Markets Looking for Terra Firma after Becoming Unhinged

The softer than expected US jobs report sealed among the most challenging weeks since the first quarter of the year for investors.  After rallying strongly in the last week of November, equities reversed course dramatically.  The S&P 500 lost 4.6%, its biggest weekly drop since March, giving back nearly everything it had gained in the previous week (4.85%).  The MSCI World Index (of developed markets) fell about 3.75% to return to its lowest level since September 2017.  Paradoxically, the MSCI Emerging Markets Index fell a modest 1.3% and is at one-month lows. 

The 10-year US Treasury yield, a global benchmark, fell for a fifth consecutive week, the longest streak since April, and finished the week near four-month lows.  The dollar fell against most currencies, except for the dollar-bloc, which are often perceived to be leveraged to world growth, though a poor Australian GDP figure and a dovish hold by the Bank of Canada did not help matters,  and sterling, which is hobbled by the Brexit uncertainty.   

Let’s review the technical condition as we prepare for next week. 

Dollar Index:  The uptrend line drawn off the September lows was violated on a closing basis at the end of last week.   It finished the week on session lows (~96.50), but not at the week’s lows that were recorded on December 4 a little below 96.40.  It was only the third weekly loss since the third week in September.  After trending higher from the lows in the second half of September, the Dollar Index has broadly traded in a 96.00-97.50 range. The technical indicators leave scope for the Dollar Index to slip further.   The lower Bollinger Band begins the week near 96.25, and the 50-day moving average is near 96.35.  Last month’s low was recorded just above 95.65, and the 100-day moving average is found near 95.70.   

Euro:  Since the middle of November, the euro has closed outside of the $1.13-$1.14 range precisely three times.  The technical indicators seem to warn of risk to the upside in the coming days, but the sideways activity is whipsawing the readings.  The trend line drawn off last month’s highs comes in near $1.1435 at the start of the new week.  The trend line drawn off last month’s lows is near $1.13.  The euro has closed once above its 50-day moving average since late September.  It is found near $1.1415 now.  The ECB meets this week.  The euro has fallen on days the ECB meets this year, with September being the sole exception.  The cut trimming of GDP and inflation forecasts could offset the confirmation that new net asset purchases will cease at the end of the month.  

Yen:  The dollar-yen exchange rate has also been trading broadly sideways.  Since the start of November, the JPY112-JPY114 range has contained the lion’s share of the price action.  There has been one close out of the range during this period.  The technical readings are getting stretched, but no sign that they are turning up or divergence.  For a lower risk entry, we are more inclined to be patient and look to buy dollars below JPY112.00.  Allowing for an intraday violation in the middle of August, a trend line from the May lows, through the September and October lows, was successfully tested last week (~JPY112.25) and the lower Bollinger Band is seen near JPY112.40. A convincing break of JPY112.00 would target JPY111.40-60. 

Sterling:  The British pound slipped to its lowest level since June 2017 last week (~$1.2660).  The government lost three votes relating to Brexit, but the vote on December 11 is the big one.  Even the Tory Party Whip is warning of a defeat.  Sterling is vulnerable to the headline rejection, though given that it has been well-telegraphed, a sell the rumor buy the fact type of activity.  Moreover, the rejection of the Withdrawal Bill would begin a new phase in the process not necessarily lead to a no-agreement exit in three and a half months. Based on current volatility (and normal distribution), there is about a 70% chance that sterling will be in a $1.2450-$1.3015 range next week.  

Canadian Dollar:  The US dollar also reached its best level against the Canadian dollar since June 2017 last week (~CAD1.3445).  Soft economic data in the first part of the week (IVEY PMI and a wider trade than expected trade deficit) and the less confident Bank of Canada statement kept the Canadian dollar under pressure after Q3 GDP had previously shown that domestic demand contracted in Q3.  The employment data at the end of the week (record job growth, more than nine times more than the median forecast in the Bloomberg survey, though wage growth slowed) offered a reprieve.  The implied yield on the March BA futures rose 3.5 basis points, the first increase in more than two weeks and the most since October 24.  Interpolating from the OIS curve, the Bloomberg model shows about a 16% chance of a January hike, down from around 80% a month ago. The US dollar broke below the 20-day moving average, which it has steadily climbed since mid-October (with occasional intraday violations), but found support there again ahead of the weekend after the diverging employment data.   

