The Holiday Spirit!


Last week July 4th was celebrated midweek and as if to mark another round of independence, trade wars started for real against China on Friday. The US equity markets stayed cool, against the threat and in fact rallied into the close. Whether that was due to the holiday spirit and the national fervour extending out and affecting sentiment or whether it was our friend complacency is something we need to understand.
Complacency is a real danger and can turn on a dime to good old fashioned fear. Is the market just ignoring what is going on …it did seem to be a bit a of a non-event, or will we see changes next week?
There are other factors to consider such as the hope for an EU/US agreement on auto tariffs and that too is a big factor for sentiment to digest.
These are the considerations this week as we look towards the next in what is a full diary of potential catalysts for both sentiment and the USD.

The Week In Review.
The initiation of trade tariffs against China hit the Copper market.

The UK government have agreed on a soft Brexit option. This is a better course if it holds politically and can support the GBP.
There was some better economic data during the past week. In the US, ISM manufacturing moved back through 60.2and non-manufacturing also beat the estimate at 59.1. Non-Fram came out better than expected but wages missed and are down to 0.2%

In the UK, manufacturing PMI met the estimated 54.4, construction PMI moved t 53.1 Services to 55.1 and all beat their estimates.
Stronger service PMIs in the EZ as well with Italian and German better than expected with France a minor miss. German industrial production was also strong at 2.6% from -1.3% This lifted the EUR on Friday.
The CAD data was less impressive with unemployment rising and a miss for hourly earnings. The trade balance also slipped.
In China, we had the Caixin numbers which showed a slight fall in manufacturing at 51 and a better than expected services number.

The Big Picture
I want to discuss the weakest link. As you know if you are a regular reader I am focused on the Equity markets for trading opportunities and in terms of sentiment these indexes continue to be the most vulnerable in risk-off conditions and offer the best risk/reward opportunities.
Having said that they are predictably choppy and volatile as we witnessed on Friday. Furthermore, they are likely to remain such for the foreseeable future.
In the US they certainly seemed to react positively to Non -farm data and completely ignored the trade tariff commencement. So what does this mean going forward?
Equities are exposed to multiple issues. Tightening and talk of tightening is but one of them. The trade war is now a reality…as from Friday. No longer threats but action and the Chinese have retaliated as expected and as promised.
Chinese Shanghai, now a bear market, is behaving very differently:

The S&P 500 jumped into risk-on mode:

The DOW was a little more reserved:

Last week we discussed the fragility of risk-on moves and that has not changed. If economic data gave a boost to the US markets, trade wars can undermine it quickly and it remains the number one threat to risk appetite.
The EU is also exposed to a great deal of trade tariff damage,  although there may yet be an agreement which will offer its own twist to the sentiment environment and makes it relevant news we need to look out for. I should add that China are now making overtures to the EZ to seek a trade war ally against Trump. Strength in numbers!
All this lends potential fuel to risk-off conditions which remain for me the number one theme to trade.
The European and UK indexes fared less well so I am still looking for pullback opportunities. Any news including trade wars and Brexit can cause waves but the bias remains and I am still in the FTSE short and still giving it plenty of room to accommodate the current indecision. This was always a trade looking for the longer term and weekly targets.
Higher oil prices hold their own threat to equities and something else to undermine them.
Finally on the theme of risk I like to keep my attention on this:

Not only for the generic background but also for JPY trades which are always on my risk-off shopping list.

As far as equities are concerned we have seen a divergence develop late last week between the US and Europe, UK and China. The US equity correction may survive a little longer but the pressures have not gone away and the duration is more likely to be short-term. In the meantime we can focus on the UK and the DAX and keep a watch on overall sentiment.

What about the USD? Friday brought a fall :

NFP data was, in fact, better than expected but wages data was not only disappointing but worrying if you consider the FOMC ongoing plan with rates.
The US10 Treasury note pushed further and testing the resistance level:

The week ahead holds some important catalysts for USD direction, including inflation. This is all in the context of my bias for a weaker USD in the longer term and the ceiling on the yield of 3% looking unlikely to give way to higher moves. Add to this the reality of the yield curve continues to flatten with its inherent warning of recession ahead ..which cannot, of course, be timed but for which we can and should prepare.

The other factor which can affect both equities and the USD is corporate earnings and they too are in the diary for the coming week.

The Week Ahead.
Monday: More ‘speak’ from the RBA and BOJ and later from the UK and Draghi wh will be testifying to the European Parliament on policy and economics.
Tuesday: CNY CPI, UK GDP and manufacturing production. From the EZ German economic sentiment, CAD building permits.
Wednesday: More from Draghi and the CAD rates and statements. There will be a press conference. Carney from the BOE will talk about global financial crisis!
Thursday: ECB minutes, CAD new homes prices and US CPI and core CPI. Weekly US unemployment and NZD Manufacturing index.
Friday: Chinese trade balance, and US consumer sentiment.


FTSE is a live position and I will add to it if I see the right level. I will also be looking at GBPUSD and GBPAUD after the UK GDP. The FTSE is at BE so I can afford some risk elsewhere. Remember not to overload.
I also have a limit order in the DAX.
EURGBP is too mad and political and whilst I often trade it has been side-lined!
USDJPY is on the list for a break of 109.30…my line in the sand, above there, there is not enough risk/reward
The USD is all about follow through now it has broken the first level of support. The USDCAD is still preferred on the downside, so again we watch the USD and choose the right levels.
Gold is still on the list. It is still in step with the USD but I prefer to see signs of risk-off and take higher breaks to the long side. AUDJPY is on the same list!

There is a lot to watch for on the open. The focus is still on equities as the preferred instrument to trade but a more general risk-off environment, if it emerges, in the wake of the trade war unfolding, offers many more lines of attack The holiday is over and we now have to see if the party is still going on in the USD. equity markets.

Judith Waker