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S&P 500 Taps Record High, Dollar Extends Tumble Amid Political Risks

S&P 500 Taps Record High, Dollar Extends Tumble Amid Political Risks

2018-08-22 00:24:00
John Kicklighter, Chief Currency Strategist
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Talking Points:

  • The S&P 500 hit a record high intraday but retreat before the close owing to liquidity conditions and political headlines
  • A four-day decline for the Dollar matches the longest slide since January 2, and responsibility for the move may be misplaced
  • Top event risk into the next 24 hours is the start of US-China trade talks, but Trump has already disarmed optimism

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A Record High with Reserved Enthusiasm

The standard bearer of risk trends - the S&P 500 - notched another remarkable milestone this past trading session. It hit a fresh record high during intraday trading to extend its four-day advance. A few weeks ago, Apple became the first publicly-traded company to surpass $1 trillion market valuation, today a new record high was notched by the benchmark index and tomorrow will mark the day that this bull market breaks the record for duration. It has been a remarkable August for US equities, but that same enthusiasm seems to be expressly absent for many of the other risk-oriented assets in the financial system. The EEM Emerging Market ETF has enjoyed the same four-day advance as US indices, but that has only earned a recovery from a multi-year low rather than any fruitful progress. Though in different stages, global indices, junk bonds, Treasury yields and Yen crosses all paint a different picture of conviction. That shouldn't come as much of a surprise given our laundry list of high profile fundamental concerns (trade wars, sanctions, political instability, growth forecasts, monetary policy normalization, etc) and the current dearth in liquidity conditions; but too often, traders make their assessment via a single instrument - often the best performing with unrealistic representation of the underlying current of confidence.

Daily Chart of S&P 500

Dollar Extends Its Retreat

A highlight for market watchers to complement the US indices was the Dollar's own slide. Where the stock benchmark rose, the Greenback dropped four straight trading days. On a technical basis, this has undermined the progress on a high profile technical progression pattern. The inverse head-and-shoulders pattern for the DXY Index (the mirror of an upright head-and-shoulders for EURUSD) was rendered inert this past session when the currency closed back below the 'neckline' that took months to fall to bullish pressures. This should come as even less of a surprise than the failed effort to mount a true risk appetite run. To forge a strong USD advance in thin markets is hard enough. However, to foster this clear advance amid the imbalance of possible Fed policy changes, the complicating repercussions of broad tariffs and sanctions, and with the US President weighing in on what he considers an overvalued currency; it would take a serious overriding fundamental drive. Looking at the lower time frame chart, it was worth noting that the Dollar suffered a sharper decline intraday at the same time the S&P 500 made its intraday move to a record high. However, the political risks that floated in the afterhours seemed to separate the currency and index.

Daily Chart of EURUSD with Consecutive Candle Count

Political Risks from Domestic to International

There was a clear response from the US capital and currency market this past session from political headlines and that will likely be the case heading into the next 48 hours. For the retreat in shares afterhours, the headlines reporting President Trump's personal lawyer Michael Cohen was pleading guilty (and possibly implicating the President in legal issues) and former campaign chairman Paul Manafort was found guilty on 8 counts added to the uncertainty that typically unnerves the markets. That said, more recent swells in domestic political risks has rendered far smaller market reactions than what we have seen in 2017. The market will decide how important this risk is when the markets open for trade again Wednesday morning in New York. In the meantime, global political risks will compete for our attention. The United States and China are due to revive their failed trade talks starting Wednesday which could have boosted confidence that globalization and speculative distribution would be add some lift to the markets, but President Trump may have already defused the positive potential of the event. On Monday, the President said he doesn't expect much progress to come from these discussion - before they even began. Keep an eye on USDCNH, the Shanghai Composite, the FXI ETF and CBOE's Chinese volatility index (VXFXI) to register the market's assessment.

Daily Chart of USD/CNH

Liquidity Moves and Nascent Fundamentals for Euro, Pound, Kiwi and Commodities

As we keep track of the expected market-wide themes like trade wars negotiations and the unexpected, there are other areas of the market that continue to show a remarkable level of activity sans clear catalyst. The question is whether these unexpected moves can maintain tempo to offer trading opportunity. The EURUSD rally was heavily supported by the Dollar's slide, but the Euro itself mounted a measurable advance. As much as he may feel it was his doing, the world's second most liquid currency was not likely responding to Trump's evaluation of its subpar value. Nor was it a local and definable fundamental driver. Without a critical contribution, the Euro's lift should be eyed with skepticism for follow through. The same is true with the Pound's individual advance on the day. This time, the Sterling likely found some modest level of motivation via the Brexit theme as industrial leaders recounted remarks from the Treasury suggesting EU banks and investors will still be allowed access to the UK markets regardless of the Brexit solution which can help maintain London's critical global financial status. As for the Kiwi's own rebound, it is likely the culmination of moderate risk appetite, clipped liquidity conditions and the over-extended net short exposure on the currency via futures. In commodities, gold extended its rebound with the help of the Dollar, but the tempo was notably more restrained. From oil, a rebound has hopelessly confounded any technical potential from recent short-term patterns - yet another victim of liquidity. We discuss all of this and more in today's Trading Video.

If you want to download my Manic-Crisis calendar, you can find the updated file here.

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