look like decent reversal candles Thursday. Looking at the weekly chart of the DXY above you can see the big reversal. It’s one of those candles that could signal the end of this little 3 week upmove. Down and through 97.80 this week and we could see a run toward 97.00 again, perhaps even 96.00ish. But overall the USD remains in an uptrend. 

EURUSD Weekly -TradingView

Turning to the Euro now and it retains a downside bias in the same way the USD retains its topside bias. I’m expecting a test of the downside trend line which has held Euro on a number of occasions in the past year at 1.0980ish. But as I wrote Friday morning in my newsletter we might see a run to 1.1200 maybe 1.1230 first.

But I’m a seller of rallies of currencies against the USD.

That’s particularly the case with Sterling which seems biased substantially lower. I’ve been writing in the daily for a couple of months Brexit was under priced and a move to 1.17 is a chance technically. For the moment though the key support level is 1.1950 with resistance at 1.2400/30. 

GBPUSD Weekly – TradingView

CFTC Data 

Remember I always write that positioning is only important if we get a catalyst to cause an unwind. You’d have to think that catalyst arrived for shorts in US 10’s and other rates markets last week. Of course the CFTC data is only as at Tuesday so it will be interesting when the next batch of data is released this Friday if the rally has indeed been fuelled by a short unwind as I’d guess.

Looking elsewhere gold bulls are doing well and the USD is still exposed in a total positioning sense with substantial longs and shorts against other currencies like the Euro, Sterling, Aussie and so on. The catalyst for a shift in these positions remains absent at present however.

The week ahead

On the data front Monday kicks off the week ahead with global services PMI day. Will tehy continue to resist the downdraft of manufacturing? Australia, Japan, and CHina kick things off before the European and US updates. That will also give us the composite indicators as well. Also out are ANZ job ads in Australia as well as the monthly inflation guage.

Tuesday is trade day in Australia with another mnter surplus expected while the RBA is guesstiated to sit pat Tuesday after the next couple of rate cuts. The leading and coincident Indexes are out in Japan as well as factory orders and construction PMI in Germany. IBD/TIPP survey is out in the US along with JOLTS. API crude is released after the bell at 4.30pm New York.

Wednesday we get home loan dat for Australia with Junes figures to be released. Industrial production is out in Germany and the RBI has a decision on Indian inteest rates which is expected to drop to 5.5%. Chinese reserves data might get some interest and the ECB has a non-monetary policy meeting. EIA crude and associated data is out in teh US along with consumer credit. 

Thursday kicks off with a speech from Assistant Governor Michelle Bullock but that shouldn’t be too specific. Notice it’s quite on the central banker front this week. Chinese trade is out and will be important for sentiment about the trade war and its impacts, Japans eco watchers survey and bank lending is also out. Jobless claims and wholesale inventories are out in the US.

Friday is going to be interesting and I am looking forward to see where Q2 GDP prints. Consensus is for just 0.1% at the moment, but we’ll all be very interested in the private consumption part of this as a guide to the future of developed economies I think. Chinese inflation is out and the the RBA’s quarterly Statement on Monetary Policy is to be released as well. Will they adjust their forecasts for growth and inflation after the rate cuts? If not, then more cuts are coming certainly.

Also out Friday is German trade, another bellwether for sentiment about the global economy at the moment, UK Q2 GDP and associated data is also out along with Italian inflation, Canadian jobs data, and in teh United States we get PPI data.   

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 escalations questions hopes of a central bank rescue – McKenna Macro Markets Weekly

Here come the central bankers – McKenna Macro Markets Weekly

on July 28, 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’s end saw US growth do better than expected. It was another nail in the coffin for the Euro after Mario Draghi said the ECB is coming with more stimulus. That the Euro held 1.1100 though and European stocks didn’t like his message is a sign that sentiment is now fundamental to markets.

And as the Euro and DAX displayed last week it’s sentiment not in the economy or even stocks intrinsically themselves right now but how much vodka, gin, bourbon,or whiskey is going to be added to the central bank punchbowl.

