Posted on: 15 Aug, 2019
The buying interest back into the US Dollar has returned, even if not as intensely as the demand flows seen in the Japanese Yen and the Swiss Franc, which remain kings in times of risk aversion.
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The last 48 hours of trading since Trump partially blinked on tariffs to China have provided an important revelation in terms of the opinion the market has formed about the new all-time low in trust between the US and China, even if both sides stick to the pretense of further trade talks by early Sept. The market is essentially not buying into the latest concession and instead it has swiftly returned into a 'risk-off' tone. The Japanese Yen, the Swiss Franc and the US Dollar drew the most interest, while high beta G 10 FX (AUD, NZD, CAD) had a miserable day. Another type of record low, this time on the long-dated US 30y bond yield, was also seen, which represents a watershed mainstream moment as a headline grabber to raise the awareness of how bleak the outlook for inflation and growth in the US look. This measure of projected financial conditions, via bond valuations, was further cemented after the US yield curve 2y-10y inverted for the first time since 2017. Add into the mix the negative growth in Germany for Q2, alongside the lowest industrial output by the latter, and one can find even more logic why markets can't find lasting enthusiasm.
The indices show the performance of a particular currency vs G8 FX. An educational article about how to build your own currency meter can be found in the Global Prime's Research section.
* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.
Stocks sell-off hard as catch-down with bond yields continue: US equities experience sharp falls across the board, with an average loss of valuation to the tune of around -3% in the main indices (SP500, DJ, Nasdaq). Tuesday’s risk-off erosion after the US walked back the decision to implement further tariffs to China by Sept 1 has proven to be very short-lived, with the bond market still charging higher and clearly communicating widespread deflationary pressures and foreboding a global recession is brewing. Remember, investors have been propping up equities, especially in the US, seeking out alternatives with a minimum yield in a world where now over 30%, or $15.8tn, of the widely followed Bloomberg-Barclays Global Aggregate bond index offers a negative-yielding. This strategy has been working wonders in the assumption that the US will be able to avert a recession. If the perception starts to shift as more segment of the yield curve invert, the dynamics may also have to re-adjust.
The US & UK 2y-10y yield curves invert: In the US & UK bond markets, another watershed moment took place on Wednesday, as the yield curve in the 2y-10y collapsed into inversion for the first time since 2007. The Fed’s favorite yield curve of 3m-10y had inverted a while ago, sending us the first warning signs that whenever this event occurs, more often than not, it tends to lead to a US recession in about 311 days on average. In fact, inversion in the 2/10s spread has preceded each of the last five US recessions. Panic also reigned in the longest-segment of the US Treasuries, as the 30-year bond yield dropped to a fresh record low of 2.02%, now trading below the Effective Fed Funds. The disparity between the levels in yields and stock valuations remains out of whack and one wonders if this is finally the time when equities re-adjust to close down the gap.
China's industrial output prints the weakest growth since 2002: What appeared to set the ball rolling for risk conditions to once again deteriorate was the toxic combination of a slew of poor Chinese readings. China printed the weakest industrial output growth in a single month since 2002, while retail sales growth kept slumping, clearly arguing that the economy is facing strong headwinds and decelerating, which may prompt the PBOC into action by providing further stimulus to keep the economy afloat. Therefore, more targeted monetary (including rate cuts) and credit easing are likely needed in the near future.
Germany suffers like no other the linkage with China: Then came the German Q2 preliminary GDP q/q, which confirmed fears of a slump into negative territory at -0.1% (in line with expectations). Looking at the internals, GDP (non-seasonally adjusted) as well as GDP (working-day adjusted) both came better-than-expected, with private consumption and investments improving even if offset by weaker domestic activity. This is the second quarter with negative growth in the past year.
Germany faces a structural deceleration: Markus Guetschow, Economist at Morgan Stanley, argues that what’s happening is Germany is based on structural deceleration: “When the German economy first started to sputter in 2H18, one view was that this was primarily due to transitory factors. It is now increasingly clear that the ongoing deceleration is more permanent in nature, as the sectors that dominate Germany's industrial landscape are particularly affected by various structural shifts. Changing growth dynamics in China will likely continue to reduce demand for German-made machinery and equipment over time, and global car production and sales growth are expected to stall this year. As an open economy, Germany was among the biggest winners of global growth in recent years. It is now among those that stand to lose the most.”
Where do we stand in the chances of the Fed cutting rates in Sept? After the reprieve by the US not to be as aggressive on tariff hikes as initially thought, the market seems to have now formed the view that a 50bp rate cut is largely off the table now, with odds only at 16%. Since the US and China have scheduled trade talks in 2 weeks’ time, it may warrant extra breathing room for them to act too bold as they must continue to juggle a gloomy global outlook with fairly steady economic conditions domestically. Note, next week's Jackson Hole symposium will be a key event to watch, as it provides the ideal platform for the Fed to updates its views on policy.
