Theory Into Practice: The War Of Words Heats Up

Our attention and that of the market has been focused, and I could say distracted, for a few weeks on central bank policy, with the geopolitically tensions comparatively calm although rumbling on in the background. That was until Friday when the twitter fuelled slanging match between The North Korean leadership and Mr Trump escalated, somewhat ironically in UN speeches.

I say ironically as the UN, centred as it is in New York, represents a global membership for reconciliation and peace following the devastation and the destruction of both countries and cultures that WW2 left in its wake. It is a place for members to work together in a conciliatory environment. The dispute growing daily more dangerous between Trump and Kim Jong Un is not just a spat between two egocentric alpha males, representing countries who both have UN membership.  On Friday, more threats of more sanctions, testing and even annihilation,  brought the market back into fear mode…at least enough to promote some safe-haven buying as the week’s trading closed out.

The Week In Review
The FOMC stepped up hawkishly to the plate. Not massively so, as there were a bunch of ifs and buts. But, by and large, the FOMC restated their intention to continue the tapering process via both rate increases, one of which is intended by year end, and balance sheet reduction.
When a central bank governor, alludes to the ‘mystery’ of stubborn inflation, we should all be on our guard. The fact that the Fed cannot explain why inflation is not growing as it should with labour market conditions very much improved and a massive amount of liquidity, is something of a concern. We have to watch the index:

And more importantly, the Treasury market for the fate of the USD going forward: here is the Yield chart, courtesy of stockcharts .com

 

The follow through in the USD is far from an assumption.
At the other end of the spectrum, we have the EZ, flush from a slew of new and promising PMIs on Friday, tempered a little by a speech from Draghi on bad debts, it still has the better outlook short term, but longer term is less sure as Brexit limps onwards. Both countries will suffer at least whilst the divorce continues. Any further than that cannot be projected, but let us say that challenges exist on both sides.
In the UK, things are a little more involved. Carney from the BOE attempted to calm the taper talk down, retail sales showed an improvement and Prime Minister May attempted to launch a more conciliatory approach with the EU in their negotiations suggesting a transition period. It does not initially seem that much was achieved as far as the EU is concerned.
The BOJ had their say just after the FOMC. They have a massive amount of QE and I think it fair to say, the least to show for it. They continue along the path of easy monetary policy, and dare I say, hope for the best.
In Canada, which has been relatively strong in global recovery terms, retail saw a small beat of the estimate although the core number missed. CPI also missed.

The Week Ahead.
The opening is about watching sentiment and how and if the market reacts to the newer developments surrounding the UN meeting and watching the election outcomes.
The German elections also failed to deliver a big majority although Merkel came out on top. As for New Zealand, they have reached a stalemate with neither party in a position to form a government. This is a development that will potentially weaken the currency and offer some opportunity on the short side.
Monday: Kuroda from the BOJ will speak following last week’s meeting. The election result in Germany, as well as a speech from Draghi. NZD, will see some business confidence data and there is central bank speak from the RBA and post FOMC speak from the Fed.
Tuesday: US consumer confidence, New Home Sales and more from Yellen.
Wednesday: US durable and core durable goods, Crude oil inventories. The NZD will announce rates and publish a statement which will be interesting after the election result, look out also for more fed speak and a speech from BOC.
Thursday: BOJ Kuroda back in the hot seat, as is Carney from the BOE (very important to heed this), US final GDP and weekly unemployment. From China, the all-important private Caixin Manufacturing PMI. CPI data from Germany and Spain
Friday: German retail sales, UK current account and GDP, EZ CPI,8 CAD GDP, US core PCE, and Carney and Draghi together in London on the subject of central bank independence…that should be interesting 

Opportunities.
In uncertain times with so many loose cannons…otherwise known as black swans, as well as an orchestrated effort among world banks ‘manage’ tapering and balance sheet shrinkage, sentiment changes quickly and is unpredictable. Understandably. In such conditions, we have to remain flexible and take opportunities as they arise with no expectations for longevity!
For me this week, I am looking for EURGBP long, post-Theresa May who failed to give much more than a temporary lift on Brexit outlooks and with EZ data still looking good.This is on support now and will need confirmation. Wait for the election news to work through…Merkel did not get the majority she wanted although is the biggest party:

 

EURUSD started in the middle of nowhere and is moving down,  if we see a good pullback and it will be a long possibility, but not yet!  Smae comments re the german election.Here it is on market profile:

 

GBPUSD is a short, subject to keeping an eye of the US yields:

USDJPY, USDCAD I will leave this week, AUDUSD is a short.

EURAUD is a strong potential for a long, again subject to election reaction and let that die down:

The other strong conviction is AUDNZD as a long but expect a reaction at open and wait for the volatility to die down.It needs to clear 1.0971 for me:

Gold is a long whenever the pattern emerges and the news supports either US weakness or risk-off conditions:

Equities…I prefer the S&P500 but not yet…we wait.

The stress has to be on understanding our own risks as we continue to look for opportunities in a market such as this. We cannot know or predict how the geopolitical news will develop, or how the market will react…we have seen the resilience it is capable of. What we do know is how to react when the conditions are identified. We also know that beyond the central bank rhetoric, the bond market is carefully weighing the financial climate and we are wise to understand them.

Dangerous times and dangerous personalities in lead role, call for extreme awareness and as always, immaculate risk and reward management and control of risk exposure. Only then can we be comfortable with the trades that offer us the best convictions.

Judith Waker