Australian Dollar: After gapping higher in response to the constructive even if ill-defined US-China agreement, the Australian dollar moved lower for the rest of the week, and close 1.35% lower for the second time in three weeks.  The Australian dollar was turned back after approaching $0.7400.    The gap looks like exhaustion.   The Aussie had trended higher since the two-year low was recorded in late October near $0.7020.  The $0.7200 area is the 50% of the move, and it needs to convincingly break this area to boost confidence that a high is in place, and even then, ideally the $0.7160 area, which corresponds to the low from mid-November and the next retracement objective.  The Australian dollar often, though of course not always, seems to lead the general direction of the US dollar. Even if one does trade it or have Australian dollar exposure, it is still worth monitoring. 

Mexican Peso:  If the yen is often a range-bound, the Mexican peso trends.  A simple five and 20-day moving average crossover system (buy when the five day crosses above the 20-day and sell when it crosses below) has caught the large moves this year with only a few short periods of being whipsawed.  For the past six weeks, the dollar has been moving back and forth in a MXN20.00-MXN20.50 range with a few exceptions.  This had left the five-day average to cross below the 20-day average for the first time since mid-October when the greenback was near MXN18.85.  The dollar’s eight-week advance ended with a back-to-back weekly loss.  In the futures markets, the speculative shorts have been reluctant to cover and have a larger gross short position than they did at the end of November.  

Crude Oil:  The five and 20-day moving average crossover system has worked well this year too, even with the whipsaws in July and August.  Recently it would have caught the last push to new four-year highs beginning in mid-August, and then the five-day moving average has been below the 20-day day moving average since October 15 when prices were still above $70 a barrel.  The drop has been so precipitous that the 20-day moving average itself has not been approached since October 17…until before the weekend in response to the OPEC+ deal.  Yet, the week’s high was actually set earlier in the week.  Reports that OPEC’s cuts are defying the Trump Administration is not necessarily the judgment of the market, though the technical indicators suggest additional corrective pressures and a crossing of the moving averages may be a proxy for other momentum models.  An upside break of the $5 rectangle pattern would suggest an initial target around $60 which is where the 38.2% retracement of the drop since October is found.  

US Rates:    US 10-year yields fell for the sixth consecutive week and approached 2.80%, the lows from July and August.  The technical indicators for the December note futures contract are stretched but have not turned.  This suggests not chasing the market higher from here.  Momentum traders may consider using any additional strength to take profits.  Next week, Treasury brings $78 bln of supply to the market in three-year ($38 bln), 10-year ($24 bln) and 30-year paper ($16 bln).  Perhaps, when thinking about the US coupon curve, which continues to flatten, not even due is given the debt management with issuance concentrated at the shorter end.   As the market ostensibly reconsiders the trajectory of Fed policy, the two-year yield has fallen from about 2.95% to roughly 2.70% last week. Over the past month, the market has barely waivered on the likelihood a hike here in December, but in the odds of another hike in Q1.  According to the CME’s model, the market has discounted about a 27% chance down from 60% in early November.  The odds of at least two rate hike in H1 19 has fallen to 1 in 12 from 1 in 3 a month ago.  

S&P 500:  The technical development that many are talking about is the “death cross”-the S&P 500 50-day moving average crossed below the 200-day moving average for the first time since late April 2016. It crossed at the end of last week as the S&P 500 tumbled 4.6%.  It was the third loss in four weeks and nearly fully offset the 4.8% gain in the prior week.  The S&P 500 gapped higher on Monday and quickly filled it the next day and more.  The 2600 area offers support, and a break could signal another 2% loss.  A move above the 20-day moving average (~2712) may help stabilize the technical tone.  


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