S&P 500, VIX and Euro Talking Points:
- Though concerns over the Coronavirus persist, its market-moving potency wore off before risk assets truly broke down
- Monetary policy was a surprise mover for the Canadian Dollar on BOC rhetoric, the ECB decision ahead may offer a broader reach
- Growth and trade wars are still themes for which we should keep track, but the key sparks may sit further ahead
S&P 500 Levels Out…and Continues to Outperform Other ‘Risk’ Assets
There was little dispute that risk aversion was catching traction on Tuesday – the first day of the week that US liquidity was added to the mix – given the breadth of the retreat. However, when speculators were faced with making the decision to genuinely start to wind down on risk exposure this past session, they demurred. The coronavirus outbreak in China is still a serious enough concern for the country’s government that they shutdown all outbound travel from a provincial capital city for the first time since 1949. Yet, just as global market participants decided to play down the risk following the US and Iran trading military attacks, they decided this wasn’t a pressing enough threat to pull back. Nevertheless, I will be keeping a close eye on USDCNH and the FXI as the world deals with the threat of contagion.
Chart of the USDCNH with 50-Day Moving Average (Daily)
Chart Created with IG Trading Platform
In the meantime, my constant watch over the general bearing of risk trends seems to highlight that telltale appetite for assets that have more of an established momentum rather than untapped value. Looking to the risk-based benchmarks I follow regularly, there was a notable gap higher on Wednesday’s open with some varying falter into retreat through the session. The S&P 500 remains one of the pacesetters with an intraday tag of record highs before it lost altitude. It’s standing remains a remarkable contrast however to the likes of the rest of world equities (VEU) or the likes of emerging markets. With this recent bout of uncertainty, a standing like that from EEM which is just north of a breakout or the S&P 500 loosely off record highs, doesn’t offer much in the way of technical backdrop to coordinate. Yet, USDJPY and some other key Yen crosses find the uncertainty taking place with major resistance just overhead. If there is a sudden resurgence in genuine speculative conviction, this could propel a breakout. Alternatively, outright risk aversion or even a ‘path of least resistance’ drift could see the barrier hold.
Chart of the USDJPY with 50-Day Moving Average (Daily)
Chart Created with IG Trading Platform
An Unexpected BOC Volatility Reminds Me to Be Diligent with the ECB
Speaking of Yen crosses, there may be a general resistance and tentative easing for most of the majors; but CADJPY proved the most charged this past session. That wasn’t due to any particular sensitivity to sentiment but rather a distinct fundamental spark on the docket through Wednesday. The Bank of Canada rate decision was not high on my list of expected market-movers as the group has been rather balanced in its language and it has kept one of the highest benchmark rates in the developed world. That would seem to secure some stability. Yet, the language from the group at yesterday’s meeting – because they didn’t actually change policy – was enough to send the Canadian Dollar careening. I was looking elsewhere for a channel that would be more sensitive (NZDCAD) but the charts with the lowest bounds to a Loonie retreat proved the most impressive. USDCAD and CADJPY were two such impressive moves. There is still range for both to traverse, but keeping up momentum, even in ranges, is proving difficult nowadays.
Chart of Equally-Weighted Canadian Dollar Index with 200-Day Moving Average (Daily)
Chart Created with TradingView
With this surprise volatility to come from the BOC decision, I would like to imagine that the European Central Bank’s rate decision today will have that kind of impact on the Euro. The second most liquid currency has been exceptionally steadfast. However, it is unlikely that this already extreme dove will push its policy settings to the point where it can earn more bearish response than 2019 managed despite the restart of QE, and a reversal is unlikely. Instead, I will be watching the expected review of the group’s framework. This could prove a market mover for the Euro, but I am more interested in what it does to the global assessment of monetary policy as a crutch for worldwide risk appetite. If there is anything that truly starts to undermine the confidence afforded to extreme easing, there could be considerable fallout.
Chart of Large Central Bank Balance Sheets in Billions of Dollars (Monthly)
Chart Made by John Kicklighter with Data from Bloomberg Terminal
Yet Another Possible Trade War Front to Tack and Keeping Tabs on Growth Updates
With the US and China trade war on pause until serious updates on the Phase 2 proceedings (or news of new problems arise), the fear of an escalating threat to growth with isolationist policy has notably faded. That said, the status quo between these two superpowers is still extremely costly compared to our status just two years ago. Europe has become to new front to watch for trade dispute turning into economic throttle. President Trump remarked that now a pause is in place with China, Canada and Mexico; he is willing to put pressure on Europe. This week’s agreement by France to pullback on its digital tax until the end of the year seemed to buy us an indeterminate amount of time in this fight. Yet, an unexpected flare up appeared in Davos when the UK Finance Minister said they would move forward with a digital tax by April no matter what. To this the US Treasury Secretary warned a tariff on UK auto imports would follow such a move. Keep tabs on GBPUSD.
Chart of the GBPUSD with 100-Day Moving Average (Daily)
Chart Created with IG Trading Platform
And not to be forgotten, growth was another matter for traders to chew on in small bites this past session. Aside from the downplay on the fear of global contagion, President Trump leaned into the Fed once again suggesting that the US economy could be growing closer to 4 percent and the Dow would be 10,000 points higher if the central bank hadn’t made a modest effort to moderate between 2015 and 2018. A more tangible reading was the Chicago Fed’s National activity index which swung from 0.41 to -0.35. Keep tabs on measures like the 10-year to 2-year Treasury yield curve, but I am waiting for the run of January PMIs on Friday to give the more definitive global GDP update.
If you want to download my Manic-Crisis calendar, you can find the updated file here.
.
