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All four major US indices—the S&P 500, NASDAQ Composite, Russell 2000 and Dow Jones Industrial Average—closed higher on Friday, and each, except for the Dow, posted records. This, while shrugging off the risk of a government shutdown which occurred at midnight Friday, after markets had closed. We covered the shutdown in greater detail in yesterday's Week Ahead post.
This morning, Asian stocks were mixed; the Stoxx Europe 600 opened lower. Bulls attempted to carry prices higher, only to be pushed back down by bears. Should the session close with the same price behavior it would form a shooting star, signalling that investors seem to be split between those who rely on global economic growth and don’t care about the shutdown and investors who await a bipartisan resolution, to avoid being caught in a correction. The momentum, however, is on the side of the bulls, after an upside breakout of a bullish pennant on Friday.
As mentioned earlier, the government is now in shutdown mode. It's now the third day and counting.
While S&P 500 VIX Futures opened 1.16 percent higher at 12.07, they've fallen 0.86 percent to 12.03, as of 02:34 EDT. This indicates trader anxiety, though the decline clearly points to a sense of calm descending. The benchmark has been falling since August 31, 2015. It is now sitting against the resistance of the downtrend line. An upside breakout may suggest a reversal, from bullish to bearish sentiment.
The yield on the US 10-year Treasury initially dropped 0.55 percent—the potential result of a combination of funds rotating out of equities and into bonds and of a reduced expectation of higher rates due to the shutdown’s possible economic damage—but has been pared back to 0.25 percent and is now fluctuating.
Ironically, against this backdrop, the dollar eked out a small advance, bouncing from an earlier decline, mirroring the cooling nerves S&P 500 VIX Futures were also projecting. Technically, the greenback is trading within a rising flag pattern, in which demand is presumably provided by profit taking by sellers following the 2.45 percent plunge for the global reserve currency in the 4 trading days between January 10 and 15, and by dip-buyers—wherein a downside breakout would signal a resumption of the trend prior to this interruption.
The USD’s strength even withstood bullish news from its biggest currency trading partner the euro. The common currency scaled back an early advance after German Chancellor Angela Merkel made a breakthrough toward forming a ruling coalition, when the country’s center-left Social Democrat party (SPD) agreed to begin formal negotiations.
While escaping “political disaster,” according to the New York Times, Thomas Kielinger, a prominent Die Welt journalist argues the instability thus far and if Germany won’t return to Europe’s center stage soon, enables French President Emmanuel Macron to lead the EU while Germany’s economy will be “at a standstill.” Technically, the euro—in a mirror image of the dollar’s bearish flag—appears to be on the verge of completing a pennant, upon an upside breakout, which is bullish within an uptrend.
While the shutdown may cause a temporary market correction, in our opinion it will have no lasting impact on broader stock rallies. The last shutdown occurred in 2013, and it only provided a buying-dip for further rallies.
FX traders continue to monitor China’s appetite for the strength of its currency as the yuan trades at the symbolically key level of 6.4 per dollar. Technically, the USDCNY pair has been trending down since January of last year. However, it has reached the uptrend line since January 2014.
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