Stalling risk momentum makes for an interesting market setup – McKenna Macro Markets Weekly

on February 10, 2019

Hi folks, welcome to my weekly newsletter. 

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Key Takeaway

Stocks stalled, indeed the S&P 500 only got back into the black for the week in the last 5 minutes of trade for the week.  That’s a warning.

The USD was better bid across the board but just couldn’t break out – Yet! And of course the very thing that is stalling stocks, causing bond rates to fall, and adding to the general sense of caution after a strong rally in stocks – SLOWING GLOBAL GROWTH – saw oil dip back after failing to break resistance.

So, we are in hiatus. Waiting for positive trade news in many quarters to push stocks to the next leg higher. But will it? Friday ended with what seemed to be the promise of QE to infinity – not sure though that’s what was proposed. But what it shows is there is still a lot of hope in this risk rally from the lows.

It’s not necessarily over. But there are signs in the charts that caution is as warranted now as it was in late November and early December. Or at least October.

Weekly performance Feb 1 to 8 2019

Key Themes driving markets

The US dollar had its best week in six month but hasn’t broken out

Like the donkey in Shrek I kind of feel like saying “are we there yet”. By that I mean the realisation that for all the faults that there may be in the US there are greater and in some ways more intractable political and economic threats outside the US.

You can see that in the French-Italian spat as the French President, his eyes on the upcoming EU elections in May – faces off against Italy’s populists. You can see it in the constant downgrades to the German and EU wide economic outlook – Italy is in recession for goodness sake.

Yet even though the Citibank Economic Surprise index shows the moribund state of the EU data flow and even though it shows that on balance the US data is still okay it clear in the price action trader are either still too long of Greenbacks or not yet ready to re-embrace the US dollar.

(Unfortunately the CFTC data is still catching up so we don’t know yet the actual positioning – seriously are they doing it by hand?)

USD Index – Top, Daily and Monthly; Bottom Weekly and against the USDCNH rate

So the US is on the cusp of a break but – not yet there yet. Sorry Donkey!

A move above 96.70 would open the topside toward the uber-important 97.70/98.00 region which has constrained the US for some time now. A big part of that is the heavy longs that were being carried as well as the re-calibration of Fed expectations and notions the US will soon join the rest of the world in slowing down.

It likely will. But in the relatively game of least ugly which is global foreign exchange trading the USD rally is likely to be broad and powerful sometime in the next few months.

For the moment though I’ll make you 93.70/97.70 – give or take – as the range for the moment.

Euro is still in its range but could break

Like the USD Index – of course because it is essentially a derivative of the Euro and some other currencies against the USD – the Euro is stuck in a big old range.


With the constancy of the weakness in EU data and thus the growth outlook even the most ardent USD haters (why else would you buy Euro unless you are repatriating funds from trade) are a little more sceptical about the outlook for the single currency.

Indeed throw in the France/Italy spat and the upcoming EU Parliamentary elections at the end of May this year and you could make the case that fears will grow about the whole European experiment the closer we get to that data and weigh on the EURUSD.

But, it’s worth noting there doesn’t appear to be any groundswell – even wind chop really – for change to the single currency.

So it’s going to be data and expectations about growth and central bank policy which will be the driver of the Euro (a little Brexit too).

And of course the price action is key.

As you can see in the Euro chart above it is drifting back toward the bottom of the range inside the range – 1.1280/1.1570. A break of 1.1280 opens the low of 2018 at 1.1215 and of course there is that pesky neckline at 1.1150 now.

Euro would need to get back above 1.14 to negate the negative short term outlook.

QE to infinity rescued stocks late Friday

What traders viewed as a QE to infinity story dropped late in New York trade Friday. But I think that market might have the wrong end of the stick, or at least I hope they do.

All Federal Reserve Banks: Total Assets

Here’s a thread I put on Twitter Saturday, which I’ve edited to make it readable in this format:

Here’s the QE to infinity story. “Fed debating if balance sheet should be regular tool, Daly says”. That’s San Francisco Fed President Mary Daly.

I don’t think the way the market took it is correct.

What the news tells me is the Fed is debating whether the past 20 or so years of monetary policy by decree – the rate is “here” at 5%, 3%, 1%, 0% or now 2.25-2.50% – has failed and they want to go back to old world (when I first started in markets) when they (central banks around the world) acted in the market all the time to get rates at a level they wanted.

That means the Fed and others will buy AND SELL securities to nudge rates around…

It’s easy to characterise this as a just buy all the time because of where the economy is at (or where markets think its at). But it simply recognises (finally) QE and QT are probably symmetrical. Hallelujah!!!

That’s something anyone trading rates & bonds before the “policy by decree” era will remember.

