Today’s Key Market Drivers: 15th May 2019

US stock markets pull on a short squeeze.


The S&P 500 rallied 0.8% on Tuesday putting a short squeeze on traders who had shorted stock markets on Monday expecting a continuation lower after trade talks broke down between the US and China. Whilst my view is this recent sell-off is a sign of a larger move lower in coming weeks the initial emotional reaction by many traders sees them short the market not understanding how and why investment banks and hedge funds use this “novice trading volume” to take opposing positions and make money.

Professional traders understand how the novice trader thinks and acts and they use it to their advantage. You don’t have to be a farmer to know the herd gets slaughtered and the herd mentality in financial markets leads most novice traders straight to the slaughterhouse. That is why you must never follow the herd.

Why I need to stay flexible with my fundamental views.


If you can’t change your mind as a trader and you fall in love with your own views then you’ll be sadly disappointed on many occasions. That is why experience does count for a lot in this game and the phrase “trade what you see, not what you think” is only applicable to novice traders. Professional traders will change their mind based on facts and what they see and if the current trade war between the US and China bites into the US economy the US Fed will need to lower rates and the US Dollar could fall considerably when the pricing in of this expectation occurs.

I’ve been suggesting for months now the US economy is doing well and if the economic trend continues the Fed would need to raise rates before Xmas. However, the trade tariffs between the US and China will not only impact both economies from a financial perspective but they will likely impact both economies from a psychological perspective too and if consumers reduce spending and growth and inflation falls the Fed will need to drops rates. My expectation of currency pairs such as the AUD v USD going lower would therefore not likely materialise as the US Dollar would be sold.

CNBC put out a comment this morning saying “The New York Fed’s gauge of recession probability over the next 12 months is now at 27.5%, the highest since the global financial crisis.

The AUD is trying its best to put in a low.


The Aussie Dollar is hanging on by a thread as traders begin to accumulate long positions expecting this to potentially be the low in price. They may be right but in my experience being first to the party is always a nerve-racking experience. Will anyone else show up? Am I the only one? I look stupid standing here all on my own? That’s exactly what’s going through the minds of traders who try and buy lows in markets.

Thursday’s official jobs numbers will impact the AUD in the short term, however, Trump’s Twitter account and China’s official news agency is what traders are using as their buy and sell barometers at present. China has officially responded to the US tariffs with new tariffs of their own and given the G20 summit in Japan on the 28th & 29th June is more than a month away current trade tariffs will stay in place and it is unclear if more trade talks will resume beforehand. Trump and Xi are expected to speak on the sidelines of the G20.

Aussie wages growth numbers may get some attention today.


Wages have been stagnant in Australia for over a decade and today at 11.30am AEST we will get the latest Wages Price Index number which isn’t likely going to set the world on fire and if weaker than the market expects the recent little rally on the AUD would be short-lived.

One hour prior to the Wages number we will see the release of Westpac Consumer Confidence figures which has the potential to move the local currency around 25 ticks. What the Asian market will be more focused on is the China Industrial Production and Retail Sales numbers due at midday.

In the European trading session, the market will digest German and Euro Area GDP numbers which may give the Euro another boost if better than expected. In the US trading session, it will be Canadian inflation figures and US Retail Sales and whilst the US Retail Sales number this month won’t be a big market mover it could be in future months as traders get a read on how US consumers are behaving as the trade war escalates.

The reality is nobody knows how this will end.


What we will see and hear in the weeks leading up to the G20 summit is analysts and economists’ views on what impact the tariffs on both countries will potentially have on US and global economic growth. These are the questions investment banking and hedge fund traders will be searching for right now so they can price in their views and likely outcome.

The overnight market reaction is typical after a sharp one-day decline and the longer-term moves will be dependent on how the collective wisdom of senior economists and commentators is viewed. My expectation is the market will get nervous and over the coming week make a new low unless a resumption in trade talks is announced. Trump is also unlikely to back down from his Twitter account and will continue to stick it up the Chinese.


Be tough and stay resilient. Keep going no matter what.

AB

 

About the Author: Andrew Barnett

Andrew is a professional trader and successful investor who has a strong focus on education. He is a regular Sky News Money Channel Guest and one of Australia’s most awarded and respected financial experts and is regularly contacted by the Australian Media for the latest on what is happening with the Australian Dollar. Director at LTG GoldRock, Andrew Barnett, guides thousands of traders around the world in the live market on a daily basis, advising them on buy and sell directions, as well as trading his own personal account. Andrew, a regular keynote speaker at trading and wealth-creation events throughout the Asia Pacific region, is an authorized representative registered with the Australian Securities and Investment Commission (ASIC).

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