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

on June 16, 2019

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Key Takeaway

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

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

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

The Week That Was…

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

Key Themes driving markets

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Bonds are getting back near important support levels for yields

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

Source: Refinitiv

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

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

US 10 year yields weekly – TradingView

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

Source: Twitter

US stocks held their ground – what’s next

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

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

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

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

S&P 500 futures weekly – TradingView

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

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

Wrong – US dollar recovers

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

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

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

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

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

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

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

USD Index (DXY) Weekly – TradingView

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

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

Oil, after a tumultuous week

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

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

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

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

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

WTI (CLc futures basis) Weekly – TradingView

And just quickly, the CFTC data

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

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

Source: CFTC

The week ahead

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

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

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

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

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

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


Greg McKenna
@gregorymckenna on Twitter
In collaboration with SMART Markets

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