by Pinchas Cohen
The Week That Was
Geopolitics
After the long Labor Day holiday weekend, traders returned on Tuesday to a shortened trading week, though one dominated by risk and opportunity.
The geopolitical risk began with the North Korea's latest missile launch, which led to a 0.75 percent slide in the markets on Tuesday, though by the close of trading on Friday, irrespective of the tumultuous week, losses had been pared back 0.15 percent, for a 0.6 percent decline on the week. Are equity investors shedding their thick skins and becoming more sensitive to political risk, much like their dollar and Treasury counterparts?
Probably not, at least not to the same degree. The dollar slid 1.56 percent, reaching its lowest value since January 5, 2015 – while the S&P 500 is down 1.19 percent since its all-time-high.
As well, 10-year Treasury yields dropped 5.15 percent. While it’s true that other factors affected the value of the dollar and Treasuries, North Korea is thought to be at the forefront of investor concerns. If that’s so, there is a good possibility that the dollar and yields will jump. Still, for now markets remain sanguine; fears of another missile launch on the reclusive country’s “foundation day” holiday on September 9 turned into nothing more than a giant banquet with accompanying cultural performances.
Politics dominated US-focused headlines too. In what investors considered a positive development, President Donald Trump reached an agreement with the leadership of the opposition Democratic party to put in place a 3 month extension to the country's debt ceiling, along with relief for victims of Hurricane Harvey. While markets reacted positively to the effort and returned to risk-on, it’s merely a 3 month reprieve from the inevitable need to reevaluate the country's ability to meet its bills within the current debt framework.
In addition, since the debt fight—along with the possibility of an attendant government shutdown—still looms, how positive will investors find the deal to be if ultimately it’s at the expense of long-anticipated tax cuts, the crown jewel of the Trump agenda as far as investors are concerned?
Fallout from the debt deal could be tricky. To begin with, Congress will have to remain focused on the looming debt ceiling through the end of the year. Second, by throwing in with the Democrats in order to make this deal, the President has given up on his leverage. Third, Trump divided and weakened his Republican party while strengthening the opposition. As well, Senate Minority Leader Chuck Schumer and House Democratic leader Nancy Pelosi, who brokered the deal, are now heroes to their parties – which will only encourage them to keep fighting their fight: more spending and no tax cuts.
On the other hand, the Republicans have lost faith in Speaker of the House Paul Ryan – indeed, some House members are questioning whether he should continue in the role. Another casualty of the Democrat's deal: Treasury Secretary Steven Mnuchin, who was booed during a meeting before the vote. It doesn’t help the morale of Trump’s cabinet nor of his point people in their efforts to best represent him, when they know that Trump could pull the rug out from under them at any moment.
It also doesn’t bolster their credibility when Republican members of Congress stop taking them seriously, as they obviously can't anticipate or represent what Trump will actually do. Finally, it certainly doesn’t help Trump rally the troops.
As Idaho GOP Representative Mike Simpson sarcastically said on Thursday:
“A three-month debt ceiling? Why not do a daily debt ceiling? He’s the best deal-maker ever. Don’t you know? I mean, he’s got a book out!"
Economy
While the US is mired in both local and geopolitics, Europe continues to lead the global economic expansion, as the eurozone slightly revised its second-quarter GDP number upwards, and the forecast for the eurozone YoY GDP has been raised.
Markets
The VIX spiked nearly 40 percent on Tuesday, a mirror image to the 0.75 percent plunge of the S&P 500. However, the S&P 500 VIX Futures spiked “only” 13.32 percent on Tuesday and settled with “just” a weekly advance of 5.3 percent.
This further demonstrates the market's current narrow breadth, suggesting a possible top, as we argued here last week. This lack of stock market participation in rising prices can also be seen from another perspective. The point has been made here before that smaller stocks, those not on the S&P 500, aren’t enjoying the advances of the equities on the benchmark index.