So the fed, and to a lesser extent the BoJ and BoE wilol be the main games this week. Can they deliver or will they disappoint heightened expectations? Which ever way they go it’s likely to make last week’s moves look like noise.

And then of course we’ll finsih with US non-farms Friday. 

The Week That Was…

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

Key Themes driving markets

Shouldn’t we all stop being angry and just trade the market in front of us?

I feel like I have to ask you that question in this week’s note because of the polarisation I consistently and increasingly see in Twitter and in talking heads comments and interactions about the state of the economy and markets across the globe. The key thing for me is that many traders are constantly reacting to things they either hate – or love – in such a manner as to make them not be able to process the big picture.

Take Dnoald Trump’s consistent and obvious message to get what he wants and manipulate the media narrative and in some senses the narrative and price action in markets. We’ve seen it on trade talks, we’ve seen him cher lead the economy, he’s bashed the Fed (and it seems like they blinked) and now he’s NOT coming after the US dollar which is really a hint that he will in time.

It’s not just Trump though is it? 

This is exactly what Turkish President Erdogan is doing with the central bank and interest rates in Turkey. Tell me it’s not what European leaders have just done by appointing the naturally dovish Christine Lagarde to head the ECB not one of the more hawkish cnadidates like the Bundesbank’s Jens Weidman. Tell me the abandonment of politicians from the economic growth space across the globe while they leave their “independant” central banks to their own rate cutting devices isn’t an attempt to influence policy – by doing nothing they get lower rates, and their mates at the investment banks and the big funds make more money.

All the while inequality grows, the Davos crowd wrings their hands and tut-tuts about what they are to do in their usual disengenuous manner.  They have screwed up global growth, they are screwing up the economy, they are threatening the very fabric of democracy, because monetary policy is at the end of its effective life. 

Hard to argue with Rich Kleinbauer or Jim Bianco is it?

Source: Twitter

But what we’re trying to do here is navigate these altered markets where there is manipulation of the price of money as an attempt to then in turn manipulate the markets so as to forestall what central bankers feel would happen if they did not do these policies and drive asset prices – in lieu of the economy – higher.

Source: Twitter

We know it will be time to pay the piper eventually. Certainly recently the doomsday cultists or probably more the Cassandra complex folks are getting louder and shoutier as central banks render moot their predictions of death and beyond for markets. We know at some point we’ll see stocks and other asssets go sideways for a protracted period in order to pay back the solid gains that have accompanied a stagnating developed economic outlook. And we know we’ll have periods of market funkyness – I’M EXPECTING ONE IN THE NEXT FEW MONTHS AGAIN.

But I want to buy it.

The issue, the really big one, is that Mario Draghi made it clear last week the ECB is not done yet and is unwilling to let the European economy and markets find their own level, Blackrock is even flying the “buy stocks” kite to see if the ECB will bite. If Japan is able to leap that hurdle then why not the ECB and ultimately the Fed is clearly the hypothesis which just might hel[ their business – or am I being cynical. The message the big clear one is folks can rage against the seeming idiocy of central bank policies, but lacking the counter factual they can (and will) keep telling us that things would have been worse had they not been so accommodative.

And again, maybe they are right. The trouble though is the shape of developed market economies is changing – increasingly they are and are becoming more so service based. As I noted during the week, the point I often make is that I strongly believe that service based economies have lower potential growth and also lower amplitude of growth. It makes it hard for the hand wringers to wring their hands and it makes it harder too for Central Banks to get the stimulus and inflation they are looking for. 

As I highlighted in my retweet of Daniel Lacalles Short Video – which you can watch here.

Source: Twitter

Why does this matter you may ask? Because policy and interest rate performance, convergence, and divergence drives asset returns in both an absolute and relative performance basis. Is it any wonder the USD is bid again and will remain so. But is it any wonder rates and bond markets are expecting more central bank policy action? It’s how the Fed is going to justify this week’s easing and the signal for more even though the US economy is defying the worst of the hand wringers worries. 

