Recession fears in the US after disappointing ISM and NFPs – Equities about to break lower?

  • master
  • 08.10.2019
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Economic Events October 7 – 11, 2019

Source: Economic Events Calendar October 7 – 11, 2019 – Admiral Markets’ Forex Calendar

DAX30 CFD

Despite the shortened last trading week, the DAX30 CFD delivered some serious volatility and especially the bears cheered, finding the current advantage on their side.

While the German index saw, as we pointed out in our last weekly market outlook, […]bullish price action respectively at least a bullish drift higher with the target being around 12,500 points[…], disappointing US economic data pushed the DAX30 CFD down on Tuesday and resulted further bearish action into the weekly close, letting the German index fall back below the psychological relevant level around 12,000 points, even though bulls could at least show some strength into the weekly close and create a close above that level.

Still, the fundamental picture darkens: main initiator for the bearish action was the weakest ISM Manufacturing reading since June 2009 which posted the biggest contraction in September since the end of the 2007-2009 recession and left US president Trump start a new tirade on the monetary policy path of the Fed and its chairman Jay Powell.

With that in mind, it seems to become more and more obvious that even the expectation of a looser monetary policy neither from the ECB nor from the Fed is resulting in rising optimism in regards to economic growth.

And with the unstable political outlook around US president Trump and the formal impeachment inquiry from the Democrats in the U.S. House of Representatives and no further progress made in the trade talks between the US and China while a trade war between the US and Europe may just have been expanding after the WTO ruling, chances seem high that the German index will continue to trade lower and not sustainably make it back above 12,000 points in the days to come.

Below 12,000 points, the DAX30 CFD technically finds a first solid support around 11,800/850 points.

On the other hand we only consider a push back above 12,500 points a positive sign which seems, given the current bias among market participants, unlikely in our opinion:

Source: Admiral Markets MT5 with MT5-SE Add-on DAX30 CFD Daily chart (between June 28, 2018, to October 4, 2019). Accessed: October 4, 2019, at 10:00pm GMT – Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of the DAX30 CFD increased by 2.65%, in 2015, it increased by 9.56%, in 2016, it increased by 6.87%, in 2017, it increased by 12.51%, in 2018, it fell by 18.26%, meaning that after five years, it was up by 10.5%.

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US Dollar

The fundamental picture for the USD Index Future got some serious scratches over the last week of trading. After the weakest ISM Manufacturing reading since June 2009 which posted the biggest contraction in September since the end of the 2007-2009 recession and left US president Trump start a new tirade on the monetary policy path of the Fed and its chairman Jay Powell, also the Non-Farm Payrolls on Friday came only in mixed.

As a result expectations of market participants of the Fed cutting rates by another 25 basis points already in October increased, showing now a probability of over nearly 75%.

What’s even more interesting is that the USD Index Future stabilised around its yearly highs and slightly below 100 points.

The main reason can clearly be found in the also very weak performance of the Euro (which has a weight of 58% in the USD Index Future) after disappointing German and EZ inflation data (more in the Euro paragraph below).

Based on the solid USD performance after such weak economic data, we generally continue to expect further USD strength, but want here to emphasize again to be careful.

Probably, the US dollar shortage in money markets is the current reason for the US dollar performance, especially against the Euro and once the repo markets normalises (if it does…), the Greenback could see some heavier selling pressure.

And we should also carefully watch US president Trump and still consider a direct intervention of the US Treasury in FX markets an option, even though such a step should not only be seen as sceptical and its sustainably being questioned, but also unlikely given the current political pressure Trump faces in the US and tensions in the trade dispute with China, Trump probably doesn’t want to escalate, at least not now.

That said, technically the USD Index Future stays bullish as long as it trades above 95.00:

Source: Barchart – U.S Dollar Index – Weekly Nearest OHLC Chart (between May 2016 to October 2019). Accessed: 04 October 2019 at 10:00 PM GMT

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Euro

As we wrote in our last weekly market outlook, the overall outlook for the Euro stays bearish, especially against the US dollar, here e.g. based on the US dollar shortage in money markets (as discussed in the USD paragraph above), given recent economic data, especially from the biggest European economy, Germany, but also based on the potential escalation of the trade dispute between the US and Europe.

As a result it didn’t come as such a big surprise that after disappointing CPI data from Germany on Monday the currency pair dropped below 1.0900 for the first time since 2017.

