Markets are calm between dramas

Summary

Markets are in wait-and-see mode ahead of several ‘low-risk’ events.

DAX shrugs off Continental skid

One S&P 500 milestone and 1.9 Dollar Index percentage points later, the mini-EMFX currency crisis continues to recede into the distance. This offers breathing space for European shares, even if investors aren’t much in the mood for maximising the opportunity. There’s mixed slippage across Europe, with small upticks in almost every large market in the region. The DAX is even shrugging off a precipitous slide by Continental (after a profit warning). Note the underlying tone would look even more stable carving out the tyre maker’s contribution, plus lesser tumbles by rivals like Schaeffler and Michelin. Fractionally lower Wall Street futures are par for the course after the U.S. benchmark hit a record.  Slight caution ahead of another one (assuming no disasters) is also understandable. The S&P 500 needs to close higher to achieve its 3,453^rd in a bull market, marking the longest one ever. The landmark could be set in one of the few in-between sessions for months.

Distraction tactics possible

While nowhere near as acute as currency anxiety, concern has fanned out to the host of less pressing fixtures remaining this week. Most have a low, if not negligible, probability of impacting riskier assets. China-U.S. talks already warranted a hefty discount before the U.S. President said he had “no time frame” for ending the trade dispute. The discussions themselves, scheduled for two days beginning on Wednesday, do carry some detonation risk. Mutual U.S./China tariff impositions scheduled for Thursday have a similar hazard level. Perhaps it would be best (for investors) if the President doesn’t feel too cornered, for now, as Mueller’s probe grinds forward. (See Manafort, Cohen, and the President’s pattern of what looks a lot like distraction tactics).

‘Academic’ Fed risk

Federal Reserve’s minutes are even more on the ‘academic’ side of event risk. It’s difficult to imagine new revelations after the statement spotlighted the most salient – “strong” – takeaway from the meeting quite well. Maybe it’s best to look at the accounts as a foreword to Jerome Powell’s opening address at Jackson Hole on Friday. Watch points for the minutes include a clearer definition of “neutral rate”, and a possible elaboration by Powell of whether the yield curve reflects the market consensus’ of that neutral rate. Comments on trade are also anticipated, after the subject went unmentioned in the Fed statement. And, what does “for now” mean? Investors have been trying to interpret how substantial Powell’s use of the phrase was, after he punctuated his view that gradual hikes are appropriate with it. This may be one instance of the market’s proclivity to over-interpret utterances by central bank chiefs. Idle hands.

Sterling, euro traders eye Jackson Hole

We’re still treating Fed minutes and the Powell speech as largely concerns for sterling and the euro. Both attempt rallies whilst the dollar consolidates. On balance, it looks misguided to chase the ‘possible start of a dollar bear market’ thesis. Currency relief could yet revive the dollar’s run. Profit taking on safe-haven buying is lifting USD/JPY to the next big figure, 111. At the same time, EUR/USD’s six-day advance—after the euro bounced almost exactly at a sensitive low first marked in July 2017—is at the brink of the upper descending trending trend of the year’s falling triangle. There’s no science here, but experience shows the structure tends to be bearish, even if the rate manages to break to the upside, as seems likely. (The relative strength index (RSI) is in a clean rally with lots of room till its upper bound). Sterling has more fundamental news to chew on. Both EU and key UK Brexit protagonists are expressing (highly conditional) optimism, even “confidence”, a far cry from near ‘no deal’ consensus of a few weeks ago. The most substantial development for sterling would be, if confirmed, any suggestion from Barnier’s office that more time could be offered at any stage. GBP/USD upside momentum is faltering perceptibly too though, having peaked at $1.2925 on Tuesday. A second attempt is underway and how that fares will be a good guide for the near term.