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Video: From Dollar Volatility to S&P 500 Complacency - Suspense

Video: From Dollar Volatility to S&P 500 Complacency - Suspense

2016-07-28 23:20:00
John Kicklighter, Chief Strategist
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Talking Points:

  • The Dollar exhibited high volatility with trend, while the S&P 500 held steadfast with seemingly little ambition
  • In the wealth of major event risk ahead, traders should remember the backdrop for sentiment that keeps this market
  • Top Friday event risk includes: BoJ rate decision; US and Eurozone GDP; Eurozone bank stress test results

See how retail traders are positioning in the majors using the SSI readings on DailyFX's sentiment page.

Anxiousness can take a variety of forms in the market. There are situations like what the Dollar was experiencing with exceptional volatility post-FOMC but little follow through. Then there are times when complacency is interpreted as confidence like the S&P 500. The index has held a tight range despite the fundamental pot shots it has taken at record highs and its backdrop implied volatility reading (VIX) shows little fear under the surface. Finally, there is the dubious facade scenario like the USD/JPY has expressed. There, sentiment seems robust, but there is ready evidence of a storm brewing just beneath the surface.

Heading into this final 24 hours of the trading week (it also happens to be the last trading day of the month), there is a legion of high profile event risk. While they promise concentrated and isolated impact for their targeted currencies, there are even those listings that pose a considerable threat to global sentiment. At the top of the list is the BoJ rate decision which we have discussed extensively this past week. The volatility impact is highly likely to be exceptional regardless of whether the BoJ holds its bearings or issues further change to its suite of accommodation. Market expectation that has driven overnight volatility to Brexit-like levels ensure that. However, we should look at this event not just for its Yen and Japanese market implications. It can have fall out for global risk trends and the dubious confidence in monetary policy for preserving the peace.

After the failed launch of the Dollar - bullish or bearish - after the Fed rate decision this week, some may write the US GDP reading off as a non-event. That would not be wise. The central bank was noncommittal and vague in its evaluation and is thereby open to winds that hasten or delay rate hikes. Much like next Friday's NFPs, this will be an important fundamental milestone for ongoing rate speculation. Furthermore, as the world's largest economy and a nexus of the global financial markets; the strength of the United States can prove a trigger for general investor sentiment. While Euro-area GDP figures, the ECB's bank stress test results, and other events due are perhaps further from this fundamental core; we should not underestimate the fragility of market's stretched confidence and exposure. We discuss what's ahead in today's Trading Video.

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