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The Market Hits The Panic Button

The Market Hits The Panic Button

As the gloves go off in the trade war between the two economic superpowers, the predictable nature of how funding currencies would react when ‘true risk-off’ hits the market has resulted in a very strong appreciation of the Yen, the Swiss Franc, and also the Euro. The equity market is on free-fall as capital also flocks off to Gold and Bonds.

The Daily Edge is authored by Ivan Delgado, Market Insights Commentator at Global Prime. The purpose of this content is to provide an assessment of the market conditions. The report takes an in-depth look of market dynamics, factoring in fundamentals, technicals, inter-market in order to determine daily biases and assist one’s decisions on a regular basis. Feel free to follow Ivan on Twitter & Youtube. You can also subscribe to the mailing list to receive Ivan’s Daily wrap.

Quick Take

The ordeal to scramble away from risk trades into safe-haven assets has accelerated at an alarming pace in the last 24h as the 'tit for tat' trade war between the US and China gets even messier as the former retaliates with further tariffs, which led to an infuriated Trump hitting back, taking the tensions to a whole new level. The depreciation in the Yuan at the open of markets in Asia, reaching a low of 7.17 against the US Dollar (USD/CNH spike) portrays a market hitting the panic button. The usual suspects, which include Gold, Bonds, funding currencies as carry trades unwind, are the main winners, while the likes of commodity currencies (high beta) and equities suffer the consequences. 

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.

Narratives In Financial Markets

* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.

China sets the ball rolling: The tightening of financial conditions has accelerated at an alarming rate with the USD/CNH setting a new 11-year high at 7.17 at the opening of markets in Asia as a result of the snowballing effect of China hitting back with an announcement to retaliate by imposing additional tariffs on $75b of American goods on soybeans, automobiles, and oil. Safe-haven assets the likes of Gold, Bonds, the Yen or Swissy are also having a field day. As Bloomberg reports, “some of the countermeasures will take effect starting Sept. 1, while the rest will come into effect from Dec. 15, according to the announcement Friday from the Finance Ministry.”

Trump's 'tit for tat' doesn't take long: Trump followed with an announcement that fresh tariffs on Chinese products, to be increased by an additional 5% to 30% will be enacted by Oct 1st. Trump tweeted: “For many years China (and many other countries) has been taking advantage of the United States on Trade, Intellectual Property Theft, and much more. Our Country has been losing HUNDREDS OF BILLIONS OF DOLLARS a year to China, with no end in sight Sadly, past Administrations have allowed China to get so far ahead of Fair and Balanced Trade that it has become a great burden to the American Taxpayer. As President, I can no longer allow this to happen! In the spirit of achieving Fair Trade, we must Balance this very unfair Trading Relationship. China should not have put new Tariffs on 75 BILLION DOLLARS of United States product (politically motivated!). Starting on October 1st, the 250 BILLION DOLLARS of goods and products from China, currently being taxed at 25%, will be taxed at 30% Additionally, the remaining 300 BILLION DOLLARS of goods and products from China, that was being taxed from September 1st at 10%, will now be taxed at 15%. Thank you for your attention to this matter!”

Trump wants US companies out of China: In addition, Trump has 'ordered' American companies to immediately start looking for China alternatives, including bringing the companies back home and making the products in the USA. In a follow-up tweet, he implied that he could use the law relative to Presidential powers, in particular at the Emergency Economic Powers Act of 1977, which may enforce actions such as no US individual or company to conduct a contract with China. As more angry tweets from Trump were coming out, at times feeling as if he had lost control, in response to China’s new tariff impositions, the bloodbath in financial markets got quite ugly heading into the US close, with the falls in equities, bond yields, and a flight to safety in currencies and gold accelerating.

A regretful Trump? On the sidelines of the G7 meeting, in what no longer should be a surprise, Trump hinted that he may have a few regrets in the way he is acting with China. When a reporter asked if he had any "second thoughts" about the trade crisis with China, Trump responded, "Yeah, sure. Why not. Might as well," he said. "Might as well. I have second thoughts about everything." Trump then went on to say that talks with China were going well, suggesting that it may be prudent to re-consider some of his recent measures, including the orders for US companies to leave China. However, in a bewildering turn of events, the White House issued a statement in which it was noted that Trump's suggestion of any regrets towards his approach to China was "misinterpreted" and that what he really regrets is not raising tariffs higher. The opening of markets on Monday, with sharp selling flows, portrays a market in despair amid the signs that Trump has really lost his plot, creating an ambient of huge uncertainty for businesses.

