US Labor Market
The soaring US labor market has market participants excited. The ADP employment change report earlier this week revealed how the labor market expanded by 230 thousand people, exceeding analyst forecasts of 190 thousand. Today’s Non Farm Payroll (NFP) figures are expected to be 185 thousand, however, the earlier ADP report’s result indicate this prediction may have similarly underestimated the labor market’s growth. The US economy is now backed by an extremely robust labor force that European economies can only dream of. In fact, many analysts have suggested that the only limiting factor on the US economy is the lack of available labor. If the unemployment rate published today remains below 4%, then September would become the sixth consecutive month of record low unemployment.
Rising Yields, Falling Stocks
Yields for US treasuries are on the rise, meanwhile the stocks markets have been overcome by a selling frenzy. The overwhelmingly positive US macroeconomic data suggests the Fed will continue it’s policy of raising interest rates, which draws investors’ attention to the bonds market and away from their stock positions. The US dollar’s strengthening continues to be the driving force behind the interest in US stocks. The volatility of major US indices is significantly lower than the rest of the world, giving the impression that keeping one’s investments in dollars safer than assets based on other currencies. Nikkei, the Dow and S&P500 all declined by approximately 0.8% today. The Hang Seng on the other hand only dropped by 0.2%, however, it was already close to its yearly minimum as opposed to US indices being near an all time high.
GBPUSD
The British pound lost its momentum against the USD once again today, despite charts from earlier this week showing the formation of a potential trend reversal pattern. Currently 13000 appears to be the key price level and the 200-period moving average sticking so close to it seems to confirm that theory. The moving average itself has been moving sideways in a range between 1.2665 and 1.3304, which needs to be kept in mind when attempting to range trade the cable.
As the London government’s time for finalizing a Brexit agreement runs out so does the risk of holding British pound positions increase. As time goes on it seems less and less likely that Prime Minister Theresa May can pull her party together. The lack of success in negotiations with the European Union may leave the UK with no option other than to sign a free trade agreement with the USA. Such an agreement would be the Trump administration’s greatest success as well as Brussels greatest fear. These possibilities hold a lot of interesting possibilities for the future, however, in the short term it simply means the likelihood of high volatility. Today’s NFP report could give price enough of a push to make some major movements, although the direction of such a movement remains an open question. Price has been following the 200-period moving average closely, while showing feasible trends pointing both downwards and upwards. One thing is certain, today one of these trends will be confirmed and it will become the dominant direction at least until the channel’s limit.
Russell 2000
In the shadow of the three major US indices, sits the frequently forgotten Russel 2000, which contains companies with small market capitalization. Despite being often overshadowed, this index can still be used for insight into current investor sentiment. Optimism in the markets translates into a higher propensity for risk taking, which in turn increases the demand for small cap company stocks that inherently come with higher risk. The reverse also holds true, as the stocks of these companies are typically the first to be liquidated when investors grow more pessimistic.
Like other US indices, the Russel also reached record heights this year. The upwards trendline previously rose hand in hand with the 200-period moving average, until the two diverged on September 24. Price broke through the trendline, pulling the moving average down with it and causing it to intersect with the trendline. Typically this would be considered the breaking of a trend, although it’s not enough to actually confirm a downwards trend. The persistent line of support at 1634 could be the key to accurately making that prediction. If this line can stop price from further declining, we can likely assume that price will stay between the 1634 to 1746 range, making a sideways movement the dominant trend. On the other hand if the line breaks, then it could be the start of a correction wave that results in a drop of up to 5-10%. The MACD indicator is in the negative, although it does not show signs being excessively oversold, which supports the possibility of a sideways ranging pattern.
Sincerely,
Laszlo | Market Analyst
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