Looking at it from yet another direction, while the S&P 500 Index declined 0.6 percent, the Dow Jones Industrial Average fell a negligible 0.15 percent. Moreover, though the S&P 500 Index fell 0.15 percent, its big-brother the Dow Jones—which includes mega caps, the biggest 30 US stocks—rose 0.06 percent.
The Dow disregarded the North Korean threat, Hurricane Harvey, Hurricane Irma and Hurricane Jose and the already existing or potential damage to property, business, the insurance and energy sectors all these storms portend. WTI crude oil Futures fell 3.3 percent on Friday, the most in more than two months on the lowered demand outlook while refiners will be offline. More on that here.
Also ignored was the 5.7 percent slide in Nickel that led industrial metals lower, on concerns about Chinese manufacturing possibly slowing.
The Week Ahead
All times listed are EDT
Monday
21:30: Australia – NAB Business Confidence (August): index expected to fall to 9 from 12.
After the Aussie dollar topped 1.1000 in late 2011, it had bottomed at the beginning of 2016, falling to just above 0.68000, a loss of 38.4 percent in a little over four years. In early July of this year, it broke out of a range since April, providing a target of about 560 pips to roughly 0.8260, from its 0.7710 breakout. However, last week’s close failed to overcome the previous, late July 0.8066 high, suggesting a potential return-move to retesti the top of the range at about 0.7700. The fundamentals could be the relief of no North Korean ballistic missile launch this past Saturday, on the country's “foundation day,” together with the US's short-term debt-ceiling deal providing dollar relief.
Tuesday
While Cable provided a nice, near 2-percent climb, its biggest upmove since June 26th’s 2.45 percent rise, it is nearing its primary downtrend line since mid-2014. Also, despite its sharp rise, it failed to close above its former, end-of-July, 1.3265 high, when it entered a midterm uptrend since the October flash-crash. The fundamentals could be the relief of no additional North Korean ballistic missile launch, together with the US debt-ceiling deal.
4:30: UK – CPI (August): CPI expected to rise 2.5% YoY from 2.6% in July, and rise 0.1% MoM from a fall of 0.1% a month earlier. YoY core CPI forecast to hold at 2.4%.
UK sovereign bonds via the UK Gilt UCITS (LON:VGOV) which has, for the third time, reached for 23.50 and declined just below, making a short attractive from a risk-reward perspective, with a stop loss above 23.50 and a target as low as 22.80, the May low; 22.53, the July low or 22.20, the November 2016-January 2017 low.
20:30: Australia – Westpac Consumer Confidence (September): previous reading 95.5.
The ASX 200 has been trading within a rising channel since the start of 2016. It has been consolidating throughout 2017. Last Friday, it closed the lowest since late January, providing a long position an attractive risk-reward ratio, with a stop-loss beneath last week’s 5645.80 hammer’s low with a minimum target of 5740, the high of the last two weeks; a medium target of 5800.00, range-top since May; and a maximum target of 59.00, nearing the April-May resistance.
Wednesday
4:30: UK – Unemployment Data: August claimant count forecast to rise 8800 from a 4200 fall in July, while the July unemployment rate remains at 4.2%. Average hourly earnings expected to rise 2.1%, in line with the previous month.
The FTSE 100 has been trading within a descending channel since June, demonstrating that sellers have been more eager than buyers, as the sellers were willing to sell at ever lower prices, while buyers were not willing to buy at ever higher prices. Should the price break to the downside, it would suggest that sellers had overrun buyers. Meaning, there aren’t available buyers at those levels, and the rising eagerness of sellers will likely drive prices lower in pursuit of additional, willing buyers.
8:30: US – PPI (August): factory-gate inflation expected to fall 0.1% MoM.
Thanks to North Korea, Draghi’s tolerance of a higher euro, back-to-back-to-back destructive hurricanes and an ever slower path to interest rates— exacerbated by Federal Vice Chair Stanley Fischer's resignation last week, injecting further uncertainty into markets—for the first time in 2.5 year, on a weekly basis, the dollar closed at the lowest low of its current trading range. This provides a downside target equivalent to the height of the range, putting 84.00 in focus.