To the Fed then… 

US advance Q2 GDP was a bit stronger than expected with a print of 2.1% against 1.8% expected. It’s not a huge beat when you take into account the way the annualised rate is calculated. And there are many who automatically deconstructed and pooh poohed the outcome and say the uptick in household consumption which was such a big driver of this growth rate is aberrant. 

It may well be only time will tell. But across my career I’ve always felt the deconstructers don’t add to much to my day and certainly not my trades because when I think about data behaviourally the market and most traders look back and say “what was the print, and what did the forex, rates, bonds, comodity, or stock markets do”. They then move from there. 

So along the lines of recognising the data is the data that the markets will trade off it is worth recognsing it was a beat and it has helped the US CESI score get back above that of Europe for the first time since early April this year. This has implications for sentiment toward and thus price action of US assets – dollar, bonds, stocks etcetera etcetera – as traders and investors adjust to this rebalancing of econoic performance. 

That’s going to be even more important if the Fed follows through with the 25 bps easing in policy this week. There is currently a 78.6% chance of a 25 bps cut this week with the remainder of the probability being for the larger 50 bps cut. So the market is expecting action and the promise of more given the probability of rates being between 50 and 75 bps below the current range for Fed funds of 225/250 after the December FOMC meeting sitting at 71.1%. Expectations of a 100bps move are at 14.1% and a 125 point move 1.9%. There is a 12.8% chance the Fed is one and done according to the CME FedWatch tool.

The key for US – and global – assets is that if the Fed is easing while the US economy is doing okay then we can continue to see US assets outperform. The USD hasn’t broken 98.40/50 yet, the Euro is still clinging to 1.1100.

But in a world where the ECB will obviously be easing, where the BoJ is in strife again as Prime Minister Abe pushes toward the consumption tax, where the BoE is struggling with Brexit, South Korea is slowing, and many other nations have central bankers with an easing bias – not to mention the vast swathe of sovereigns bonds that cost investors money to hold with rates below zero – is it any wonder TINA and FOMO are reigning supreme again.   

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

I got a nice note from a fella Friday saying “you’re product is awesome” but I do need more subscribers. So let me explain:

I do macro differently to many. Others like to hold strong views and then bet on them and their analysis framework being right from the get go. My approach is more course correction style – a very Phil Tetlock type approach – where I hold a strong view but then adjust as new information comes in. 

Part of the reason I do that is because I know the markets can run against me as they chase a fashion or a trend for longer than my pocket book can handle and I want to run with the herd for a little before I run against it. 

The other reason is that I you, my readers, don’t often hold these massive Macro positions for the period that is required and with the deep pockets needed to get them to pay off. So I have the structural and then tactical views – mostly here we talk tactically.

And a big part of the tactical approach is my MACD system which is published as part of the daily note. Here’s the update as at CoB NY Friday. 

As at 3.11pm Sydney Sunday July 28

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 up against resistance – can the Fed deliver?

Is it time to sell the fact? That’s the big question on my mind as the S&P bangs up against this overhead resistance you can see on the weekly below.

Of course that would for me be a long reduction strategy not an outright short for me because the weekly JimmyR is still pointing higher so a structural long is favoured in that regard. 

S&P 500 (futures) Weekly – TradingView

The question of where to next for stocks – in the US and because of the bellwether status of the S&P the globe – will really bedecided by the Fed and what it does, implies, and says.

Could it shock with a 50 bps cut? Absolutely given John Williams suggested the “r-star” neutral rate is around half a percent and given Fed chair Powell quietly raged on Capitol Hill that rates are not as accomodative as he thought.

Will they cut 50 bps though? Now we are firmly into the play the man not the ball game again. Would I cut 50 bps? Yes, absolutely. If I’m of a mind to cut as insurance to extend the expansion and I’m aware of the asymmetry of monetary policy efficiacy in th developed world right now then yes I would cut 50 bps this week – it won’t startle the horses if the message is delivered properly.

That is the economy is doing okay, we want to make sure the expansion continues for as long as possible, and we want to ensure we do our utmost not to follow Japan and Europe down the road to economic perdition.

But alas, I’m not on the Fed and don’t have the self-imposed strictures central bankers do. So if even James Bullard reckons 25 bps then that’s likely all we’ll get from the FOMC this week. 

