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

on June 30, 2019

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Key Takeaway

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

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

Let’s have a look at the setup…

The Week That Was…

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

Key Themes driving markets

Base case scenario wins out as Trump backs away from escalation

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

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

President Trump – in a 3 tweet thread – said:

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

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

Source: Twitter

So where does that leave markets and the economy?

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

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

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

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

Bond rally now at risk, Fed to take its time

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

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

US 10 year Treasury yields weekly – TradingView

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

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

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

US 2 year Treasury yields weekly – TradingView

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

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

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

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

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

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

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

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

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

As at 16.36 Sunday 30 June for Friday’s close

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Stocks ready to reach for new highs?

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

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

S&P 500 (futures) weekly – TradingView

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

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

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

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

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

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

USD Index (DXY) weekly – TradingView

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

EURUSD daily – TradingView

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

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

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

USDCNH weekoly – TradingView

A look at CFTC positioning

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

Source: CFTC via Refinitiv

The week ahead

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

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

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

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

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

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


Greg McKenna
@gregorymckenna on Twitter
In collaboration with SMART Markets

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