Daly said – “You could imagine executing policy with your interest rate as your primary tool and the balance sheet as a secondary tool, but one that you would use more readily”.

So yeah, Daly said we can use QE as a tool.

But the bigger AND BETTER debate (maybe epiphany) the Fed has had is this is old school central banking, QE is not one sided and if the market can get used to buying and selling bonds they can more effectively manage the economy. 5/5

Of course I could be wrong and maybe it is just QE to infinity in which case the world economy is utterly screwed.

There are some signs of that anyway right now…moving on.

Bonds and oil tell a different story to stocks as earnings growth slows

People who read my daily writings know that I have highlighted the divergence in narratives you can draw from the performance of stocks, bonds, and oil prices in the United states.

Via TradingView – US10’s, S&P 500, and WTI Crude Oil

Stocks noticed towards week’s end and the rally stalled. It’s not terminal because in the 2.55-2.82% zone US 10’s a re pretty Goldilocksy in what they say about the US economic outlook. But while oil and rates stop rising and momentum washes out of stocks the chance of a decent retracement grows.

Likewise the  earnings outlook has and is being downgraded with Reuters reporting, “Analysts expect first-quarter earnings for S&P 500 companies to decline 0.1 percent from a year earlier, which would be the first quarterly profit decline for the group since 2016, according to IBES data from Refinitiv…The latest forecast is down sharply from the start of the year, when analysts estimated growth of 5.3 percent for the quarter”.

Some revision!

The good news is expectations are still Panglossian positive with Reuters saying, “second-quarter S&P 500 earnings are expected to increase 3.6 percent from a year earlier, while profit growth for all of 2019 is estimated at 4.3 percent, based on Refinitiv data”.

If the rally is ending now is a good time and place for it to happen

Back to the charts then and as you can see in this weekly S&P 500 even with the later rally Friday the weekly candle and failure at the 50 day moving average could be telling. It could be a signal of a top for this run and that a pause either in time or price is in the offing.

S&P 500 futures Weekly (continuous contract) – what a candle.

My sense is that 2,676/80 (last week’s low and previous resistance) needs to break to actually change the outlook from a pause and stall in momentum to something more pernicious.

And worth noting I have sell signals on my weekly system if that level breaks, along with other stocks sells.

What’s next for the Aussie dollar as the RBA downgrades growth and puts cuts on the table

The Australian dollar is again under a lot of pressure. It found some buyers at 0.705ish Friday after the RBA on Friday – via the quarterly Statement on Monetary Policy – confirmed the more troubling outlook for the Australian economy Governor Lowe had outline Wednesday.

The chances of a rate cut have thus increased materially if house prices continue to slip hurting consumption and employment. Of course it’s not a done deal yet we might see the Aussie fall into the 60’s – 68 cents would be good, 65 cents better.

That might actually save the economy from itself.

Looking at the chart then I’d say we saw a big reversal last week after failure at the 200 day moving average. That saw the wedge bottom break but support emerge around 0.7050 at week’s end.

Chance of retest of break at 0.7135/40 (wedge bottom). But below that the downside to flash crash recovery low at 0.6993 opens up. Below that support is 0.69545/50 and 0.6850/80.


The week ahead

There is a lot on the Calendar this week and the focus is China both because it’s back and we want to see where its markets and the Yuan head but also because there is a raft of important data slated for the week.

leaving aside the trade talks that includes,  money supply, foreign exchange reserves, and new loans Monday, FDI Tuesday, Trade on Thursday (HUGE) and PPI and CPI Friday – also huge.

The UK has GDP, industrial and manufacturing production Monday, trade too. And of course we are all eyes on the Brexit negotiations and any chance of a deal that stops the hard-Brexit growing in probability by the day. At least till the players look over the precipice. Also in the UK this week we get retail, consumer and producer prices. retail sales close out the week.

Australia has home loan data out but we all know things are parlous there. We also get the next update of the NAB business survey – this time for January. Did things improve from the weak December results we saw recently? Probably not. We’ll see Tuesday. Westpac consumer confidence is on Wednesday so these two data points WILL influence markets this week in Australia.

In the US we hear from Powell, George, an Mester among others this week. Unit labour costs are out as is JOLTS, CPI and PPI and retail sales. That will all be a test for sentiment.

in the EU we have a Eurogroup meeting Monday, Industrial production Wednesday, and then Thursday is a big one with the release of German and EU GDP for Q4 – could it be any worse than we already know? EU trade is out Friday.

It’s a big week, enjoy.

Have a great week

Greg McKenna
@gregorymckenna on Twitter
In collaboration with SMART Markets..[/vc_column_text]

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Greg MckennaStalling risk momentum makes for an interesting market setup – McKenna Macro Markets Weekly