It is a session light of data with the USD edging higher and the Aussie underperforming all major currencies following fresh rate cut hints from the RBA. Global indices are in the green after a late session rebound in NY yesterday. Activity picks up tomorrow with UK CPI and Fed minutes, EU Elections on Thursday and UK retail sales on Friday. Also watch any response from Beijing to US ban on Huawei. The video for Premium subscribers below focuses on GBP, gold and indices. A new trade action will be issued on one of our index trades.
Trade Becoming a ProblemNow that the US and China have demonstrated they're in no rush to reach an agreement over the trade spat before June, the impact on global growth could well become a problem, sufficiently serious to not be adressed in time by the Fed and other major central banks. Here are some figures:
The WTO said in its latest report that out of the 7 indices of international trade (such as merchandise trade volume, auto production and exports) 5 indices are falling below trend. The WTO is sticking to last quarter's decision to downgrade its projections for 2019 global trade growth to 2.6% from 3% in 2018.
According to Bloomberg's calculation of the latest Dutch Bureau for Economic Policy Analysis index, world trade fell 1.9% in the three months ending February from the preceding 3 months, marking the sharpest drop since May 2009.
What does this all mean to FX and indices traders? Aside from Asian currencies resuming their descent and the Aussie suffering along to the benefit of the US dollar, the matter will become an urgent issue for central banks. Today, the probability of the Fed cutting rates in September stands at 46%. This compares to a 72% chance of a cut in December. Stock indices have cooled down to a trading range after no longer manifesting optimism over the elimination of rate hikes. By mid summer, markets will shift to worrying that odds of a rate cut are not high enough, and this will be the Fed's next policy mistake.
|2.2%||1.9%||May 22 8:30|
You know the market is admittedly clueless about sterling's future direction when the experts themselves are saying: "it could go 1% up or 1% down" or, to hear an answer worded in the following manner: “If the Withdrawal Agreement is accepted…., then we will see ….and if it is rejected, then….”. I highlighted in last week's chart that implied option volatility on GBPUSD for appears excessively supressed, considering the sharp descent in spot GBPUSD. Those who are bearish GBP will tell you the market is being complacent and volatility is underpricing the risk of heightened political uncertainty (PM May having to leave and allowing a leadership vacuum behind her). Those who are bullish or neutral GBP will explain the relatively low volatility by either indicating that it's too early, referring to the vote in two weeks' time. Others would stated that a smooth Brexit is inevitable.
So what do we think? Will Theresa May wait for the outcome of Thursday's European Elections to map her strategy for the Withdrawal Agreement vote the following vote? How about technicals? We currently have two existing trades on GBP for the Premium Insights. On Friday, I added an update to Friday's trading update with three charts and notes (also in Arabic) to lay out the case for the trades. Our record in the Premium Insights for the GBPUSD has been improving, with 11 out of 19 trades closed at a profit over the last two years (since May 2017).
NOTE: UK CPI on Wednesday, EU Elections on Thursday, UK retail sales on Friday
UK Labour leader Corbyn has just announced the breakdown of Brexit talks with PM May's Conservatives. May blamed it on divisions in the Labour Party. This sets set the stage for her departure, whether or not a Brexit withdrawal agreement passes in the first week of June. But what about the indicative votes? (see below). Could this eventually set the stage for a rebound in the pound as it fell once again Thursday. All currencies are down against the USD with the exception of the yen as risk dips back down. Monday's long DOW30 Premium trade was closed yesterday at 25870 for 450-pt gain. The other index trade remains open.
The final act of Theresa May's leadership of the UK will take place in early June as she makes one final effort (effort # 4) to forge a Brexit deal. She had previously pledged to leave after a deal on a meaningful vote but now she will try to score a win on a withdrawal bill. According to 1922 Committee chairman Graham Brady, May will leave regardless of the vote's outcome.
May is attempting to introduce indicative votes in order to not only avoid MPs answering yes or no, but to hold an exercise over what kind of majority Parliament would want to back. More on this next week. GBP weakness is certainly UK-specific, but it is also exacerbated by USD strength.
It appears to be a lost cause with Labour and the ERG already lining up against it. Labour is even reluctant to engage in futher deal talks with May because they believe any deal may not survive a leadership challenge. That leaves little hope of any political tailwinds until May officially quits.
Pound vs VolatilityThe turmoil and uncertainty has sent cable lower in eight of the past nine days, including a half-cent fall on Thursday to the worst levels in three months. At this point the market will grab onto any positive signs or developments but a leadership challenge will add new risks. The better hope for a near-term rebound may be better economic data. Note in the above chart how sterling implied volatility has remained supressed despite the currency's free-fall. Does this imply the lack of surprise element? Will volatility pick up when (if) May leaves? Ashraf tells me he sees the final support 1.2650/70 on a closing basis before a sharp move higher.
On that front, there were positive signs Thursday in North America. US housing starts and the Phily Fed beat estimates, leading to a rebound in USD/JPY. Canadian ADP employment data was also extremely strong in what should be confirmation of the official jobs report released last week.
US-China Trade talks remain the dominant story in the backdrop and markets were positive Thursday but there was some worrisome news. China struck a defiant tone saying it will never make concessions in important matters of principle. Reports also said that the US is asking the EU and Japan for auto quotas that are likely to be seen as unacceptable and in violation of WTO rules.
Multiple reports on Wednesday said Trump will delay a decision on auto tariffs, allowing for a major reprieve in indices throughout Europe and Asia. The move boosted risk assets and the Canadian dollar was (and is today) the top performer while the pound continues to lag. Watch out for comments from the Fed's Brainard on Thursday. US jobless claims, Philly Fed survey and hiusing starts are due next. The 7 charts below highlight the supporting technicals across the intermarket landscape, justifying why we went long indices during the selloff. The index trades are netting +500 pt in the green.
Risk assets reversed positively on reports that Trump won't use national security powers to put tariffs on auto imports. He had been scheduled to deliver a decision by Friday but he has decided to delay it by as much as six months. We have noted previously that the plan was likely to settle with China and then pivot to Europe and Japan on autos. Yet, the reccent breakdown in China talks meant Trump had to reorganize and decided he didn't want to fight two battles at once.
In a sense, that's good news – especially for automakers, Germany and Japan – but it may also be a signal that he's braced for a longer battle with China. DAX30 has regained the 12200 level, bouncing off the 5-month channel and 55 WMA.
Along those same lines, the White House also appeared to make moves to end steel and aluminum tariffs against Mexico and Canada. Several reports indicated a deal is close after ministers from the NAFTA countries met Wednesday in Washington. That news helped to lift the loonie.
Looking ahead, comments from the Fed's Brainard at 1615 GMT (17:15 London) will be worth heeding. What we're trying to evaluate now is how stubborn and committed the Fed is to holding rates and remaining patient. Low inflation, tariffs and further disappointing data like Wednesday's retail sales report have made the Fed fund futures market increasingly confident about a rate cut late this year (odds are at 76%). So far policymakers haven't genuinely opened that door but Brainard has floated key signals in the past and is a risk to do that again.