Be warned folks that is an uncertain outcome then. I say that because with the 25 bps priced in such a ove elevates Chair Powell’s press conference to the fulcrum against which markets will react. That’s a disquieting outcome if you watched his press conferences over the past 12 months – he is as prone to misstep as a fella leaving the bar late after one too many.     

USD – the Trump Administrations says its not ready to intervene

Hearing “we have full faith in the coach” from the club president is often the death knell for that coach heard loud and clear across the club and the sport.

It was with that in mind that I heard Friday Larry Kudlow say the President had decided not to do anything about the USD at this time. Clearly it seems to have been contemplated and discussed and my guess it reamins on the table.

But, in the absence of a quick series of Fed rate cuts and a collapse in the relative performance of the US economy my guess would be that like unilateral currency intervention over the past couple of decades it would prove ephemeral and simply provide me and others with a buying opportunity for the Greenback before it roared back higher and bloodied the President’s nose.

That’s why he’s not doing anything at the moment – the Goldman Guy, Steve Mnuchin and his mate “King Dollar” Larry Kudlow might have persuaded the President that forex markets might actually hand him his hat. It doesn’t mean he won’t try. But it does mean any intervention is unlikely to work for more than a short time unless the US is joined by other central banks or goes down a Banana Republic route.

USD Index (DXY) Weekly – TradingView

So for the moment the USD looks biased back to the top of the recent range at 98.40 and if that gives way it’s 99.20/30 where the top of the channel lies.

CESI scores, the economy, asset return potential, and a positive nominal return all argue for continued USD outperformance. I’ll discuss the moves in the CAD, Sing, Aussie, Sterling (biased under 1.20 now) and others in the daily note. But for the moment Euro looks like it’s heading toward 1.0980/1.1000. Maybe lower, all we need is a close below 1.1100

EURUSD Weekly – TradingView

CFTC Data 

I’ve talked a lot about the realitythat positioning doesn’t amtter unless or until there is a catayst to flip folks out and make them run the other way.At present that catalyst is absent for the USD longs (other currency shorts) nor is it in evidence for the 10 year bond short which grew again last week 

Gold is in a similar spot but the CAD may be vulnerable with USDCAD above 1.3150. WTI too looked like it was getting close but again found support. Check out this WTI chart below – we know a level, perhaps THE level.

WTI (CLc terms) Daily – TradingView

The week ahead

On the data front Monday kicks off slowly. Japanese retail sales are out as are sales in Spain along with inflation, Italy releases its PPI, and the UK has mortgage lending and consumer credit. Then it’s just the Dallas Fed manufacturing which I will be keenly watching…if it heads in the same direction as the NYEMpire and Philly Fed it would be a good sign the regional surveys are leading the national one.

Tuesday is Japanese employment and a BoJ interest ate decision. French GDP for Q2 is out with the German Gfk consumer confidence survey. The Euro Area also releases a raft of business and consumer sentiment data. German infaltion is out and then it is US personal income and spending data along with house rice indexes and pending home sales. API crude is out after the bell in my early morning.

Wednesday is interesting as the end of the month with the release of South Korean industrial production and retails sales data along with China’s NBS manufacturing and services PMI data. Australia’s inflation is out Wednesday as well along with private sector credit. Then it is German retail sales and unemployment, French inflation, Spains Q2 GDP, and the EU Q2 GDP and infaltion – HUGE folks. Italian and Mexican Q2 GDP are also out.

In the US it is the ECI, ADP employment, Chicago PMI (also a biggie) and of course EIA energy data. Canada releases monthly GDP and PPI. And of course we get the Fed’s interest rate decision at 2pm Washington time.

We’ll deal withthe fall out from that in Asia Thursday as the new month kicks off and we get the updates manufacturing PMI data from across the globe.New Home sales are out in Australia, China’s PMI is going to be very important but of course so will the aggregate of the globes releases. 

The other big event Thursday is the BoE decision and the Challenger job data and jobless claims while we get ready for Friday’s non-farms. ISM in the US is also very important, more so than the Markit manufacturing PMI because of its long history.

