Markets Reverse, Trump’s Tariff Talk – “A Damp Squid”, Stocks Plummet

Summary: “What a difference a day makes”.. Manic Monday’s euphoric risk-on mood reversed. Markets saw no meaningful progress on the China-US trade negotiations. Wall Street plummeted, dragging global equities lower. The Dow sank 2.28%, the S&P 500 not far away, down 2.24%. The yield on the benchmark US 10-year bond extended tumbled by 6 basis points to 2.91%, the lowest since September. Global yields followed. Germany’s 10-year Bund fell 4 basis points to 0.26%. The Dollar ended mixed, up against the Euro, Sterling and Aussie, down versus the Yen and Swiss Franc. Emerging Market assets and currencies slumped. The Turkish Lira ended 2.7% lower against the Greenback.

  • USD/JPY – slumped 0.70% to close at 112.78 from 113.60 on Monday. The Japanese currency is always the most sensitive to moves in the US 10-year yield. The souring of risk sentiment will also weigh on this currency pair. As will a short JPY market that looks to be over-extended.
  • GBP/USD – had another volatile trading session, initially climbing to 1.2840 on a weaker US Dollar before plummeting on another Brexit setback to 1.2659, June 2017 lows. Sterling closed little-changed at 1.2717. The roller-coaster ride continues.
  • S&P 500 – After rallying 0.8% on the initial euphoria of trade hopes following the US-China “ceasefire”, investors realised that this means little. The pattern of the Trump administration’s habit of overstating success is wearing thin. The S&P 500 plummeted 2.24% to close at 2730 from 2785 Monday. Early Sydney sees further selling to 2702.00. Looking shaky.

On the Lookout: Risk sentiment took a hit following the euphoria on Trump’s tariff truce which carried no meaningful follow-through. Stocks and Emerging Markets tumbled. The Dollar though was little-changed. USD/DXY finished at 97.00 (96.98 Monday). History has shown the FX markets that many G20 meetings have come and gone with little to show for. However, the US Dollar cannot ignore the sharp fall in the US 10-year bond yield. In less than a month the US Ten-year treasury yield has fallen to 2.88% low last night from 3.23% (Nov 9). Are bond traders seeing the end of the Fed’s tightening campaign?  Watch those bond yields.

Trading Perspective:

  1. USD/DXY – The Dollar Index is overextended and is vulnerable to a down-side squeeze. The latest CFTC report on the Commitment of Traders (week ended 27 November) saw Total Net US Dollar longs increase to US$ 30.2 billion, an increase of US $ 1.2 billion into the G20 meeting. Speculators are currently long of US Dollars in 7 out of 8 IMM currencies, which are all the Majors except for the Mexican Peso. This currency pair traded to a high of 97.13, closing at 97.00. Look for a drift lower to the 96.00/20 support level.
  2. USD/JPY – this currency pair is slip-sliding away with risk sentiment souring and US yields tumbling. The yield on the Japanese 10-year JGB was down one basis point to 0.06%. Its US counterpart US 10-year yield was down 6 basis points. The latest CFTC report (week ended 27 Nov) saw net speculative JPY shorts increase to -JPY 104,324 contracts from -JPY 100,065. The largest net short JPY position for 2018 was -JPY 125,536 in January. Which is not far away. Look to sell USD/JPY rallies to 113.00 for a test of 112.20
  3. EUR/USD – The Commitment of Traders report of the CFTC in the latest week indicated that most of the USD buying came against the Euro. Net speculative total Euro shorts increased to -EUR 55,071 contracts from the previous week’s -EUR 47,224. Last night the Euro traded to a high of 1.14186 before settling at 1.1343, 0.11% lower. The support between 113.00/20 should hold for another attempt at 114.00/20. Net short Euro bets are at their biggest since January 2017.
  4. US Ten-year Bond Yield – slumped to a low of 2.88% before settling at 2.91% (2.97% Monday). The next target support is at 2.85% which was last seen in September this year. We should hold the levels between 2.85/2.90 % as markets consolidate. US markets will be closed today as the country honours deceased ex-President George HW Bush with a national day of mourning. Federal Reserve Head Jerome Powell’s testimony to the US Congress has been cancelled. Next up is the US Payrolls data on Friday. We may well have peaked around 3.20 %. Expect more volatile times ahead.