Theory Into Practice: Tit For Tat etc!

Yes, China is retaliating with more tariffs on US goods. Initially, the market took it badly but since the open of the US Wednesday session, ithas regrouped and reconsidered. That may be because the damage assessment has changed but more likely to do with US Treasury secretary Mnuchin indicating further negotiations to smooth out the differences.

Gold was enjoying a rally which is now pulling back. US equities are recovering above the 200 EMA.

We do not know the longer term effects on equities or on sentiment which they are affecting, but we do know volatility is back and likely to stay.

Here is the VIX

the indexes are vulnerable and sentiment to any trade war news. The Nikkei continues to be the best gauge of the risk environment.

The bias in equities is still to short but now we wait to see the strength of any correction.

The USDX shows uncertainty: and what an interesting place:

The bias remains and interesting to see an FOMC member, Bullard,  speak about headwinds, dangers, and low wage inflation. As politics takes centre stage these comments might look less than important but here is one member thinking rates are likely to stay low for longer…and that is much more realistic than previous hawkish Fed speculation on future policy. The bias remains down for the USD.

Already this week, economic data has disappointed. The RBA was less optimistic in their meeting, which keeps the AUD bias short, German retail fell to -0.7%, UK construction PMI fell with a significant miss of the estimate.

Core CPI fell in the EZ, and ISM non-manufacturing fell slightly and on Monday, ISM manufacturing also missed.

In China the Caixin PMI’s, manufacturing and services (the latter announced Tuesday) both dropped and missed the estimate. Both took a step closer to the 50 watermark.

The ADP NON-Farm was better than expected but when we come to the government figure on Friday focus more on average hourly earnings, as that holds the best forecast for inflation.

The jury really is out, and there is a lot to prove on the status of economic growth. That is yet another factor to keep risk conditions sensitive to negativity.

The Watchlist

I am keeping a narrow focus on what I believe are the higher probability opportunities

USDJPY

Looking for a pullback or a break of the lows,

Gold

A long on a pullback with some big levels underneath to watch. This is a long-term trade and one with a lot of potential in difficult geopolitical conditions and disappointing econmic outlooks:

GBPAUD

Wait for the correction to finish, another long opportunity

FTSE

Looking for the short so wait for the right levels. Needless to say, we have to watch the shifting  the fundamental conditions:

USDCAD

Not at the top of the list, but NAFTA talks have progressed and there is an interesting support level. if it breaks and the fundamentals support it this would be a good place to short. This is subject to the oil market, which has been weak in the risk-off conditions apparent until late today. It too has staged a small recovery, but the truth is, circumstances and conditions are likely to be choppy which is why it is smart to trade only the best levels. Also be aware of CAD job stats on Friday just before US NFP.

I use weekly and monthly charts to ascertain these as well as the market profile charts.

Even as I write there are comments being reported from China and the US. The outcome is in the balance but we have to accept that trade wars are a lose, lose situation not only for the parties but globally. I will be watching these equity indexes very closely as the tit for tat engagement continues.

The bond market has seen the yield advance Wednesday with little to show in the USDX so that is something to review after NFP at the weekend and I will not be looking for trade entries after Thursday afternoon…NFP is a day to avoid. In the meantime, preparation is the key as we avoid predictions on directions and market mood and patiently wait for the market to come to or preferred places to do business. patience and discipline 🙂

I will be back after the weekend with a review of NFP and those all-important wage statistics.

Judith Waker