As traders, we are used to factoring in global macro conditions. We know that is this environment and the news and events that derive from it that drive the prices we chose to buy or sell. We also know that this year has seen a major move towards the politics part of the environment and away from the more predictable and relatively calm arena of classic economic cycles and effects.
When I say politics, I must also include geopolitics and despite the renewed shift towards nationalism that we have seen in the US the UK, France Germany Austria and more dangerously this weekend, Spain, it does not at all detract from global threats and realities. The truth is we have evolved into an inter-related global village, enhanced, not always in a good way, by the media revolution, but the face-booking, insta-gramming tweeting generation that permeates politics as much as the classroom.
The markets reflect that inter-related quality and that at least gives us some way to understand market relationships and how they can help us in our trading plans in what are increasingly unpredictable times where we see leaders and governments pushing politics to the limits of their safety. As the new example in Catalonia unfolds as I write we do not know the consequences but it is a dangerous situation, and another black swan to join the existing global bevy.
The Week In Review.
The week has seen the start of the Communist Party Congress in China where we expect a positive tilt. The news from China has also been on the upbeat side…with the usual caveat. CPI was steady at 1.6% PPI improved at6.9%, GDP held 6.8% but that was a slip from the last quarter. The fact that it rarely changes, and much less so than any major economy, is the basis of the view that the numbers are, shall we say, expertly ‘managed’ With the mounting debt that the BIS (Bank For International Settlements) assessed as 257% debt to GDP for 2017, and the IMF already estimating it will be 300% by 2020 there is a lot to be concerned about. Read that again…it is mind-boggling. That puts them a smidge behind Japan!.
In Japan, Kuroda promises the ‘anything’ fix for economic resue. So more of the same there.
Two big political drivers saw the USD close out a strong weak:
Politics persists and this can go either way: be prepared. ‘For now, the strengthening yields and the tax reforms now being proposed support the USD. In the UK, there was some compromising chat with Merkel and May but that issue continues to shadow the outlook for the GBP. Inflation is still high with CPI at 3% yet the BOE continue to keep the lid on rate hike intentions. The Average Earnings also crept up to 2.02% which is good news in growth terms but can add inflationary pressure.
Watch out for BOE policy, they will have to control inflation at some point and not let the currency weaken too much. We did see weaker retail sales, but that is not unusual in the light of price rises for the consumer, and again wage inflation may support future improvements in retail data. The Eurozone this week will also have a shadow provided by Catalonia, so we will watch the open to assess the sentiment. In Australia, benefiting lately from Chinese data and the optimistic perspective, we also saw improved good job numbers.
The RBA will still be watching the AUD as any weakness will hamper recovery and the threats of bubbles and Chinese debt remain as does the bias to the downside. In Canada, retail and CPI missed the estimate, core retail is a minus number. All eyes on the BOC next week.
The Week Ahead
The Japanese election has returned Abe with a big majority and he is a supporter or easy money policies which will weaken the JPY. Unless we see risk-off conditions, of course.
Monday: CAD wholesale sales
Tuesday: PMIs, EZ overall, France and Germany
Wednesday: AUD CPI (inflation), UK GDP (prelim and important) US core durable goods, CAD the big BOC rates meeting and statement followed by a press conference US oil inventories, and NZD trade balance.
Thursday: Spanish unemployment, some ‘speak’from the RBA, The ECB rates and statement…another big meeting with no expectation of change but the language will be important in the light of taper talk. , US unemployment and ending home sales.
Friday, US advanced GDP…another big number for the USD, and consumer sentiment.
The alternative scenario preparation remains the way to prepare for the coming week. The big weekend news related to Catalonia and their relationship with Spain. This could be a defining moment and many believe that the Spanish government controlled by a minority party, is destroying bridges.
This is one to watch for sentiment shifts and knock on effects on the Euro. The long side USD favourites are AUDUSD : look for the big break or a decent pullback and be aware of the data during the week:
the NZD on pullbacks:
USDSGD, breakout or pullback, and it is currently in a triangle consolidation. The overhead resistance is the weekly trend line:
Also, EURUSD and GBPUSD…this still depends and is vulnerable to political developments and thus trickier.
As we start the week, due to the yield strength the bias begins to the longing the USD. With that in mind I have prepared an alternative USD scenario:
In the event of USD weakness will be looking for USDCAD shorts, and wait now for the BOC on Wednesday. This needs a pullback or a break back down into range:
Also, longs in Gold. The US yield continues to be key in any decisions about the direction of the USD.
EURGPB remains a fundamental bias to the short side.
AUDNZD, a bias to the long side but it needs a big pullback
NZDCAD also on a pullback or break of support. EURAUD remains on the list but needs a correction and again a close watch of EZ politics.
In the event of a sentiment shift, and the reappearance of risk-off environments: Gold longs, AUDJPY shorts, and selected equities, DAX is the frontrunner but not yet!!
I have some favourites on that list but will discuss them in the live session tomorrow when i have had the chance to see the first days behaviour.
We have to remain prepared for anything to happen on the political and geopolitical front especially with concerns spreading over Spain. The mood is still to take risks and search for yield and return, that is after all why the market players are prepared to take those risks. I talked last week of the dangers of passive investing, of markets moving in large numbers, of the potential for ‘fake’ rallies or at least ungrounded ones. The new age style in investing increases the problems that would faced if selling programs were triggered and the danger of sharp falls.
It is true the market has shown remarkable resistance and calm through a year of many surprises. Its resilience has amazed many a seasoned analyst but we should not be fooled into thinking that the bevy of black swans swimming on the horizon will be treated to the same reaction if they come into focus. The possibility of seismic shifts are something we are getting use to folding into our plans and if the information age has made that easier to understand, it has simultaneously made it infinitely more dangerous.
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