A very likely driver here was, that investors feel strengthened in their expectation of the ECB’s QE infinity, announced on the September 12 at its latest meeting.

The only reason for the Euro not taking on further bearish momentum against the US dollar and going for a stint down to 1.0750 can be found in also very weak US economic data respectively the coinciding drop lower in US yields.

That said, and as long as 10-year US yields seem to go for another test of its current All Time lows from June 2016 at 1.36%, a dynamic push lower in EUR/USD shouldn’t be expected, instead we consider a drift lower likelier.

Technically this bearish outlook stays true as long as EUR/USD trades below 1.1100/1130:

Source: Admiral Markets MT5 with MT5-SE Add-on EUR/USD Daily chart (between August 17, 2018, to October 4, 2019). Accessed: September 27, 2019, at 10:00pm GMT – Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of the EUR/USD fell by 11.9%, in 2015, it fell by 10.2%, in 2016, it fell by 3.2%, in 2017, it increased by 13.92%, 2018, it fell by 4.4%, meaning that after five years, it was down by 16.5%.

JPY

The overall picture in USD/JPY didn’t significantly change over the last week of trading, in fact we feel vindicated in our latest scepticism around the sustainability of the push back towards 108.50/109.00 in USD/JPY.

The main reason here can clearly be found in the latest US economic data which disappointed on a broad front.

The weakest ISM Manufacturing reading since June 2009, posting the biggest contraction in September 2019 since the end of the 2007-2009 recession, leaving US president Trump to start a next tirade on the monetary policy path of the Fed and its chairman Jay Powell and as a result increasing expectations of market participants of the Fed cutting rates by another 25 basis points already in October, showing now a probability of over 80%, also the NFPs on Friday couldn’t significantly brighten the picture.

That said, and with the BoJ not being expected to significantly change its rhetoric respectively make any announcements in regards to the upcoming BoJ meeting and its monetary policy path (despite the recent turbulences in Japanese bond markets where 10-year JGB yields spiked last Tuesday after a poorly-received auction, likely a sign traders are finally paying heed to Kuroda’s recent comments warning against excessive falls in super-long yields), we consider another attempt to break back below 106.80/107.00 a serious possibility.

Especially, if any signs of risk aversion start to materialise (rising political uncertainties around the impeachment inquiry into US president Trump and/or escalation in the trade dispute between the US and China), a next wave of selling, pushing USD/JPY below 105.80 and trigger further selling, quickly activating the region around 105.00 again, seems likely.

Source: Admiral Markets MT5 with MT5-SE Add-on USD/JPY Daily chart (between August 13, 2018, to October 4, 2019). Accessed: October 4, 2019, at 10:00pm GMT – Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of USD/JPY increased by 13.7%, in 2015, it increased by 0.5%, in 2016, it fell by 2.8%, in 2017, it fell by 3.6%, in 2018, it fell by 2.7%, meaning that after five years, it was up by 4.1%.

Gold

After Gold broke below 1,480 USD last Monday (as we pointed out in our last weekly market outlook, the region around 1,480 USD could be considered a significant short-term support), it pushed back above after bad US economic data already on Tuesday and continued to trade higher into the second half of the week.

In more depth: the ISM Manufacturing index fell to 47.8% for September, marking the lowest level since June 2009 and ISM employment dropping to 46.3 points, while Non-Farm Payrolls on Friday came in mixed.

With US president Trump starting a new tirade on the monetary policy path of the Fed and its chairman Jay Powell and, as a result of disappointing US economic data, increasing expectations of market participants of the Fed cutting rates by another 25 basis points already in October, showing now a probability of over 70%, while in addition to that signs of risk aversion started to materialise (rising political uncertainties around the impeachment inquiry into US president Trump and/or escalation in the trade dispute between the US and China), our outlook for Gold stays positive – also in the days, weeks and months to come.

That said, we still see our mid-term target around 1,650/700 USD being active and even if we see a stint below last week lows around 1,460 USD, a potential mid-term long trigger is still found around 1,440/450 USD:

Source: Admiral Markets MT5 with MT5-SE Add-on Gold Daily chart (between July 6, 2018, to October 4, 2019). Accessed: October 4, 2019, at 10:00pm GMT – Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2014, the value of Gold fell by 1.7%, in 2015, it fell by 10.4%, in 2016, it increased by 8.1%, in 2017, it increased by 13.1%, in 2018, it fell by 1.6%, meaning that after five years, it was up by 6.4%.

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