Volatility returns as stocks slip on trade worries, eyes on ISM today

Indices
Morning Note

Volatility is a double-edged sword for the trader and, for better or worse, it’s back. The confident march of the bulls into the year-end has come unstuck. With the S&P 500 up 23% and Europe, ex-UK, up about 15% this year there is still room for investors to be booking profits into Christmas that could spell further downside pressure. Last year it was the Fed to blame, today it’s Trump and trade.  Things may get a little dicey as we run towards the Dec 15th deadline for the planned tariff hike on $156bn in Chinese goods by the US.

Stocks continue to feel the heat from Donald Trump’s salvoes tariffs and the mounting risk that the US-China trade war will continue festering like an open sore well into 2020.  China today is saying that it will take necessary countermeasures to defend its interests, refused to set a timeline for a deal and stressed that a trade deal needs to be on the basis of ‘equality and mutual respect’ – not the one-sided deal that Trump is demanding. Nothing in these comments is especially new.

Wall Street had a tough session with the VIX suddenly emerging from its slumber to try a squeeze on 18. The Dow ended down 1% to 27,502 and the S&P 500 dropped two-thirds of one percent to 3,093. But having opened sharply lower bulls took a grip and steadied the ship and we closed at the highs of the day. US large caps should at least benefit from a flight to quality in all this mess.  

Asia has been broadly softer overnight with Sydney and Hong Kong moving down well over 1%. European markets are flattish ahead of the open – FTSE 100 a tad weaker, the DAX a shade higher.

Few pointers 

  • Markets are discounting a trade deal with China being done this year, but it’s still not impossible. The caprice of Trump means, as we have consistently stressed, anything can happen.
  • An EU-US tit-for-tat trade war is a risk but not to be overplayed yet  – most think it can be avoided 
  • Global equities have had a good run this year – there is still plenty of profit taking that could occur in the run-up to Christmas- do we see a repeat of last year and the ‘nightmare on Wall Street before Christmas’? 
  • The market, and Trump, ultimately know the Fed has their back. Pullbacks are to be expected as the market drifts higher and higher
  • After the soft manufacturing PMI on Monday, eyes on today’s ISM non-manufacturing PMI for a health-check of the US economy – could be important as – at present – the market does not seem overly stressed by worries about the US economy after the yield curve inverted and then uncoiled again  – have markets been prematurely ecstatic? Usually after inversion you see a sharp steepening before the recession strikes.

The bid for havens has seen the yen move sharply against the dollar. USDJPY has moved one big figure on the ratcheting up of trade pressures to trade around 108.50, having begun Monday at 109.70 and with bulls confidently eyeing 110. Now we are looking at support emerging from the 50-day moving average at 108.470. A possible golden cross needs to be watched.

Elsewhere in FX, GBPUSD dutifully pulled back from the highs after touching on 1.30 and trying to make to reach its highest since May. As of send time the pair was hovering around 1.2990 – if it taps on the door enough it should open. A lot depends on the confidence the market has in the polls which shout loud and clear that a Tory majority government is coming. Services PMI on tap at 09:30 GMT is of secondary importance but could produce some movement.

EURUSD has done little since moving up to 1.1070. AUDUSD is holding the 68 handle for now. 

Gold has also found bid with yields coming down – US 10s back under 1.7% point to the pressure in equities. Gold rallied to $1482 and a look at the 50-day moving average at $1483 which may offer some resistance near-term. 

Elsewhere, oil is holding in the upwards channel trend with support at $56 holding as we run into the OPEC meeting. Talk of OPEC and allies increasing their curbs – that is, deepening cuts from 1.2m bpd to 1.5m bpd may be overconfidence, but bulls will be hopeful.