Friday kicks off with June retail sales for Australia as well as PPI. Retail sales are out in hte Euro area along with its PPI as well. Canadian trade is out but the big one the really big one is US non-farms.

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 MckennaHere come the central bankers – McKenna Macro Markets Weekly

Fed adds volatility as it mixes its message – McKenna Macro Markets Weekly

on July 21, 2019

Hi folks, welcome to my weekly newsletter. 

This is post is sponsored by SMARTMarkets 

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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

I’ll talk more about the Fed below and their ham-fisted misdirection of markets through the speech by New York Fed President John Williams late last week. To say that Jay Powell hasn’t been the best communicator as Chair is no understatement but the misstep from Williams last week is a whole other level.

In the end markets are betting on a 25 bps cut at week’s end with more to come. But the volatility of messaging also caused volatility in markets gold especially. Forex, stocks, and bonds too- but less so.

It’s a black out period now so we are free of Fed somersaults and false flags till the FOMC at months end. But if my read of some of the regional manufacturing surveys is right the volatility may come from the data this week when Markit releases their flash PMI’s for July.

The Week That Was…

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

Key Themes driving markets

Ugh, the Fed really are disconnected from the real world

What exactly is the Fed thinking.

I was so struck by the similarity in messaging between Fed Chair Powell’s an “ounce of prevention being better than a pound of cure” and NY Fed President Williams leading off with his wife being Professor of Nursing and favouring vaccination that my senses were attuned to a message of rare cuts.

Clearly I wasn’t alone. And then when he said r-star, the neutral rate of interest was 0.5% in the US and across the globe at the moment it seemed clear the other part of Powell’s message -delivered on Capitol Hill the week before – that rates weren’t as accomodative as the Fed thought was being driven home.

That Williams went on to say near the zero bound central bankers need to go big or go home reinforced the message that maybe Neel Kashkari is now the centre of Fed thinking and 50 points is coming at this months FOMC meeting.

Indeed were it not for the fact the NYFed walked back Williams comments as “academic” I would have left my comment that I was now expecting a 50 bps cut this month.

Source: Twitter

Playing the man and woman not the ball

As you can see above I had a bit of a rant. And that is the issue isn’t it. It’s not what’s going on it’s what is being said. 

I think the US economy is doing okay. It’s slowing, but like the Australian economy for many years till recently, the strength of the jobs market is enough to forestall the worst fears of a slowdown – it is a service based economy so that seems a natural correlation to me.

And like the RBA here in Australia- again until recently – it seems to me the right course of action for the Fed even with a solid economy is to ease once or twice to give the economy a little breathing room.

But it’s not the panic stations senior Fed messaging volatility – Powell, Calrida, and Williams – appears to suggest.

The trouble though is we don’t have the luxury of playing the ball – economy – any more. We have to play the men and women of central banking land. They have increasingly injected themselves into the debate. Not entirely their fault when governments abrogate their responsibilities for the economy though is it.

But this is the world we live in. The one of whatever it takes, of an ounce of prevention, of stimulus till inflation picks up, of vaccinations.

It’s a world where words matter and the Fed just got an F for signalling. Indeed after the bell Friday Boston Fed’s Eric Rosengren lined up AGAINST a rate hike. 

What is they say about airing one’s dirty laundry in public? Let’s see what they do at the end of the month. 25 seems a lock with a signal more to follow. 

That increased vol a little – but not a lot – here’s bonds

What was really interesting about the Williams reversal is that it caused a lot of volatility in Fed expectations for July. Whereas at 3.51pm Central Time Thursday the CME FedWatch tool had the probability of a 50 bps cuts at 71% after the NYFed “clarified” Williams comments as “academic” at the close of business for the week the probability had flipped back to just an 22.5% chance of the large cut.

A quarter point cut is a lock regardless of what Eric Rosengren said. Can you imagine the market’s reaction, let alone President Trump’s to the Fed passing at this point after all the signalling.

