What a fascinating, absorbing and turbulent short trading week we had last week. It really had it all; a currency flash crash, a US Government in shut-down mode with US President Trump digging his heels in and becoming increasingly dictatorial about his wall on the Mexican border, a stock market sell-off on the effects of the US/China trade tariff war (notably Apple stocks) and then a US stock market rally after an outstanding jobs report coupled with a largely dovish speech by Fed Chair Jay Powell given at the American Economic Association. US markets are now superbly set up for the US president to spin a story about how he is the one responsible for jobs growth, for putting pressure on the Fed to relax the pace of interest hikes, that corrections are just a normal part of stock market cycles, and then ultimately, if there is some mutual agreement between the US and China, how he is the tough negotiator who created the path for continued stock market growth!
As I mentioned in my article of last week, my feeling is that after a fairly aggressive sell-off in December, there is potentially some value in certain US indices. As for individual stocks, Apple (which makes up part of the Dow, S&P and Nasdaq) has primed the market that it will fall short of earnings expectations and maybe this is a clever tactic. Whilst I still see some potential volatility in the stock, I do feel that there is some upside for Apple if the broader market recovers and China tensions dissipate. The speech by Powell was both reasurring and I feel a little insincere, focussing more on political and market approval and trying to give the public the feeling that the Fed is a benevolent market overseer which is capable of reacting to nuances in the markets, than one that is totally focussed on adhering to its model. The market had priced in three rate increases in 2019. This has been revised to two; one in July and one in December. I’d be surprised if we get more than one!
Thursday morning’s currency flash crash which saw the Yen strengthen against a broad range of currencies, was blamed on US/China trade tensions, the Apple profit warning, and thin liquidity in Asia markets! The fact is, it is not the first (nor will it be the last) currency flash crash! The bottom line is that algos dominate FX markets and a sniff of weakness can set off a chain reaction where millions of orders accumulate in seconds. On the positive side, the limits of this crash can provide meaningful levels of support in the JPY cross currenciy pairs and act as a gauge for those who wish go long yen crosses which rebounded quite strongly on Friday.
So the first full week of trading in 2019 promises much! On Monday, Emerging markets should get a fillip from last Friday’s strong US performance; the UK Parliament is back in session, we have an interest rate announcement out of Canada, FOMC and ECB minutes from their latest meetings, and some timely data from Australia, the UK and the US.
Will Canada raise rates on Wednesday? The market says yes and is looking for a hike to 2%! But with the Fed’s new stance, can the BOC hold back for a while? The Canadian dollar strengthened a little towards the end of last week after falling in tandem over several weeks with the hefty fall in oil prices. I think the odds are 50:50 on a hike and I don’t see what good it will do the Canadian economy! FOMC minutes, also out on Wednesday, will probably have a limited impact on markets, which got their guidance from Jay Powell last Friday. ECB minutes are generally not so exciting. The ECB has largely telegraphed what its policy is for the next 12 months. UK members of parliament thrashing it out over Brexit will tell us nothing new. The key vote on Brexit is on 14th Jan and I feel GBPUSD will oscillate between 1.24 and 1.28 until then.
On the data front ISM services from the US on Tuesday is expected at 59 versus last month’s 60.7. US CPI on Friday is likely to come in shy of 2.0% Y/Y and so weigh as a counter-balance to Fed hawkishness, Australia Retail sales (out early Friday morning) is likely to impress at 0.4% M/M for November and give a boost to AUDUSD, and UK GDP M/M November is expected to be flat at 0% and may put pressure on the GBP going into next week’s crucial vote. What is for sure is that we currently have volatility in the markets which means that the opportunity is out there!
Watch out for me on video on Wednesday and Thursday. Good Luck and Good Trading, Ben Robson
Ben Robson is the CEO of Spectrex Commodities and author of Currency Kings- How Billionaire Traders Made Their Fortune Trading Forex And How You can Too.