Talking Points:
- We have seen a sharp deceleration in US equity indices to contrast one of the most dramatic changes in activity on record
- The extreme jolt of volatility earlier this month will likely prevent a return to 10 for VIX and charge concerns of building risks
- Many of the building fundamental waves for globe originate in the US, but the Dollar is more likely to find its drive indirectly
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Markets Uneasy After the Storm
This past week was remarkably quiet for the financial system in distinct contrast to the extreme activity that preceded it. The range that the S&P 500 - as a benchmark for sentiment - carved out was markedly smaller than the strong bounce over the period through February 16 and certainly far removed from the collapse through February 9. The sudden surge in February broke an extreme sense of calm which is well reflected when you compare the range of the week through the 9th to the five weeks that preceded it - which offers up the fourth largest change in activity for the index on record. Now, we are downshifting with consecutive weeks of 'inside bars' which technical traders will recognize as consolidation. Yet, this settling in price action does not seem to naturally translate into a calming of fears amongst market participants. Markets are generally still richly priced, investors still extremely exposed and the number of threats on the horizon growing in number.
Closer Attention to Catalysts
Systemic fundamental risks have grown in prominence and number for some time, but complacency registered in an easily read benchmark like the VIX lingering near 10 offered enough confidence to tune out. That is not so easy to do after the sudden swoon of February. A 10 percent drop for a benchmark like the S&P 500 wiped out months - if not years - of income gains and the motivation to regain the capital losses has thinned out for the more reserved 'buy the dip' crowd and dubious 'buy and hold' crowd. In this state of greater awareness, larger threats to markets will be registered more readily. The monetary policy connection and softening growth are persistent concerns of mine, but the fast rise in political uncertainty looks more imminently troubling. Whether that translate into infighting for US, UK and EU governments or moves towards protectionism that seem to be reaching trade war territory; the negative ramifications for capital flow will be more readily interpreted. And, the impact on over-inflated markets more immediate.
Competing for the Dollar's Attention
Like global equities, the Dollar closed out this past week with a relatively narrow range - one it has spent more time developing. Yet, the fundamental drums are growing louder and louder, which puts the 14 month-long bear trend in harsher light. There seems plenty of local event risk ahead to provide motivation. On the docket alone, we have: new Fed Chair Jerome Powell testifying on the semi-annual monetary policy update before Congress; the central bank's favorite inflation indicator (PCE deflator); and the Conference Board's consumer confidence report to register confidence in growth and political concerns. Yet, the Greenback may still find its motivation arising from its major counterparts. The fundamental lift for the euro, pound and - to a lesser extent - the Yen over the past year are starting to falter. We are increasingly spoiled for influence, which can cloud the outlook for specific catalyst and timing; but suggested a higher probability of higher volatility overall.
Turns in the Euro, Pound and Canadian Dollar?
On the other side of the majors, we should be keeping tabs on the equally over-indulgent trends for USD counterparts. For the Euro, growth, political stability and monetary policy have all played a role in lifting pairs like EUR/USD to a near 2,000 pip recovery. That said, growth has started to fade, German and Italian governments are looking less convincing and the ECB is doing what it can to curb speculation - going so far as to ruminate on whether their currency is the victim of manipulation (a by-product of policies they see as 'weak dollar'). Euro pairs are broadly starting to soften, but critical breaks and momentum have yet to be triggered. The Pound's fixation has been more singular on Brexit, but the lift the theme has offered in recent months has certainly diverged from the Sterling. And, a tentative reversal in course for the Canadian Dollar is actually bullish but comes with more technicals than fundamentals just yet. We look at the potential and catalysts for trades in the week ahead in this weekend Trading Video.
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