Source: Twitter

And as my tweet above states Williams has really belled the cat folks. How did Powell credibly say we are a long way from neutral last year if Willaims believes this as an “acadmeic”. Of course it could be a fresh realisation that the models were wrong as POwell intimated before congress but is somewhat difficult to believe.

Anyway, I still think the Fed cuts 1 or 2 times this year.And I still see bonds in a structural bull market. That said when you look at the 10’s in the chart below you can see the break out and retest that we’ve had this week which could actually set up a move higher in yield – you you look at technicals only. 

US 2-10 spread (top), US 10’s (middle), US 2’s (bottom) – TradingView

Under the influence of rate cut expectations the 2’s never did break higher and so look a little different technically. Unless of course the flash PMI coming up this week prints as strongly as the recent NYEmpire and Philly Fed manufacturing indexes suggest it might.

Which gets us back to the conundrum. The language of Kashkari, Powell and Williams, to a lesser extent Clarida and Bullard is that the US economy neds cuts now. But the data doesn’t necessarilty support that.

So think of this and the next cut as genuine insurance. Then the Fed – hopefully – may be able to hold rates for an extended period.

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

I do macro differently to many. Others like to hold strong views and then bet on them and their analysis framework being right from the get go. My approach is more course correction style – a very Phil Tetlock type approach – where I hold a strong view but then adjust as new information comes in. 

Part of the reason I do that is because I know the markets can run against me as they chase a fashion or a trend for longer than my pocket book can handle and I want to run with the herd for a little before I run against it. 

The other reason is that I you, my readers, don’t often hold these massive Macro positions for the period that is required and with the deep pockets needed to get them to pay off. So I have the structural and then tactical views – mostly here we talk tactically.

And a big part of the tactical approach is my MACD system which is published as part of the daily note. Here’s the update as at CoB NY Friday. 

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

Time for stocks to pull back into the EoM FOMC meeting?

Speaking of structural and tacticl views, with the JimmyR still pointed higher my core stocks position is long. Tactically though when you look at the price action last week, the earning season which isn’t getting any real positive resonance, and then look at this weekly chart I’m of a tactical view that stocks may slip into the FOMC meeting.

In my daily note I’ve been talking about 2950ish as that is where the first Fibo support comes in and it is also now where the 30 ema sits after Friday’s close below the 15 ema on the dailies – the first such close since June 5. That and the MACD suggest the daily rally is at risk – as you can see in the system summary above it is short on the dailies.

S&P 500 Weekly (futures) – TradingView

Looking at the weekly chart above the key level to watch is 2906 where the 15 ema sits. With the 38.2% retracement of the most recent upleg coming in at 2913 it would be reasonable to expect that if the buyers are a bit cautious now price can drift back to the vicinty of these two levels, lets say under 2920. Anydrop through there and it’s 2840/60 as the big support zone.

Looking at the DAX weekly chart you can see it too looks biased back to test support. In this case it’s the uptrend from the start of the 2019 rally. Trendline support comes in around 12,000 which is just about 10 points or so above the 30 week ema. The 15 week ema is first support at 12149. 

DAX Weekly – TradingView

My sense is at some point we’ll get another decent pullback and I have cash on the sidelines ready to be deployed when that comes. But I guess so do many, so the risk is it doesnt happen. So for the other portion of my fund I remain structurally long while tactically hedging. 

USD, Euro, forex broadly dancing on the spot – Fed a range reinforcer

The USD index and Euro remain in a broad range – 95.00/98.50 and 1.1100/1.1450. So, all the tooing and froing is really just dancing on the spot while we see where the real policy and economic divergence/convergence is going to be.

Naturally the apprearance of an aggressive Fed spooks USD longs as there is a lot of points of convergence between rates in the US and Europe – elsewhere too – that aggressive Fed cuts can drive.

As you know that’s not my base case. I see 1 or 2 cuts from the Fed as a smart move to extend the expansion over the rest of 2019 – insurance cuts if you will.

And of course I see more easing – such as they can – and QE coming again from the ECB. The RBA seems likely to ease too, the BoE is less hawkish, the BoJ is Buzz Lightyear easing to infinity and beyond, China is struggling still, South Korea seems to be in a world of pain, SIngapore is getting that feeling too, while Turkey is going to cut because – well the President said so.

