Trade War, Brexit and Fed Talking Points:
- Only two days after the delay of the US-China trade war escalation data, the Dow has lost momentum…and so has the SHCOMP and Yuan
- The Dollar sunk this past session, but Fed Chairman Powell’s outlook for the economy and markets wasn’t a likely culprit
- Pound has rallied into noteworthy resistance via GBPUSD following reports May is warming to a Brexit delay ahead of Parliament’s vote
That Trade War Enthusiasm Didn’t Last Long, Not Even for The Chinese Markets
It was only Monday that the markets had their first opportunity to respond to news that US President Donald Trump has pushed back the March 1st timeline to upgrade tariffs on nearly $200 billion in Chinese imports. That is without doubt a positive development in the outlook of economic activity and financial market stability, but you wouldn’t know it if Dow price, USDCNH price, crude oil prices or other baseline market metrics were your litmus test. The lack of follow through from the likes of the Dow and S&P 500 Monday afternoon was unmistakable but we could account for the curbed enthusiasm in the anticipation built up late last week and the remarkable recovery extended through January and February. Far more remarkable was the absolute loss of traction in assets with a more direct benefit like the Chinese Yuan and Shanghai Composite this past session. Despite the improved course, USDCNH actually rose this past session and the benchmark Chinese equity index slid through its session Tuesday. If the markets have already accounted for an eventual resolution between the two superpowers, disappointment is likely to follow through either lackluster growth figures or another pointed catalyst. If there is buoyancy yet to be accounted for, it is more likely to come from slower moving assets like emerging markets or other world equities. Other themes aside from trade wars to keep tabs on include collective monetary policy and global growth. Meanwhile, traders should keep close watch of the deflating volatility across the financial system. The VIX and volatility of VIX measures are further joined by lulls in FX, commodity, emerging market and yield volatility indicators. The world is no longer as aloof of its own complacency – and thereby lack of preparedness – as it once was before 2018.
Poll of Traders’ Expectations for Risk Trends After Trade War Progress
Dollar Takes a Significant Hit Though it Didn’t Seem to be Powell’s Doing
For significant moves this past session, the Dollar mustered one of the stronger drops on the day. A cursory assumption would be that the dip was the result of a fairly active fundamental docket. It is true that there was meaningful event risk on tap, but its outcome and market reaction didn’t exactly align. The top listing (the one that garnered the most and most bombastic headlines) was Fed Chairman Jerome Powell’s testimony before the Senate Banking Committee. He would touch on growth, monetary policy, external risks, political influence and inequality among other issues; but there were few true revelations for market participants. The central banker was optimistic about growth moving forward but preached caution that would be applied to monetary policy. There was no material change in rate forecasts as measured by the yield implied through December Fed Fund futures, so his cautious dovish tone altered few opinions. As for the data, housing starts and prices took a dive but the macro implications are finding few deep reflections but the same was true of the Conference Board’s Consumer Confidence survey swell. The headline figure jumped 6.5 points to 131.4 (a big change) while the expectations component surged 14 points to 103.4. What this may tell us about the world’s largest collective consumer is severely skewed by the reality that this is a reversal of a temporary US government shutdown influence. It is more likely that the Dollar’s slip was the collective reflection of its stronger counterparts, but that is an unreliable guide given the other majors’ drivers ahead. Local data will keep headlines busy but will struggle to mount the kind of speculative response to earn a genuine break from the DXY Dollar Index’s or EURUSD’s persistent range. Powell’s day two (at the House) and trade figures are significantly lower on my watch list than Thursday’s delayed 4Q GDP release. If the Dollar is set to range, consider pairs like GBPUSD, AUDUSD and NZDUSD.
Chart of the DXY Dollar Index and Implied Fed Funds Yields from December 2019 Contract
Pound Rallies Ahead of Parliament’s Discussion on Brexit, Keep Tabs on the Euro as Well
The other big FX mover this past session, the Sterling, was more aligned to its principal catalyst and will find more capable market activity through the forthcoming 24-48 hours. The Pound surged Tuesday, pushing EURGBP to break a significant range low and raise the threat profile of a more systemic reversal while GBPUSD moved up to an ambitious range resistance in 1.3300. The motivation for the British currency were reports that UK Prime Minister Theresa May was considering offering up an option of a Brexit extension as the clock quickly winds down to the March 29th split. It is encouraging that another option aside from a ‘no deal’ is being entertained, but this was a likely shift regardless. Faced with the threat of leaving the EU with no establish economic ties, MPs would hear the warnings by business groups, the Bank of England, the IMF and the government itself in their heads. They would likely force greater control away from the Prime Minister. May’s move heads off this power move and resets the focus to her March 12 proposed ‘meaningful vote’. The upcoming Parliamentary session could still force control away from the PM, but that is unlikely. The real question is whether the Sterling can simply hold its buoyancy – much less further it –as we get near the Brexit date, vote or not. Without fresh headlines to further build anticipation, that would be difficult to achieve. In the meantime, keep watch over the Euro as this theme unfolds. There are deep ramifications from this separation for the EU and the stability of the Euro-area markets and currency. And, unlike the Pound, they are not well accounted for in current pricing. In its own fundamental listing, the Euro will have sentiment surveys to register as well as the on-again, off-against issues in regional politics moving increasingly away from co-dependency. We discuss all of this more in today’s Trading Video.
Chart of GBPUSD (Daily)
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