Talking Points:
- The S&P 500 pushed to record highs on the longest bull run in 2.5 years and leveraged by an exceptional rally
- An extension of stimulus from the ECB pushed EUR/USD to 1.0500, now traders await the Fed to decide parity
- Other key event risk in the week ahead includes: the BoE, SNB and BoM rate decisions; UK and Aussie employment; more
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The Italian Referendum and ECB rate decision this past week leveraged remarkable volatility for the Euro and EUR/USD this past week, but my vote for remarkable performance goes to US equities. And, that is where my greatest concern will rest for the week ahead as we absorb high-level event risk. Looking at the performance of various return-focused assets this past week - equities, emerging markets, high-yield - we see that there was a clear swell in risk appetite. However, no corner of the speculative system leveraged as remarkable a performance as the S&P 500. The favored equity index advanced to a record high this past week, but it was the fashion in which that extension took place that was so remarkable. The six-day rally through Friday matches the most consistent run since June 2014. What's more, the jolt on Wednesday was one of the strongest for an outperforming market with no event risk in recent history.
Speculative appetite has its sources, but no aspect to this performance is as structurally important as complacency. And, that makes this market particularly unstable. There was little to lend investors more confidence or appetite through this period. Yields have lifted globally, but that advance is from fading confidence in central banks and concern over global trade while the actual historical returns are far from offering sound return. To place our confidence in optimism through the end of the year on seasonality or a reinterpretation of the Fed's policy normalization is highly suspect. Lurid and rampant speculative reach therefore remains the most important dynamic ahead.
In the meantime, the docket ahead is loaded with high profile event risk which will tap charge other fundamental themes. The Fed decision will carry through the monetary policy interest from last week's ECB stimulus move. This is one of those events where we have to look beyond the rudimentary interpretation of the outcome. A rate hike - the first since last December - is fully priced in according to Fed Funds futures. Unless the central bank surprises with no change, the real interest for this event will come through the elements used to speculate the future pace of normalization. The outlook for 2017 is still significantly discounted for tightening and can offer the Dollar more fundamental leverage. The FOMC decision isn't the only rate decision this week. We also have the Bank of England (BoE), Swiss National Bank (SNB), Bank of Mexico and Norges Bank. Furthermore, inflation data, employment numbers and PMIs are generously distributed through the period. We discuss the remarkable sentiment lean and heavy docket for the week ahead in this weekend Trading Video.
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