Do you want to find out what the latest headlines about a potential delay in the US-China Phase One trade deal really means for the likes of the AUD or NZD? What are stocks and bonds telling us about the prospects of a deal being eventually inked? Want to learn a powerful monthly setup that can define your bias for months to come? The report unveils it all...

Quick Take

The market has gone into defensive mode, even if just moderately, following reports that the US-China Phase One trade deal and its subsequent signature ceremony could be delayed until December, with the immediate reaction by Mr. Market being that a delay implies more friction/disagreement. However, in the big picture, the headline is far from damaging the outlook for stocks, with the US 30-year bond yield not placing much weight either judging by the lack of downside follow-through. While it is no longer a far-fetched scenario to think that the US-China trade negotiations could collapse, it is still far from being the base case for the market. What this implies is that the lower beta-currencies go, especially the AUD and NZD (not so much the CAD outlook as it got hurt by BOC transition into dovish mode), the better deals one could get at key liquidity areas as the market is still clearly inclined to stick to the main thematic of giving the US and China the benefit of the doubt in Phase One of the trade deal. The USD also continues to show a conducive upward stepping formation, finding a third leg up at an index level, further evidence that the market may be over-reading the trade delay headline judging by the initial fall in the Oceanic currencies, a move not manifested in a major deterioration in the risk profile. What this also implies is that the moves up in the Yen and the Swiss Franc may be a stretch that provides sell-side opportunities (the risk-weighted line accounting for the S&P 500 and US 30y hints that). In terms of the European block, the EUR saw steady buy-side flows as the EU data improved, while the Pound failed to sustain the buying interest ahead of today's BOE. 

Narratives In Financial Markets

* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.

US-China trade deal delay: The risk that the US-China Phase One trade deal could fall apart is definitely not a far-fetched scenario anymore but rather a potential reality check  as the latest developments demonstrate following a Reuters report that the Trump-Xi trade deal signing could be delayed until December, with even some rumblings by US officials that a pact might still not be reached.

Location not as important as details: According to parallel reports, the US is toying the possibility of scheduling the Trump/Xi meeting to sign the interim US/China trade deal, still to be finalized, after the NATO summit in London for December 3. The market won’t buy into this news, which implies a deal is far from done and dusted, as both sides still remain under the negotiating phase, with China pushing for a suspension of recent and upcoming tariffs and the US yet to agree for what may be seen as a Trump softening up.

Initial reaction is moderate loss of confidence: One line of thinking is that by delaying the signature of the Phase One pact, it allows more room for both sides to iron out a more comprehensive agreement, including the suspension of existing and upcoming tariffs if a compromise where China also offers concessions can be reached. However, the immediate reaction by the market has been to show a moderate panic, reading between the lines that a delay implies friction in negotiations is rising.

Risk appetite not negated: The risk dynamics have taken a turn for the worse despite just marginally as the S&P 500 still managed to eke out a tiny gain for the day, while the fall in US bond yields as fixed income gets safe-haven bids failed to find much follow-through. What this translates into is a market that, while it showed a spell of minor panic, is not placing that much weight into the negative trade headlines just yet, with the base case still overwhelmingly an agreement will be sooner or later reached. 

Disparity in risk-reward if trade deal goes awry: If the negotiations for a Phase One trade deal were to break down, it is worth reminding the reader that the U-turn in market sentiment could be quite savage as the flows into riskier assets seen for the most part of Oct/Nov have been quite steady. The S&P 500 or the Nasdaq making all-time highs is the proof in the pudding. If the terms of Phase One, which does not include the stickiest points such as intellectual property, technology transfers, currency manipulation, just to name a few, is facing this many bumps, is not an encouraging sign.

UK election polls, BoE focus for GBP traders: According to the latest YouGov/Sky poll survey, support for conservatives is down 2% at 36%, support for Labour unchanged at 25 %, Support for Liberal Democrats at 17%, up 1%, while the Brexit party support unchanged at 11%. The Pound traded steady until the negative trade headline hit the market, leading to a deleverage of long positions. In the next 24h, the Bank of England monetary policy at 12 GMT is the key event, with rates unchanged a given as policy-makers await clarity in the uncertainty of Brexit and now the election. The meeting will include new adjustments to the inflation and growth outlook to be watched closely.

US data shows its dark side: The US non-farm productivity for Q3 disappointed at -0.3% vs 0.9% exp, with the Q2 result revised higher to 2.5% from 2.3%. The Q3 print is the lowest since December 2015, adding to the mix-bag of fundamental outcomes as of late as the recently strong NFP, US ISM non-manuf, must be reconciled with poor US ISM manuf or Wednesday’s poor productivity numbers. The low print in productivity is a reflection of sluggish business investment, which has been highlighted as an important culprit why the Fed remains cautious about the economic outlook.

