The next few days will tell us whether we can continue to barrel forward or if this crazy train of a market will be derailed by reality.
Soros used to say that he knew from the feeling in his back when the market was about to do something big or that he should get out of his large positions. Let me be the very first in line to say that I am no George Soros, but as Brett Steenbarger, the great author of a number of good books on the psychology of trading and traders, said, our own emotional reaction to what is going on in the markets (assuming we have been fairly immersed in markets for some time, of course) can actually provide a clue that something is wrong or about to happen.
I have certainly noticed this in the past and I am feeling it at present - registered as a painfully high degree of frustration and a huge urge to just set up shop under an umbrella on a sandy beach somewhere. Critically bad data egging the equity markets on to new highs and boosting pro-cyclical currencies? The German DAX rushing back close to the highs for the cycle and EUR/USD firming above 1.3000 as the most uncertain period yet for Europe fast approaches this fall?
In such trying times, one has to either capitulate to the world view expressed by markets, or soldier on as the disgruntled contrarian. And unfortunately for my psyche, I must do the latter until further notice. But at least the next few days of inputs, from this evening’s FOMC, to tomorrow’s ECB and Friday’s US ISM non-manufacturing and employment data, will offer a key test of the market’s current momentum.
Of course, in my current state of cynicism, I can’t help but darkly imagine that the market will try to draw an initial conclusion from the events of the rest of this week that gets a maximum number of people offside before then viciously moving back the other way. So my two scenarios are:
- The unlikely (if hoped for to ease the old psychic pain bit…) one in which we pivot back higher in the USD and look for a vicious short-term JPY correction higher starting already by the end of the week. (the risk is that we get an initial modest consolidation, followed by a wild final extension before things come back to earth further out.)
- The other one the market “gets what it wants” (a more dovish FOMC, ECB boosting credit in some way in addition to cutting rates, and weak to so-so data out of the US on Friday) and celebrates with an additional push lower in the US dollar and higher in pro-risk trades, before reversing sharply further out in the recognition that this is mostly priced in already and that there is plenty of cause for concern in the pipeline.
Today is a public holiday across much of Europe, though not in the U.K. or the U.S., as we await the outcome of this evening’s FOMC meeting. This is one of the minimal meetings that will only feature the release of a monetary policy statement and no press conference. Considering that for the last four years, the markets have been dominated by the activities of central banks, one can hardly over-estimate the importance of the question of who will be the next Fed chairman. Sure, if everything goes “according to plan” and we see the seamless-Yellen-transition-scenario play out, there will be no interruption to the policy expectations continuity, but there are too many what-if’s between now and the confirmation of a new chairman.
AUD bears to come back in May to prey as equity bulls stay away?
Overnight developments in Asia were not particularly supportive of the AUD as we saw a downright depressing manufacturing survey at 36.7 - the worst since early 2009. There was a recent report about Australian tax revenues falling way short of expectations – one of those interesting indicators that contain perhaps more truthiness about the state of the Australian economy than the macroeconomic data is showing.
For now, the Aussie is in a sweet spot because the RBA has had a good deal of interest rate policy to work with ahead of the zero bound, meaning that it can ameliorate the effects of the slowdown for now. But crunch-time eventually awaits Down Under. On that note, I’m an AUD/USD bear as long as we can stay below the 1.0400 area, which coincides with the 200-day moving average. Confidence in downside only ever picks up if we can see some kind of dramatic reversal in the equity market melt-ups.
Economic Calendar Highlights
- Australia Apr. AiG Performance of Manufacturing Index out at 36.7 vs. 44.4 in Mar.
- Australia Apr. RPData-Rismark House Prices fell -0.5% MoM
- China Apr. Manufacturing PMI out at 50.6 vs. 50.7 expected and 50.9 in Mar.
- UK Apr. PMI Manufacturing (0830)
- US Apr. ADP Employment Change (1215)
- US Mar. Construction Spending (1400)
- US Apr. ISM Manufacturing (1400)
- US Weekly DoE Crude Oil and Product Inventories (1430)
- US FOMC Rate Decision and Monetary Policy Statement (!800)
- UK BoE’s Broadbent to Speak (1800)
- UK BoE Deputy Governor Bailey to Speak (2000)
- Canada Bank of Canada’s Carney to Speak (2205)
- Australia Mar. Building Approvals (0130)
- China Apr. HSBC Manufacturing PMI (0145)