‘Troika’ into next week

No, not the sustained collaboration Troika between the European Commission (EC), European Central Bank (ECB) and the International Monetary Fund (IMF) that is overseeing the Greek Debt Bailout. While we feel the Greek Debt Bailout situation is still festering in the background on the IMF actually only funding its commitment once the European creditor nations agree much more extensive Greek debt relief, that is not the ‘troika’ of the moment. We are rather referring to the tendency noted at many past junctures for any sustained pressure on U.S. equities tending to require a confluence of three negative factors. Interesting in this case was seemingly more dovish than expected July 25-26 FOMC meeting minutes (our marked-up version) that might have been a shining of the light of dovish benevolence. Yet it brought concern to the equities instead. For much more on that see Thursday morning’s Commentary: FOMC Minutes Minuet post.

That was grounds to feel that for all of the Fed-speak on strong employment fomenting inflation there was some reason to believe the Fed was just ‘puffing’ again (like during its 2015-2016 ‘normalcy bias’ phase.) There was also the crumbling of business support for President Trump in the wake of his lame response to the fallout from the Charlottesville protest situation.

This feeds the sense (previously explored at length) on the degree to which Trump’s diminished standing and distractions for the U.S. Congress are a problem for the Trump reform and stimulus agenda; and by extension the U.S. economy.  

Back to NOKO
And while the North Korean (NOKO) situation dropped from the headlines in the wake of Trump’s domestic problems, it is due to come back into focus on annual U.S.-South Korea major military exercises from the beginning of next week. That is important, and anyone who has not done so already might want to review our August 9th North Korean crisis? Not so much Modern Trader post.

And the first step to cooling down that crisis was going to be the U.S. reverting to silence, ratcheting down rhetoric and only reacting to whatever North Korea actually does next. That has seemed to occur for now. Yet there is no guarantee this will remain subdued, and the equities might have been under some pressure from anticipation of that as well.

Troika triumphs in the markets for now
And so the negative ‘troika’ triumphed since Wednesday morning, with some fairly predictable market responses that we are going to pursue straight away, especially on the sharp reaction in U.S. equities as a proxy for the overall international equities reaction. As part of the post-Yellen testimony push to a new high, the September S&P 500 future exceeded the June 2,451-46 congestion highs and held it as support into mid-July. While that support was violated on last week Thursday’s NOKO confrontation inspired selloff, it was reinstated with the caveat it could be violated again if the NOKO situation deteriorates. And as suggested above the current drop below it once again could be part of psychology turning more negative into next week.

Even though September S&P 500 future only fell into the area of weekly MA-13 in the 2,437 area last week and managed to Close above it, it is now below it after on the MA-13 move up to 2,443 this week. However, as also noted previous there always were major lower supports of more consequence which we have not mentioned in a while due to the pre-NOKO confrontation situation not leaving much chance they would be tested.

And most prominent among them is 2,405-00 late-February through mid-May congestion, which was also a retest of the major top from the March trading high. Along the way, there is also specific weekly chart up channel support (from the late-March 2,317.75 selloff low) at 2,420 next week.  

As also noted previous, there is also more meaningful higher resistance from last week’s activity after the failure from above the previous 2,475-80 resistance left a fresh weekly DOWN Closing Price Reversal (CPR.) That reinforced the importance of the 2,475-80 resistance at which it has failed repeatedly in the short term (now including this Wednesday), with the previous week’s 2,472 Close as the DOWN CPR signal (Tolerance is the 2,480.50 trading high from three weeks ago.)

Govvies
The sustained weakness of the equities over the past couple of sessions has also reinstated last week’s ‘risk-off’ psychology that squeezed the govvies higher, and they remain very firm on the factors noted above. The September Bund future remains upside leader on its rally above 162.00-.50 congestion that indicated the retest of 164.00-.50 higher congestion that was modestly exceeded on last week’s Close.

Even on the NOKO situation cooling down a bit into early this week, the downside reaction in the Bund and elsewhere was very subdued. September Bund future now backup into the higher end of that 164.00-.50 congestion range has next resistance at the more major 166.00-.50 congestion last fully tested in February and missed by a bit in June.

The previously weaker September Gilt future also finally pushing above its 126.00-.50 resistance in early August has been testing its more prominent 128.00-.50 resistance with 129.50-130.00 (last seen in mid-June) above that. The September T-note future remains the laggard in its continued churn even though it is nominally above 126-00/-16 resistance. However, as was the case back in mid-June, the 127-00 area is more critical above that with a buffer to the 127-18 mid-June trading high. Much above that it might be able to reach the extended much heavier congestion in the 129-00/130-00.

Foreign exchange
As noted recently (i.e. the post-ECB meeting) on foreign exchange, the evolution of the EUR/USD and U.S. Dollar Index trends have been the most critical. That is the case due to the euro being the most heavily weighted currency in the U.S. Dollar Index, with EUR/USD pushing to a new two-and-a-half year high at the end of July above 1.1710 August 2105 high.

While it has suffered reactions since hitting 1.1905, only back below the 1.1700 area (tested and held so far) is there any potential trend reversal. In fact, the weaker U.S. inflation numbers have overshadowed the geopolitical flight to safety that would normally favor the greenback. At present, the U.S. Dollar Index is weakening again toward .9300 after multiple tests of the .9400 area failed to sustain real strength.