Not only were financial markets extremely quiet last week, but the recent trend of every asset going up whilst the US Dollar nudges down remained intact. With trading volumes very much in holiday mode, we are loathe to read too much into anything. That said, here are a couple of things we spotted last week and also a quick look ahead to next week.

First up, trading volumes were extremely low last week. What stood out for us was that volume in the SPY tracker (the largest ETF tracking the S&P 500) last Monday was 18% lower than that traded last Christmas Eve. Clearly, both buyers and sellers pretty much failed to turn up and the rest of the week wasn’t much better. Should we just ignore this and put it down to slow Summer trading? Perhaps, but what also stands out to us is that having broken to new all-time highs above 2135 points in early July and progressing to the 2160 area without looking back, progress in the last month has been pretty much sideways (with a slight upward bias).

Chart 1 – The S&P 500

Now, this roughly sideways pattern in the last month may well be a small consolidation to digest the post Brexit gains before moving higher. Or perhaps the low volume is a sign that the move to new high ground lacks real conviction. A break back below 2150 would be a warning sign in our opinion, and a break back below the previous highs of 2135 would add to concerns that the move to new highs was in fact the last move in the bull market that began in 2009.

Supporting the bullish equity view was the improving performance from non US markets, with European markets up over 2% and Japan by over 4% last week. This broadening out in global participation could well be a sign that equities generally remain in a bull market, however, to be more confident in this view, we do need to see the EuroStoxx 600 break above the 350 area we highlighted last week.

Chart 2 – The EuroStoxx 600 Index

Within FX, as noted the Dollar slid a bit lower during the week, which seems to be the way at the moment when risk assets perform well. What really stood out for us during the week was the potential reversal lower in the New Zealand Dollar on the day of a central bank meeting. Having cut rates, the kiwi dollar initially rose to a new high for the last 15 months, and then the central bank Governor decided to reiterate to the market that their real concern was downside risks and that they see the value of their Dollar as too high. By the end of the day, the kiwi dollar had given up all gains, leaving behind a possible failure day. This is a bearish trade set up and we have sold kiwi dollars in our portfolios. Click here for more detail on the RMG FX Strategy UCITS Fund.

Chart 3 – The New Zealand Dollar

To add credibility to the failure theory, the kiwi dollar also generated bearish patterns against a number of currencies such as the Aussie and Canadian dollars and even the British pound.

Looking ahead to next week, the US sees monthly inflation numbers and the minutes from the July FOMC meeting. The CPI numbers may be of greater importance. With the low base effects from oil in particular, the inflation rate in the US should start to pick up in the months ahead, and should lead to expectations of action from the Fed, and be supportive of the US Dollar.

So, at the end of a slow week in markets, the best new trade idea we have is to be short of the New Zealand Dollar. In equities (bonds also), markets are seemingly hesitating, and it’s not clear whether this is a sign of exhaustion or pause for refreshment. Next weeks’ inflation numbers may give us more clues to the next major moves.
Stewart Richardson
Chief Investment Officer