USD INdex (DXY) – Trading View

At any other time the USD’s charms would be self evident. But in the mixed up world of central bank signalling, Trumps interventions in central banking and currency markets the fact so many central banks face a slowing economy and need to cut rates only serves to reinforce policy convergence. And that is not a USD positive right now.

But that said, everyone elses troubles stops the outright selling as well – hence the rangese.

And you can see the rangy nature of major forex write large here in this weekly Euro chart. We need a break of either side of the 1.1100/1.1450 range to get the next big move underway.Till then its pretty much noise within the range. 

Euro Weekly – TradingView

And one indicator worth watching for the USD to start to gain a little ground, or not as may be the case, is the relative performance of its economy against expectations as well as against other nations. US data has started to turn and is on the improve – though it remains deeply in negative territoy as measured by the Citibnak Economic Surprise Index (CESI) scores.

CFTC Data 

When you are looking at data on positioning there are a number of things you need to think about. The first is what the absolute number actually tells you. IE is itat an extreme or not. The second is whether the net position as a function of total open interest is material enough to worry about. And another is what si the catalyst or level that may cause positions to be unwound and prices move aggressively in the other direction.

Naturally who is holding the positions and what their reaction function might be is also important.  

I say all that as I wonder about the CFTC data and just where things might get spicy for traders, positioning, and prices.  In the 10’s traders are happy to build more shorts into the recent spike – so we’d likely need to see new lows to change that. For the USD it’s clear that there has been a small dimunution in confidence that it is going to rise as positions have been pared, in particular CAD buyers have taken USDCAD to fresh lows as longs have built (chicken and egg I know).

If I was to puck a few points of concern for positioning I’d say if the AUDUSD can get above 72 centrs things could get interesting, if BoJo becomes Prime Minister and resiles from his October 31 or else calls Sterling could rathchet. Perhaps Yen below 107.20 and WTI below $54.00

The week ahead

I’ll write about gold and oil in my daily Monday. Suffice to say the British/Iranian face off is an interesting one especially given where the price pulled up last week while when it comes to gold TINA is driving the buying and is unlikely to stop in a hurry.

Now to the week ahead.

Earnings season continues – but it’s not really the headline at the moment it often is. Sure daya to day a company here or there is getting headlines as a “bellwether” for the economy. But it seems clear right now interest rate expectations are the most powerful driver of stocks.

Monday is very quite with nothing of note in Asia and then only the Bundesbank reports and a speech by BOJ governor Kuroda to get us interested.

Tuesday we have a speech from RBA assistant governor Kent – but its on the CLF so it won’t have any monetary policy implications. the CBI industrial trends is out in the UK and we get a speech from the BoE’s Haldane which might be interesting as the bank reconstructs itself from its hawkishness. Redbook and existing home sales are out in the US along with the Richmond Fed index. API crude data is out after the bell. 

Wednesday is probably the most important day of data for the week with the release of the “flash” PMI data from Markit for this month. It’s a blatant attempt to get two bites at the marketing cherry for this data but it’s market moving nonetheless. New Home Sales and EIA energy data are also out.

Look out for the “canary in the coal mine” headlines Thursday with the relase of South Korean Q2 GDP. RBA governor Lowe is speaking at the Anika Foundation with the topic – Inflation Targeting and Economic Welfare. Sounds like he’ll be doing a lot of justification in that one. But the Anika Foundation speech as become an important one annually for RBA governors over the year – tone setting.

Germany releases Ifo, we get an ECB interest rate decision and no doubt we’ll all be hanging off what Mario Draghi has to say. And then it is durable goods in the US and the goods trade balance, not to mention another regional PMI with the release of the Kansas City Fed manufacturing PMI. 

Friday is biggish too. Tokyo CPI is out, German import prices, and then US advance GDP for Q2. Associated price adta is also out. This is a biggie in the run up to the fed meeting the following 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 MckennaFed adds volatility as it mixes its message – McKenna Macro Markets Weekly