The new trading week and month has started on a very sour note, as markets begin to digest the implications of the impasse currently underway in Washington. For anyone not familiar with what is happening, it seems the threat of the first partial shutdown of government agencies in 20 years is no longer a threat, but a reality.
However, the standoff surrounding the shutdown is merely a prelude to what is likely to be a much more dangerous confrontation over the need for Congress to lift the debt ceiling to allow fresh government borrowings, as the 1st October is the start of the new fiscal year.
If the tantrums in Washington were not enough for the markets, enter Silvio Berlusconi, stage left, with his threat to bring down the current Italian government by demanding fresh elections. For those of you unfamiliar with Italian politics, such actions are a fairly common occurrence, but the timing could not have come at a worse moment.
And with the first batch of Chinese PMI data coming in lower than expected, it has not been a happy start to the trading week or month.
The remainder of this week also sees a slew of data from all G7 countries plus Australia, and ends with the Non Farm Payroll numbers on Friday – that is assuming the Bureau of Labor Statistics is open for business. But joking aside, with no data available, any decision regarding an end to the FED’s bond buying program may simply be deferred once again.
With so much going on this week, it goes without saying that trading will be extremely tricky as markets will be reacting both to data and the latest political twists and turns. In other words, we are going to be treated to a double dose of volatility, and some very sharp price moves. However, with volatility comes opportunity so here is a quick run down of what to watch out for this week.
The big guns are out this week with statements and interest rate decisions. These start in Europe on Wednesday with a press conference from Mario Draghi and an interest rate decision, so an important moment for the euro and eurozone. Here the markets are expecting more ‘dovish’ talk from Draghi, and anything to the contrary will see the euro over react. And, of course, waiting in the wings is Silvio, desperate to remain the centre of attention (& also avoid jail).
In China the focus is very much on PMI data, and the standout release is September’s number which will give markets a clue as to whether China is managing to build on recent strong months of growth. In fact while preparing this post the number has come in very slightly lower than expected.
Staying in Asia Pacific, we have some very important data from Australia, which includes an interest rate decision. Interest rates have been kept on hold, which is no surprise. However, the reason why, as traders and investors we should be acutely aware of what is happening in the Australian economy, is Australia’s close relationship with China. It is a relationship based China’s insatiable appetite for commodities.
As a result China’s demand for commodities drives not only the Australian dollar, but also impacts the US dollar and the global economy. We could say commodities not only provide the bridge between money and real world products, but they are also a gauge of risk since they are considered a high risk asset class in their own right.
Staying with Australia, retail sales have come in slightly better than expected, with building approvals and the trade balance yet to come. All these releases are key determinants of whether the local and global economies are improving.
For forex traders sentiment towards Australia is always first reflected in the Aussie Dollar and, to a lesser extent in the Aussie Yen, both of which have rallied. The Aussie Dollar in particular was already finding support at 0.93 and with the releases has since bounced higher.
This week we also have important data due from Japan which has started with the Tankan Manufacturing Index release. This came in well above expectation at 12 against a forecast of 7, with the non manufacturing version flat at 14.
However, the key fundamental news item for Japan is the Bank of Japan’s press conference on Friday which could create a volatile reaction for the yen, given the increasing concerns over debt levels. As I mentioned in last week’s podcast, the USD/JPY is now preparing for an explosive breakout, and this item may be the catalyst the pair has been waiting for.
On Friday we have the non farm payroll numbers, which are preceded on Wednesday by the ADP. To date the ADP has failed to provide a precise forecast for its more illustrious brother on Friday, and we should also know very soon whether any data is likely to be produced given the partial shutdown.
Finally, moving to some charts, it is interesting that despite all the noise and fury surrounding the shutdown, the US equity markets have remained stoical, with the daily VIX only moving marginally higher from the 13 price region towards 17.50, a range it has been testing for the past few months.
The move higher in the VIX has seen the YM (the mini DOW future) move off its highs of mid September at 15650 and is now testing the 15100 region. Volumes on the daily chart remain average, and there is certainly no evidence of any selling climax, just yet. This suggests that institutions and large players are not preparing to exit and take the market lower, and the current move lower appears to be a natural pullback coupled with profit taking.
The longer term outlook on the weekly chart paints a similar picture with last week’s close lower on the YM appearing to be more of a pause point – no doubt as a reaction to the political uncertainty.
The lesson for us this week therefore can be summed up as one where the political noise has not, as yet, translated into major market moves, as evidenced by the technical picture. So far markets appear to be taking a relatively sanguine view at present, perhaps based on previous experience of the fiscal cliff earlier this year. This is the approach we need to develop as traders and investors, which is to be aware of the big picture, but to tune out the noise, rhetoric and distractions and focus on the charts, which will ultimately reveal all with the volume price relationship holding the key.
As I said earlier whilst there is still no technical evidence to suggest a major selling climax of risk assets, markets will remain volatile in the short to medium term, so we do need to remain vigilant.
By Anna Coulling