Trade war escalation steals Powell's show: The renewed tensions in the trade war stole the show from Fed’s Chair Powell speech at Jackson Hole last Friday, despite the fact that the politician aimed, as anticipated, to keep a mild dovish tone but far from pre-committing to any aggressive course of action. Interestingly, Powell removed from his speech the referral of ‘mid-cycle adjustment’, which was seen as a dovish admission and led to a short-term move high in stocks before all hell broke loose. Powell downplayed the risks of inflation this time, by noting that “it appears to be moving back up closer to our symmetric 2% objective, but there are concerns about a more prolonged shortfall." Powell retained concerns about the economic risks by saying that “the Fed is working to sustain economy that faces significant risks”, while he tried to tame his approach to the recent vol in markets through August by simply noting that “the three weeks since the last meeting were 'eventful”, which again demonstrates the strategy he is looking to deploy is to sound ambiguous until further data-backed evidence of a slowdown vindicates a more aggressive stance. He seems to be in wait and see with his foot applied to the easing pedal but ready to go up a gear or two (more cuts) if/when needed. 

Trump takes attacks against the Fed to a whole new level: After Powell’s speech, Trump had no hesitation to attack at the Fed again, this time with an even more aggressive stance implying that Powell acts as an enemy of the country. Trump tweeted “as usual, the Fed did NOTHING! It is incredible that they can "speak" without knowing or asking what I am doing, which will be announced shortly. We have a very strong dollar and a very weak Fed. I will work "brilliantly" with both, and the U.S. will do great.. My only question is, who is our bigger enemy, Jay Powel or Chairman Xi?"

Fed's Clarida ponders further moderate cuts: Meanwhile, comments from Fed Vice-Chair Clarida, noting that “the global outlook has worsened since July meeting” seem to suggest that he is still open-minded to the idea of lowering rates a few times even if the rest of his commentary still falls short and out of sync with the aggressive 100bp worth of rate cuts priced in until 2020. Comments such as “the economy is in a good place right now” or “the economic outlook is favorable” would balance out some of his more negative opinions such as “there are powerful disinflation pressures” or “contacts say uncertainty about trade is having an effect on investment.”

Fed's Mester on the wait-and-see camp: Fed’s Cleaveland President Mester sits somewhere in the middle, and after a Bloomberg interview, she remains a member that is still hinting that more action on rates may be necessary by saying “we might need to recalibrate policy if uncertainty continues.” Data-dependency was at the center of her premise before pre-committing by noting that “I would like to wait and see how firms are reacting to consumer tariffs before reacting,'' while admitting that even if inflation is in a pretty good spot, “we're clearly below our mandate but we've been stable.”

Germany's stimulus program may have to wait: According to Der Spiegel, citing government documents, the German government foresees a recession ahead but is still reluctant to commit funds as part of a stimulus program. "We see no reason for short-term measures to stabilize the economy," the document read. As part of the report, Der Spiegel notes that “the German government now expects a contraction in growth in the third quarter but doesn't foresee a severe economic crisis so long as trade conflicts don't escalate and no hard Brexit.” The news is a Euro negative input even if it’s been largely ignored by the escalation in the full-blown trade war between the US and China.

China getting closer to Hong Kong intervention: According to Xinhua news agency, in an opinion piece, as the protests in HK fail to cease, China may be considering to zero in its resources for an eventual intervention to bring order back to the streets. The Chinese-sponsored media company wrote that "it's not only China central government's authority but also its responsibility to intervene when riots take place in Hong Kong."

Recent Economic Indicators & Events Ahead

Source: Forexfactory

A Dive Into The Charts

As the gloves go off in the trade war between the two economic superpowers, with the unfolding hegemonic battle hitting a new low in sentiment, the predictable nature of how funding currencies would react when ‘true risk-off’ hits the market has resulted in a very strong appreciation of the Yen, which dominates the demand for safety, followed by the Swiss Franc, and also the Euro, which happens to be breaking above its daily baseline as I type. The Sterling, recently re-invigorated by the optimistic commentary by German Chancellor Merkel about the prospects of finding an alternative to the backstop by the end of October, is also holding quite steady in bullish territory. The currencies that are obviously suffering the most include the Aussie, the Kiwi, and at a fair distance away we find the Canadian Dollar. The US Dollar has also seen a bearish breakout which validates a double top and turns the outlook into a more bearish stance in the currency against the strongest contenders (JPY, CHF, EUR).

The Euro index: It’s broken above the daily baseline (13ema) but there is still no confirmation of turning bullish until we see acceptance above the level on a closing basis this Monday. If so, the suite of indicators, which helps to decode the microcycles, would suggest being more constructive. Until then, the prospects are not officially bullish but getting closer.

The US Dollar index: The bearish outside day rejecting for a second time the resistance level is a bearish development, which when coupled with a break below the baseline, makes the prospects of further downside pressure as a rationale with a fair share of logic. The bearish candle from Friday also carries above-average market participation (high tick volume), while the suite of indicators that help to assess the market cycle (fisher transform and cci) is also bearish.