10:30: US – EIA Crude Inventories (w/e 9 September): last week’s reading showed an increase of 4.6 million barrels.
The 3.3 percent decline on Friday (see chart above) confirmed that the falling channel since February remained intact. While the fundamental impetus was Hurricane Irma, it reinforced the psychological resistance of the channel top and the downward trajectory. While a pullback is likely after such a sharp move, the next benchmark would be the August 31, $45.58 low.
21:30: Australia – Employment Data (August): 24,100 jobs expected to have been created, from 27,900, while the unemployment rate is expected to remain at 5.6%.
After the weekly analysis of pair, in the Monday section, above, here's a zoom-in on the daily chart. While on Friday the pair managed a higher high, keeping the peak-trough succession intact, it formed a powerful bearish shooting-star, whose clout is measured by how much longer the shadow is than the real body of the candle. More importantly, the body of the shooting-star failed to close above the July 27, 0.8069 high, suggesting a correction to the uptrend line at around 0.8000. While aggressive traders may short the pair now, with a stop loss above the high, and moderate traders may short it upon nearing the resistance of the shooting star’s high, for an attractive risk-reward ratio, more conservative traders would wait for a return to the uptrend line for a long position.
22:00: China – Retail Sales (August): expected to rise 10.4%, in line with July.
While the USD/CNY pair extended its plunge with a consecutive third weekly decline, with the last two falling dips coming in at more than a percent, Friday’s daily trading formed a mega-powerful bullish hammer, as measured by how many times longer its upper shadow is than its actual body. This suggests a correction, at least to the 6.6000 price level. Waiting for a potential dip to retest the hammer’s support, toward 6.4390 would provide a better risk-reward ratio.
Thursday
4:30: UK – retail sales (August): forecast to rise 0.2% from 0.3% MoM, and 1.8% from 1.3% YoY.
7:00: UK – BoE Rate Decision: no change on policy expected, but watch out for the minutes and voting patterns for potential impact on sterling crosses.
Should the dollar rebound this week, compounded by sterling’s resistance, as described above in the Tuesday section, the price is likely to return toward its uptrend line since October, providing a buying opportunity. The closer to the uptrend line, the better the risk-reward ratio, when July’s shooting star provides the resistance at 1.3265. The 1.3000 price level may prove a psychological support. Since the shooting star’s resistance is at 1.3265, an entrance around 1.3040, would provide a 40 pip risk, for a stop-loss beneath 1.3000, and a 225 pip potential gain, making it better than 1:5 risk-reward.
8:30: US – CPI (August), Initial Jobless Claims (w/e 9 September): CPI expected to rise 1.9% YoY, while core CPI is expected to rise 1.8%. Jobless claims forecast to drop back to 236K from a hurricane-related spike to 298K a week earlier.
After our analysis of the weekly chart in the Wednesday section, in the shorter-term (see the dollar index daily chart in the Geopolitics section) we expect a bounce after Friday’s daily close with a bullish hammer. Fundamentally, no North Korean missile on Saturday and the debt-ceiling deal should give the dollar a push in the short term. The index will probably get stuck at 92.00-93.00, but will most likely not climb above the 94.00 level.
Friday
8:30: US – Retail Sales (August): forecast to rise 0.3% from 0.6%.
The retail sector, and retailers in general have been in trouble all this year. That is succinctly demonstrated by the SPDR S&P Retail ETF (NYSE:XRT), which has been trading within a falling channel all year.
First, last week, it completed a third consecutive weekly rise toward the resistance of the top of the falling channel, providing an opportunity for shorts. Second, should the falling channel persist, it will have completed a massive head-and-shoulders since early 2014, whose implications are staggering, with a minimum target of 25.00.
10:00: US – University of Michigan Consumer Confidence (September): expected to rise to 96.9 from 96.8.
While the S&P 500 is still within a bull market, its inability to cross above the August high, which was compounded with a double-bearish shooting star/Island Reversal, should raise a red flag. A cross below 2420 would complete a H&S and form another red flag.