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S&P 500 Ends a 10-Month Climb in February, GBP/USD Breaks and EUR/USD Readies

S&P 500 Ends a 10-Month Climb in February, GBP/USD Breaks and EUR/USD Readies

2018-02-28 23:00:00
John Kicklighter, Chief Strategist
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Talking Points:

  • The end of the month brought a risk aversion to many assets to emphasize the volatility the markets had suffered in February
  • For the S&P 500, February marks the first negative close in 11 months - calling to end a record-breaking climb
  • A slow pick up for the Dollar looks to be as much Euro and Pound weakness as innate strength for the single currency

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February Closes and So Too Does the S&P 500's Record

Wednesday closed out the month of February and there was a distinct risk aversion to the session. US and global equities were under pressure alongside emerging markets, junk assets and carry trade. Yet, despite the breadth of the fundamental theme, the intensity leaves reason to doubt conviction. Closing out periods for exposure is rarely a trigger for new trends. Rather, it is more frequently a short adjustment period that nevertheless highlights what the bias had been heading into the transition and how 'overexposed' investors felt according to the degree of rebalance. Nevertheless, the slide to close the month reminds us how dramatic and intense February was. It will go down as one of the most volatile periods of this nine-year bull market and may ultimately signal the beginning of a gradual shift in speculative tide. In the meantime, it was definitively the end to the S&P 500's record-breaking 10 consecutive month advance.

S&P 500 Monthly Chart

S&P 500 Ends a 10-Month Climb in February, GBP/USD Breaks and EUR/USD Readies

Dollar's Drift Brings it to Key Resistance

The past 48 hours has seen a positive performance for the US Dollar, but it would be a stretch to label the performance robust. The pace has been moderate and the fundamental backing is dubious. The push offered up by Fed Chairman Powell's testimony before Congress on Tuesday - for what it was - has certainly diminished. And, this previous trading session's docket was notably light for meaningful US event risk or themes. We could chalk it up to cross-currency winds, but that would only further the argument that we should not depend on an impending break from the Greenback. In the upcoming session, we have an event of merit in the PCE deflator - the Fed's favorite inflation indicator. Yet, again it is important to question why interest rate expectations would be critical enough for the Dollar to achieve breaks for pairs like EUR/USD or sustain them for the likes of GBP/USD given how divergent theme and currency have been over the past six to nine months.

GBP/USD Daily Chart

S&P 500 Ends a 10-Month Climb in February, GBP/USD Breaks and EUR/USD Readies

Euro, Pound and Yen Mark Sharp Moves

There was some remarkable volatility in the FX market outside of the Dollar this past session. The Japanese Yen charged higher (Yen crosses dropped) with many attributing it to the slide in risk trends. This would lead to some key breaks like that for EUR/JPY and GBP/JPY while the USD/JPY would move to confirm a trendline resistance rejection which would be the technical step to reengaging a prevailing bear trend. Given I am dubious of the drive in sentiment, I certainly question the drive behind the Yen crosses. Back to GBP/JPY, this was a severe decline on Wednesday which had even more influence from the Sterling. The UK currency tumbled after UK Prime Minister Theresa May rejected the EU's Brexit draft. She is due to deliver her government's position on Friday in a speech so be careful trading the Pound. The same considering of caution should be applied to the Euro pairs like EUR/USD at its key support. With the Italian election on Sunday, we may put lingering concerns to the absolute forefront and in turn change the bearing and intensity of the Euro crosses.

EUR/USD Daily Chart

S&P 500 Ends a 10-Month Climb in February, GBP/USD Breaks and EUR/USD Readies

Heavy Event Risk and Technical Activity with Limited Hold

On the fundamental side, the Asia session has a remarkably dense docket Thursday morning. From Japanese and Australian fourth quarter capital expenditure to New Zealand fourth quarter terms of trade to the Chinese manufacturing PMI, there is hefty event risk. Some of this related data has been capable of generating volatility for its target currency, but very little trend has resulted. Consider that when you wade through it looking for a position that may not be possible to secure. The same erraticism is possible on the technical side. Crude oil has dropped back below $63 and in the process rendered a once critical technical level irrelevant. Congestion is the common denominator but traders too frequently look to label these developments the birth of trends. Recognize when market are not ready or capable of turning 'developments' into 'trends'. We discuss all of this and more in today's Trading Video.

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