As many’ve already observed

The market’s becoming unnerved

While risk is forsaken

More gains will be taken

So overall wealth is preserved


The dollar is broadly higher this morning as market participants are starting to become a little nervous. Three consecutive lower closes in the equity markets have led to a risk-off scenario. My observation is that there may have been an actual change in sentiment lately based on the following idea: throughout the raging bull market in equities, even on days when prices opened lower, by the end of the day we consistently saw traders ‘buy the dip’ thus preventing the market from closing lower. Every decline in the market was seen as a buying opportunity. But during this short run, and I grant it is short, just three days so far, early gains have melted into late losses. To me this implies that one of the great supports for the bull market may be losing its potency. As I’ve written before, markets don’t always need an obvious catalyst to change their direction or sentiment. Oftentimes, it is only clear long after a move as to what was the cause.   A fourth consecutive lower close in the equity markets (and futures are lower as I type) just might signal a trend change. If the narrative to date has been: risk remains in vogue because of the so-called goldilocks scenario (solid growth with low inflation allows for continued low interest rates and ever higher equity prices), then every signal that something there is changing, most likely low interest rates, could well force a change in that narrative. And that, my friends, offers the opportunity for a much more significant risk-off move. I’m not saying it is happening, just that we need to watch it very carefully.

Once again, the pound is leading the way lower, down 0.6%, as PM May’s lunch yesterday clearly gave the market indigestion. The Northern Irish are not willing to compromise their views and neither are the Dubliners. All the hope that was seen last week regarding the next steps in Brexit are fading quickly, and from what I’ve read this morning, it seems hard to believe that a solution will be found by the end of the week. Another delay in opening the trade negotiations will certainly weigh further on the pound, and as I have been writing all along, support a move back down toward 1.30 as a start. In fact, it seems increasingly likely that PM May will lose her support and perhaps force yet another election in the near term, further reducing chances for a satisfactory outcome. This will not help overall market risk sentiment, I assure you.

But the fading risk sentiment is manifesting itself in Japan as well, where the yen has rallied 0.4% after another down day by the Nikkei, its third of the past four sessions during which it has fallen nearly 4%. We are seeing similar price action in Europe, with lower equity prices and the euro declining for the past four sessions and this despite substantially better than expected German Factory Order data (+0.5% vs. -0.2% expected). I’m sensing a trend! Remember, as we approach year-end with equity markets having shown gains globally, it would not be surprising to see some profits taken, removing risk from portfolios. Historically, the dollar has benefitted in these times.

Turning to the emerging markets, the story is similar, with the dollar broadly higher and movement a little more pronounced than we have witnessed lately. South African rand is the leader on the downside, falling 0.9%, in what has clearly been a straight risk-off move. But KRW is lower by 0.7% after another weak close in the KOSPI has encouraged further unwinding of risk. And while the losses haven’t been quite as large elsewhere, all of EEMEA and most of APAC are under pressure. Here’s the thing, remember how much momentum helped risk appetite on the way up? I assure you it can hurt that much, and more, on the way down. Again, I am not saying this is the turn, but at this point, you cannot rule it out either.

To the extent that data matters, which I don’t feel is the case right now, there are three releases this morning: ADP Employment (exp 190K); Nonfarm Productivity (3.3%); and Unit Labor Costs (0.2%). We also hear from the Bank of Canada today at 10:00, but there is no expectation of a policy move there.

As I survey the markets, the story today is going to be whether or not we have a fourth consecutive lower close in equities. Breaking the current streak will likely result in further benign activity across equities and FX, but if the streak continues then I would look for it to begin to accelerate somewhat, bringing further risk-off sentiment and dollar gains.

Remember, markets can be very perverse, rising and falling significantly without any obvious catalyst. But once momentum starts to take over, then very little can stop those moves. We have observed upward momentum in asset prices for a long time. If it turns, we can expect downward momentum to last for a while as well. For hedgers, that should help inform your decision-making process. In markets that are moving, price taking is the only way to insure execution. And that is very different than what we have experienced for the past eight years!


Good luck