It was an ugly night in the US, and while some have talked about the high-volume dump of stock as the S&P 500 tracked through the 200-day MA (2762). I think we can also add in order book dynamics, with a genuine buyer’s strike, specifically from high-frequency accounts, while reports of algo’s dumping equity on the back of the sheer ferocity of buying in US fixed income has also come to light.
Either way, the damage inflicted on the psyche of the market seems intense, and the bull’s question if it’s worth buying into a market that has just fallen 3%, closed on its low and on good volume amid a clear deterioration in the macro. The flattening of the US yield curve is getting all the attention, and while some see this as a sign of an impending recession, it feels as though we are nowhere near that point. However, the market is dictating to the Fed to hold off and not to do anything rash and the Fed, at the same time, will not want to hike in an environment of a flatter curve and will absolutely hold off in 2019 if the 2s10s yield curve inverts.
We can already see this in the rates market, where the market is pricing in 11bp of cuts between 2019 and 2021.
Can we blame Trump for this drawdown, or is it more to do with the confusion stemming from changes in Fed communication? One could argue it is a bit of both. The market is certainly saying the damage from tariffs is already manifesting into lower economic expectations, and Trump rolled the dice from a position of relative economic strength, and this is likely to backfire and by claiming to be a ‘tariffs man’ is not going to help.
Going after Amazon, a former market darling is not going to be taken well by the market either. That said, Trump has tried to step in front of a juggernaut that is building speed by tweeting a ‘real deal’ with China will take place, or none at all. China’s Ministry of Commerce has confirmed, for the first time, that the cease-fire is to be reviewed after 90 days, and they are making the necessary changes. This has stabilised some of the selling through Asia, with S&P 500 futures 0.4% higher, while the China CSI 300 is unchanged and we see buying in USDCNY.
That said, digging deeper there is no real meat on the bone in today’s news flow to encourage market participants too intently, and there are even US media reports (source: Washington Post) that China is becoming frustrated and ‘irritated’ by Trump’s air of triumph after the G20.
The USD remains firm here though and has seen buying through Asia against all G10 currencies except the AUD. The range seen through G10 FX are tight, and we see modest adjustments to exposures. AUDUSD was treated to a woeful Q3 GDP, some 50bp below consensus at 2.8%, although this is still above trend, with AUDUSD trading from 0.7350 into a session low of 0.7295. We’ve seen good buying in the Aussie yield curve, while swaps markets have priced out the prospect of a hike by December 2019, with the implied probability now sitting at 58%, down from 64% yesterday. Even this feels lofty.
(AUDUSD – daily chart)(Source: Bloomberg)
We’ve seen good buying in GBPUSD, despite the pair continuing to oscillate around the 1.27-handle and at the bottom esculents of the 1.32 to 1.2650 trading range it has held since August. In theory, the proceedings over the past 24 hours are GBP positive in my opinion, as the prospect of a no deal Brexit has been reduced, and as I have said before I like GBP upside, but I can’t bring myself to pull the trigger at this point. Assuming next weeks vote fails, then the first port of call is to assess just how many Tory MP’s vote against the deal, as this will give us some understanding on whether Theresa May has scope to head back to Brussel’s to re-work the deal – should the EU even entertain this.
Parliament, having a greater influence around any plan B, which has become a thing in the wake of Dominic Grieves motion, effectively raises the prospect of the UK aligning to a Norway+ model, although the Brexiteers will despise the notion of free movement of people. It also raises the chance of a second referendum, and there is momentum building here. Of course, the issue of a no-confidence vote on May’s leadership or even on the Tory government is a consideration. Lurking cunningly in the wings is this new idea that the UK doesn’t need to pass legislation to revoke Article 50.
That leaves the idea that the session ahead will be left to focus on Europe, with ECB president Mario Draghi due to speak in Frankfurt at 19:30aedt, so watch EUR exposures here. US cash markets will be closed out of respect for President George Herbert Walker Bush, but futures market will be open, although one would expect reasonably subdued ranges. There could be some pre-positioning in crude and gasoline given tomorrows key OPEC meeting, which I lightly covered yesterday, but the market is gunning for a 1.3mb/d cut from OPEC members, even if the Saudi Energy Minister has suggested it was ‘premature’ to assume this.
The bulls will want to see a solid cut, perhaps closer to 1.5mb/d in tomorrows OPEC meeting, backed by a decent US non-farm payrolls print on Friday with 3% wage growth or more dark clouds will descend on markets.
Published by Chris Weston, Head of Research, Pepperstone