Just days after equity markets rallied in celebration of the announcement of a 90-day cease fire in the U.S. – China trade war, the arrest yesterday of Huawei Technologies Co’s Chief Financial Officer, Wanzhou Meng in Canada, reminded all that the trade dispute is but one thorn in a relationship that is becoming increasingly prickly. Political analysts were quick to highlight the risks that the U.S. and China are on the verge of a “cold war” that encompasses issues ranging from trade, Taiwan, the South China Sea, technology theft, and 5G.
The last “cold war” between the Soviet Union and the U.S. lasted over 40 years, which for those of us old enough to remember, finished with the fall of the Berlin Wall in 1989. Whether a full-blown cold war eventuates or not, the arrest of Meng, which prompted an immediate protest from the Chinese Embassy in Canada, is a blow to the prospects of a less volatile trading environment in 2019. As a side note, it also likely to result in U.S. executives rethinking any immediate and non-essential travel plans to China.
Little wonder then that U.S. equities fell heavily with the S&P500 down almost 3% at one stage yesterday, before staging a strong recovery into the close after the Wall Street Journal published an article “Restrained Inflation Reduces Urgency for Quarterly Rate-Increase Pattern”. The article suggested the the Federal Reserve would adopt a new wait-and-see approach on rates in 2019, following a hike at its December meeting in just under two weeks.
The Wall Street Journal article followed comments from earlier in the day by the Fed’s Kaplan and Bostic, who suggested that lower inflation could potentially allow for greater patience in relation to future rate hikes. It does appear that the recent volatility in markets and mixed economic data has resulted in Federal Reserve members now reading from the same dovish script. For those that missed the Bank of Canada meeting earlier in the week, the BoC also adopted a more dovish tone, highlighted by a discussion of downside risk specifically to the energy sector and growth prospects overall.
The question then for traders is what are the key takeaways after such an eventful week?
If readers recall in our article from earlier this week, it was outlined that the rally in the S&P500 was mature and approaching resistance at the top of the range “After a 7% rally over the last 6 trading days, the so called “easy money” to be made from our bullish bias has dissipated” and “Despite the better macro backdrop, a failure to break through the 2820/40 resistance area would be a setback that traders need to remain alert to”. While the speed of the fall surprised, the direction did not. This week, the S&P500 has tested and rejected both the upper extremities and lower extremities of its roughly 2820 – 2600, 8% range. A break above 2725 is now needed to negate near term downside risks (which would escalate dramatically on a break of 2600/2590) to set up another test of the key 2820/40 resistance zone.
Elsewhere, the rally in gold has played out nicely, reaching the initial target to trade marginally above the October $1243.47 high. Ideally some profit should have been locked in. However, at the very least, the stop loss should be raised to the entry price to give the rally a chance to extend towards the 1260/80 region, a position which provides some portfolio insurance if stocks come under pressure again.
Finally, to the U.S. dollar which despite volatility elsewhere has remained strangely range bound this week. I continue to favour a U.S. dollar pullback, consistent with an interest rate market that has dramatically repriced its rate hike expectations for 2019 in recent weeks. A break and close below trendline support ~ 96.00 area in the DXY would confirm that a pullback in the big dollar is underway.
Source Tradingview. The figures stated are as of the 7th of December 2018. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.