US-China trade talks scheduled: A report via Bloomberg, citing people familiar with the matter, notes that China aims to still meet its commitment by attending face-to-face trade talks in early September following the US tariffs delay. Unless Trump keeps offering further concessions to the Chinese, which would make him look even weaker even if it may eventually boil down to financial conditions, don’t hold your breath for much to come out of it, especially after the complete loss of trust. China is playing a marathon while Trump is racing against time, he needs results and needs them as soon as possible to ring-fence its most precious assets (electorate support and stock valuations). Additionally, concessions from the Chinese side in the run-up to the celebration of the 70th anniversary of the founding of the People's Republic on October 1 won’t be a smart move either.
UK PM Johnson is starting to sound like a hopeless soul: The hard-line stance the EU is looking to maintain with regards to Brexit remains unshakable. The quirky British politician stated, once again, that the EU is not willing to compromise at all on a Brexit deal, adding to the uncertainty of a hard Brexit outcome by saying that the longer this situation goes on, the more likely no-deal Brexit becomes. Johnson finds that the EU is not willing to negotiate on the belief that the UK parliament can eventually block a no-deal, which is what’s undermining his leverage. With the situation in Brexit unlikely to change amid the stand-off by both sides, the Sterling still faces fairly substantial asymmetric tail risks as no solid base can be built to accumulate the currency.
Barclays no longer working with Coinbase: The crypto space has come under renewed selling pressure after news broke out that Barclays, the London-based global bank, is no longer working with cryptocurrency exchange Coinbase, industry sources told CoinDesk. The decision is affecting British clients as it removes the ability to make withdrawals and deposits via the U.K. Faster Payments Scheme (FPS), hence disrupting the exchange activities. Although according to CoinDesk, Coinbase is planning to replace Barclays with U.K. upstart ClearBank, citing people familiar with the situation.
The buying interest back into the US Dollar has returned, even if not as intensely as the demand flows seen in the Japanese Yen and the Swiss Franc, which remain kings in times of risk aversion. Remember, these two currencies have met the 100% proj target, even if the last days of acceptance at these lofty levels is a premonition that buyers are willing to pay up for the increase in risk premia out there, with stocks and the VIX sending troubling signals. Meanwhile, the Euro, despite its status as funding currency, went through a down day despite the technical in the index are still constructive with demand into key support expected. Shifting gears into the Sterling, we’ve seen 3 consecutive days of gains, sending its overall valuation in index terms to a very attractive technical area to re-engage into short-sided business. Lastly, with the risk dynamics swiftly permuting back into ‘true risk-off’, the high beta G10 FX currencies (AUD, NZD, CAD) ended as the worst performers, which unless disturbed by an economic event, these are the currencies most often feeling the most pain from risk-averse conditions in the market.
Let’s now revisit a few of the charts shared with you in the last 24h. Firstly, as pointed out in yesterday’s note, the price of Crude Oil did indeed find a technical cap on its recovery right at the intersection of a 3rd trendline touch, leading to a sharp selloff in line with the dominant trend, which is what a trendline can serve as, as a visual representation of order flow structures.
A second chart that I referred to in the last 24h with increased odds of finding follow-through selling interest included the Bitcoin market. There, we saw a break back below the daily 13 ema baseline on increasing volume after a decisive bearish close with little conviction to buy the lows. Fast forward to the present hour, and the fragility of the asset has continued to manifest by recording the largest losing day since July 15th.
Next, a rather convincing sell-side signal seems to have popped up in US equities (S&P 500), judging by the sizeable red candle closing at day lows on increasing volume. What’s more, it occurs in the context of a market in a bearish mode as price trades sub the 13d ema. I’d be looking to experiment in a short position as the prior support (black line) is retested.
A market that I find technically attractive to be looking for intraday long entries includes the EUR/GBP. The uptrend in this pair has been quite something, and the last pullback on decreasing tick volume tells us that the commitment to engage in sell-side action remains limited. Most importantly, we’ve comet to key technical junctures in the Euro and Pound indices, testing a level of key support and resistance respectively, which implies a technical bullish outlook.
A pair I mentioned in yesterday’s note as an attractive short was the GBP/CAD on the assumption that further follow-through continuation in risk may be seen and/or Sterling weakness may return. None of these outcomes played out, however, in these type of squeeze-type trades where a rotation back to test the lows looks likely, a tip to play this trade safer would be to wait for the lows to be taken out, which would then provide the evidence necessary to marry one’s assumption with the actual market’s intention.
A pair that looks undeniably bullish by sending us a clear statement of intent is the USD/SEK. Here, a major bullish outside day was printed on Wed in line with the bullish market structure. These type of major shifts in order flow and manifested by the price action do tend to find follow through continuation when traded under the right context as is the case in USD/SEK. Any retracement back to the circle line does look like an interesting long proposition.
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