The Sterling index: The currency remains bullish but the combination of a major resistance overhead, alongside the elongated candle, makes buying the Pound at these levels a rather dangerous proposition with big downside risks compared to the upside room available. The index is not at an optimal level to capitalize on its bullishness, so limited involvement off the daily suggested.

The Canadian index: The sell-off last Friday has sent the currency into bearish territory as the baseline was lost but the impending support line where the index closed last Friday does not yet validate a follow-through bearish view until a close below the support area can be achieved.

The Yen index: The Japanese currency is the strongest with the outlook unambiguously bullish while it continues to trade above the baseline. The amount of volume participation on Friday tells me that any retracement is seen as a buying opportunity on the higher time frames. The suit of indicators I monitor as part of the indices (fisher transform and cci) also gave trigger signals to suggests a new bullish cycle is now clearly underway.

Then Swiss index: Unlike the Yen, the Swissy does not hold as clear cut bullish prospects, even if the overall sentiment has turned bullish, confirmed after Friday’s bullish outside day. The reason why I am a bit more skeptical is because of the near-by resistance line tested. The index must breach and close above the technical level, which would be the missing factor to suggest the sentiment towards the Swiss Franc is really taking off. Until then, be more cautious. In the early Asian session, the resistance is acting as a blockage to seeing further strength in the CHF.

The Aussie index: The currency is bearish but we are reaching a point of support where I’d expect profit-taking in the Aussie, which may create short-term upward pressure. The relief rally, amid the risk-off environment, may prove short-lived. The currency is one of the main contenders to keep depreciating in the week ahead as the risk worsens and the Yuan implodes.

The New Zealand index: The Kiwi may see a slight uptick in Asia if the Aussie index manages to find the mentioned bids off support, but technically, the index looks clearly bearish with a lot of work to be done by the bulls if they are to make a bullish statement in the technicals.

Important Footnotes

  • Risk model: The fact that financial markets have become so intertwined and dynamic makes it essential to stay constantly in tune with market conditions and adapt to new environments. This prop model will assist you to gauge the context that you are trading so that you can significantly reduce the downside risks. To understand the principles applied in the assessment of this model, refer to the tutorial How to Unpack Risk Sentiment Profiles
  • Cycles: Markets evolve in cycles followed by a period of distribution and/or accumulation. To understand the principles applied in the assessment of cycles, refer to the tutorial How To Read Market Structures In Forex
  • POC: It refers to the point of control. It represents the areas of most interest by trading volume and should act as walls of bids/offers that may result in price reversals. The volume profile analysis tracks trading activity over a specified time period at specified price levels. The study reveals the constant evolution of the market auction process. If you wish to find out more about the importance of the POC, refer to the tutorial How to Read Volume Profile Structures
  • Tick Volume: Price updates activity provides great insights into the actual buy or sell-side commitment to be engaged into a specific directional movement. Studies validate that price updates (tick volume) are highly correlated to actual traded volume, with the correlation being very high, when looking at hourly data. If you wish to find out more about the importance tick volume, refer to the tutorial on Why Is Tick Volume Important To Monitor?
  • Horizontal Support/Resistance: Unlike levels of dynamic support or resistance or more subjective measurements such as fibonacci retracements, pivot points, trendlines, or other forms of reactive areas, the horizontal lines of support and resistance are universal concepts used by the majority of market participants. It, therefore, makes the areas the most widely followed and relevant to monitor. The Ultimate Guide To Identify Areas Of High Interest In Any Market
  • Trendlines: Besides the horizontal lines, trendlines are helpful as a visual representation of the trend. The trendlines are drawn respecting a series of rules that determine the validation of a new cycle being created. Therefore, these trendline drawn in the chart hinge to a certain interpretation of market structures.
  • Correlations: Each forex pair has a series of highly correlated assets to assess valuations. This type of study is called inter-market analysis and it involves scoping out anomalies in the ever-evolving global interconnectivity between equities, bonds, currencies, and commodities. If you would like to understand more about this concept, refer to the tutorial How Divergence In Correlated Assets Can Help You Add An Edge.
  • Fundamentals: It’s important to highlight that the daily market outlook provided in this report is subject to the impact of the fundamental news. Any unexpected news may cause the price to behave erratically in the short term.
  • Projection Targets: The usefulness of the 100% projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100% projection, you can anticipate the area in the chart where some type of pause and potential reversals in price is likely to occur, due to 1. The side in control of the cycle takes profits 2. Counter-trend positions are added by contrarian players 3. These are price points where limit orders are set by market-makers. You can find out more by reading the tutorial on The Magical 100% Fibonacci Projection
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