EU data shows its bright one: Earlier in the day, the EUR and bund yields were underpinned by better-than-expected Germany Factory Orders data (+1.3% m/m versus 0.1% expected), with the final Eurozone PMI data at 52.2 vs the 51.18 ‘flash’ estimate, and the Composite jumping to 50.6 vs 50.2 a reinforcement. The improvement in Germany’s services readings was a bright spot to outline, with the strong read from Italy also helping to anchor the positive vibes around European assets and the EUR.

Fed's Williams admits CB still moderately dovish: NY Fed President Williams, one of the big voices in the Fed alongside Powell and Clarida, said that the Fed will be data-dependent and preemptive going forward, indicating that adapting to new circumstances will continue to be the ‘modus operandi’ as part of their easing cycle. Williams added that monetary policy is moderately accommodative right now and that the 3 cuts since June were very effective at managing risks to the US economy so far.

Recent Economic Indicators & Events Ahead

Source: Forexfactory

Professional Insights Into FX Charts

The first technical insights for today include a highly rewarding pattern to define one’s bias for the following months, something I shared in my last Youtube live stream, by simply identifying the instances when an outside day pattern occurs. By outside day we understand a two-bar chart pattern that occurs when the current day's price bar has a higher high and a lower low than the prior bar and the open and close of the second day fall outside the open and/or close of the first day. There is incredible power in this pattern to represent a reversal in flows. In the EUR/USD chart since the GFC, 10 were printed, with 9 out of 10 leading to at least a movement the size of the outside bar next month at the bare minimum, with over 50% going for protracted bull/bear runs, some lasting over one full year. Judge by yourself in the chart below.

Another market that ever since the end of August, when a monthly bullish outside day was printed, implies a reaffirmation of the bullish tendency includes the AUD/NZD. It has not occurred that often in the recent price history, but whenever it happens, the power of the signal cannot be sufficiently overstated, leading to movements that are, at the bare minimum, the same distance/dimension as the size of the outside day acting as the trigger signal. By then drilling down into lower timeframes, one can reinforce the bias based on the monthly, with a play straight off the monthly chart sensible if the swap is not severely skewed against you. Longs AUD/NZD offer a rather neutral swap at Global Prime, so it’s still a viable strategy.

The AUD/USD monthly chart, as an extension of today’s lesson, also portrays the merits in identifying this outside pattern as a bias definer for the months to come. Again, every single time that an outside bar was printed, at the bare minimum, the next month/s, the main bias playing out is in the direction of the outside day reversal pattern, with a few instances of the formation also representing a follow-through continuation. Notice, in the month that just closed in October, a bullish outside day was printed, suggesting a potential setback in the downtrend, with risks of buy on dips this month of November a real possibility if history is any indication.

Important Footnotes

• Risk model: The fact that financial markets have become so intertwined and dynamic makes it essential to stay constantly in tune with market conditions and adapt to new environments. This prop model will assist you to gauge the context that you are trading so that you can significantly reduce the downside risks. To understand the principles applied in the assessment of this model, refer to the tutorial How to Unpack Risk Sentiment Profiles
• Cycles: Markets evolve in cycles followed by a period of distribution and/or accumulation. To understand the principles applied in the assessment of cycles, refer to the tutorial How To Read Market Structures In Forex
• POC: It refers to the point of control. It represents the areas of most interest by trading volume and should act as walls of bids/offers that may result in price reversals. The volume profile analysis tracks trading activity over a specified time period at specified price levels. The study reveals the constant evolution of the market auction process. If you wish to find out more about the importance of the POC, refer to the tutorial How to Read Volume Profile Structures
• Tick Volume: Price updates activity provides great insights into the actual buy or sell-side commitment to be engaged into a specific directional movement. Studies validate that price updates (tick volume) are highly correlated to actual traded volume, with the correlation being very high, when looking at hourly data. If you wish to find out more about the importance tick volume, refer to the tutorial on Why Is Tick Volume Important To Monitor?
• Horizontal Support/Resistance: Unlike levels of dynamic support or resistance or more subjective measurements such as Fibonacci retracements, pivot points, trendlines, or other forms of reactive areas, the horizontal lines of support and resistance are universal concepts used by the majority of market participants. It, therefore, makes the areas the most widely followed and relevant to monitor. The Ultimate Guide To Identify Areas Of High Interest In Any Market
• Trendlines: Besides the horizontal lines, trendlines are helpful as a visual representation of the trend. The trendlines are drawn respecting a series of rules that determine the validation of a new cycle being created. Therefore, these trendline drawn in the chart hinge to a certain interpretation of market structures.
• Fundamentals: It’s important to highlight that the daily market outlook provided in this report is subject to the impact of the fundamental news. Any unexpected news may cause the price to behave erratically in the short term.
• Projection Targets: The usefulness of the 100% projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100% projection, you can anticipate the area in the chart where some type of pause and potential reversals in price is likely to occur, due to 1. The side in control of the cycle takes profits 2. Counter-trend positions are added by contrarian players 3. These are price points where limit orders are set by market-makers. You can find out more by reading the tutorial on The Magical 100% Fibonacci Projection