On Stock Markets
In a week which started with Trump accidentally being attacked by the British Ambassador to Washington* and exonerated for charges of misusing power for self interest, Fed Chair Powell seemed to succumb to political pressure from the US administration and used the Humphrey-Hawkins testimony to unwind last week’s NFP beat. By putting the July rate cut back on the agenda, the result was a week of aggressive two way volatility for stocks, forex and commodities, further exacerbated by stronger inflation data on Thursday. Is Trump chaotic and clumsy or is he mercenary and manipulative. The reality is neither but this doesn’t stop us exploring the volatility he creates.
*A private diplomatic telegram from the British ambassador in Washington critical of the Trump administration was leaked, resulting in an attack on Twitter by the president, and the ambassador's resignation.
This July chop allowed us to reduce part of our larger than normal EURUSD position (Long from 1.1217) before the CPI print, but kept some, together with our USDJPY Short running from 108.90. We also cut our long Gold from 1385 at 1426 and reversed our short index trades before the first Humphrey-Hawkins testimony, and went long and stayed long into the weekend.
Why the flexibility in our trading strategy? This two way volatility, we believe, will continue to characterise the market through the July chop as the Dollar continues its slow turn and indices slowly but surely move into the 1929/1987 style blow out. Next week, we publish our six month review of indices with some amazing historical templates that provide very actionable and believable outlooks and therefore strategies that incorporate the current market hesitation.
One of them is the rather quirky "wake up and smell the coffee" fractal that we identified over 2 years ago—Starbucks still leading the DJIA.
We will therefore continue to buy indices on possibly further politically (viz Fed) inspired dips and sell USD rallies as the decline in 10-Year yields is not over yet.
The clarity, potential volatility and return from buying AUDUSD is, by recent times, exceptional and we will be issuing a buy signal next week.
One of the reasons for the current whipsaw rolling into aggressive trends, as we pointed out in last week’s newsletter, is that the FITS (fundamental, intermarket, technical and sentiment) are not quite ready for sustained trend. Markets remain fundamentally uncertain but also confused by political machinations and comments as evidenced by a rather curious but fortunately well spotted inversion of the Humphrey-Hawkins fractal which encouraged us to reverse index shorts.
This week is therefore an appropriate time to investigate the impact of the main protagonist for global stock markets, the President of the United States, Donald Trump. Next week we investigate his impact on Forex and the increasingly popular view of a managed USD devaluation.
Donald Trump has had a significant effect on global stock markets, arguably more so than any previous President in living memory. Watergate, Monicagate were scandals that soon passed. One possibly has to go back to the expansionist Eisenhower in the 1950s to find a comparable agenda and impact on economic growth, expectations and therefore markets. And yet a crucial difference, and one that, in some ways undid Obama, is between rhetoric/expectation and reality. Our Trump Policy Fractal may be a little tongue in cheek but it serves to highlight the uncertainty created by a President with such a strong agenda but without the necessary political support at least in Congress.
The Make America Great Again agenda has been based on restoring US manufacturing, employment and growth and yet at times, given the rhetoric seems to be measured (by Trump himself) more by the level of the DJIA than economic data. As we have highlighted many times previously the Trump era will, in retrospect, be viewed as one where expectations far exceeded an improving but now slowing economic reality and where a significant adjustment (crash) will be made once indices have become entirely driven by sentiment within sentiment in an euphoric blowout—and we suspect once the Trade War has been resolved. Possibly the largest ‘buy the rumor buy the fact oops sell’ for many years.
In the interim, the market will be driven by two forces both influenced by the President.
Firstly a Fed that is coming under increasing pressure to lower rates even if the data doesn’t fully justify it. Let's face it, using excuses such a the long running Trade war, Brexit and other geopolitical concerns as an almost sudden pretext to shift the markets focus is a little disingenuous. But perhaps no surprise and possibly justifiable given the increasingly erratic and arguably less instructive NFP that the Fed and others seem to focus on.
Secondly, the market will also clearly be driven by vacillating (but currently not negative) truce expectations about the Trade War. And those expectations will be fashioned by political comments from both the Chinese and US administrations and particularly the US President's tweets.
Firstly the trade war.
The clear conclusion is that Tariff news does not have a lasting effect and is therefore an opportunity, unless anticipated, to fade, particularly in the context of a trend and currently the blowout. Indeed there is a similarity of Tariff news fractal to the general Trump SPX fractal that punctuated the early stages of his Presidency.
That again shows the sell-off is an opportunity to buy as indeed was the longer term Protectionist fractal—for now.
However the timing of short term event or tweet bottoms appears to have changed in 2019 as the Trade War seems to nudge closer to a resolution. President Trump’s tweets seem to appear consistently in the same place. A cynic or conspriacy theorist would suggest this is manipulation and possibly when the market reaches a certain possibly technical point, ie moving average % retracement. After all the Bundesbank based their foreign exchange intervention policy in the 1980s on a moving average—until traders found out.
However, after extensive research we cannot find any consistent use of any technical tool. But there is a still a clear pattern of when he tweets and its effect on SPX.
In a research paper by Krishan Rayerel “The Impact of Donald Trump’s Tweets on Financial Markets" he concluded:
“Positive and negative Trump tweets move stock prices and lead to significant abnormal returns. These effects last 2-3 trading days. Transitory increases in trading volume and Google search activity implies that Trump catches the attention of retail investors”. Knowing that President Trump’s tweets have this transitory impact is clearly useful for swing trades or positioning with a trend. Knowing when they might come due to the consistency of the price action before is an even greater blessing.
Trump’s Presidency may or may not be, in the words the British Ambassador to Washington, inept, dysfunctional, incoherent and chaotic. But one thing is for sure—as we approach the November 2020 Presidential Elections there will be more tweets and more market gyrations that will fuel the 1929/1987 blowout. So maybe there is some truth in what Ambassador Kim Darroch says. That the Trump’s presidency could “crash and burn”.
With the market increasingly confirming our view of a blowout, and crash, and the templates and maps to assist us we are confident one thing. We will enjoy Donald Trump’s tweets much more than the British Ambassador will.
Here’s to making the very best.
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