VG Macro Weekly 04Sep2020

Summary

• On Friday, the USD, precious metals, and equities took a break from the trend reversal that started on Thursday, while US 10 year yields rallied close to 10bp.
• The weekly charts of all the stretched assets I am watching are showing signs of indecision or reversal ahead of the Labor Day holiday. Are markets waiting for the impact.
• Currencies: highest positive grade in USD & JPY / highest negative grades in AUD & NOK. Daily indecision is resolved with a trend reversal, and generated a weekly indecision.
• Equities: highest negative grade in Nasdaq and S&P / highest positive grade in UKX and HSI. Price action looks similar to equity indices of 2016: summer break of prior highs followed by consolidation in the Fall ahead of the election.
• Rates & Commodities: highest positive grades USGG10YR and BCOMEN / highest negative grades in BCOMPR Index and BCOMIN Index. Friday’s aggressive 10 bp rally in 10y US yields followed a doji candle on Thursday.

This has been a critical week for the risk rallying trend of the last six months. The large drawdowns in equity markets follow the trend reversal in rates and precious metals market and establish a credible stop level for a short risk position. For the moment, I have no way of knowing if this reversal is real and will generate a significant follow through. In isolation, a move like this, coming right ahead of the pre-Labor Day NFP release, should not be fully believed. However, the risk – reward dynamics for fighting this trend have gotten significantly more favorable. When you take into account the early August reversals in the rates and precious metals markets that have historically led the equity markets, the likelihood of a temporary period of consolidative risk aversion or a more aggressive period of impulsive de-risking is greatly increased.

I did not expect this turn around to happen ahead of the long weekend, and cannot fully explain it. Pre-holiday trend reversals are usually false signals driven by the market’s desire to remove weak positions during an illiquid time. However, this trend is significantly more overextended than the other trends I have seen and the reversal seems to be too big to be a simple pre-holiday stop run. Furthermore, we can draw parallels between current market behavior and the price action seen ahead of the 2016 US election. In 2016, the outside range week reversal hit the equity markets a week before Labor Day and led the S&P to a long and drawn out consolidative process that ended on the Friday before the US election after a 5% drawdown.

The recent equity selloff may be tied to the US kids going back to schools, which in many states will be run through zoom. Will parents be able to work productively while their children lack proper personal supervision during class time? Furthermore, will lack of a pre-election vaccine create added anxiety about the outcome of the election possible impacts on the market.