EURUSD and S&P 500 Talking Points:
- The S&P 500 put in for a gap lower Thursday morning with a broad slip in risk-based assets - a broad but not aggressive shift
- Coronavirus is still the headline generator, but underlying growth is catching more concern and even monetary policy has stirred some life
- EURUSD, already trading at a more than two-and-a-half year low running at an impressive pace now faces German GDP and US sentiment data
Risk Trends Slip but Coronavirus Remains Top Fundamental Headline
Speculative appetite seems to be spinning its tires once again – committing neither to a full-blown ‘risk on’ or ‘risk off’ bearing. Through Thursday’s session there was a mild retreat registered with many of the sentiment-urged benchmarks that I like to follow. The drop wasn’t a dramatic one, rather it was triggered by a familiar gap (bearish) and was followed by moderation or a tepid bid, depending on which particular measure you evaluated. There are plenty of drivers in the open market to spur some short-term volatility but nothing seems to resound with the command necessary to single-handedly guide the entire markets in a single direction. Yet, that in itself is a feature of the landscape for which we should account. Pressing for momentum is a risky and choppy venture.
Chart of ‘Risk’ Sensitive Benchmarks Performance from Feb 1, 2019 (Daily)
Chart Created by John Kicklighterwith Data from Bloomberg Platform
While there may not be an effective driver of substance at the moment, that doesn’t mean that there isn’t an domineering headline to draw investors’ attention. The spread of the coronavirus is frequent top line whether the search is in general world news or finance. For the latter, it is worth noting that whether the market registers an advance or retreat on any given day these past few weeks, the virus is almost equally likely to be attributed to the shift. As for the underlying conversation, questions over the transparency of statistics coming out of China is having a knock-on effect in raising concerns over the ability to project the economic toll that will be exacted. Risk trends can be moved by this discussion, but USDCNH, AUDUSD and the Shanghai Composite are likely to be more sensitive and highlight the nuance.
Chart of Google Search Interest in Market Terms
Graph from Google Trends
A Deeper Interest in Growth and Unexpected Monetary Policy Volatility
The markets are a dispassionate reflection of crowd distribution of capital, so it the human and social toll doesn’t show through in market actions like the subsequent economic impact. And, the impact of this crisis is certainly raising concern. Banks are updating their forecasts for the loss of GDP owing to this event and even central bankers (like the Fed’s Kaplan this past session) are saying it is difficult to get a clear reading on growth potential. A hard-reading on economic potential came from a less-popular source: Chinese auto sales figures for January. The 18 percent drop was the largest on record and a significant segment of growth given the market is the second largest in the world. We are facing more traditional growth updates ahead, so keep tabs on the likes of crude oil, copper, the US 10-year to 3-month Treasury yield curve and other more growth-sensitive metrics.
While growth is the more prominent, ‘traditional’ theme on my radar for the final 24 hours of trade this week, it is certainly worth sparing a thought to monetary policy. The Fed indicated that it would reduce the level of its short-term liquidity infusion efforts (repos) which could be a sign of stabilizing financial systems, but it could also unnerve participants dependent on the support they offer. A surprise lack of movement was registered Thursday by the Mexican Peso despite the Bank of Mexico’s 25 basis point rate cut. The fact that it was forecasted by the consensus of economists and the rate is still at 7.00 percent likely had something to do with it. Alternatively, the Brazil Central Bank stepped into the currency market in an attempt to stop the Brazilian Real’s slide. USDBRL pulled back from a fresh record high, but it as yet doesn’t look like a full reversal.
Chart of USDBRL with 200-Day and 50-Day Moving Averages (Daily)
Chart Created with IG Trading Platform
EURUSD Is Friday’s Top Fundamental – and Technical – Attraction
As far as momentum goes, there has been a surprising shift in the leader board from the US indies and other typical hierarchy to the frequently-overlooked EURUSD. The FX market’s most liquid pairing has tumbled for eight of the past nine trading and has run at the most neck-break pace since October 10, 2018. That has in turn driven retail traders to ramp up speculation on a more significant move. Clearing lows stretching back to May 2017, it would stand to reason that there would be greater interest of a driving trend, but the retail crowd has instead lead to the largest number of long positions (via IG’s Client Sentiment data) in at least 12 months.
| Change in | Longs | Shorts | OI |
| Daily | -1% | 4% | 0% |
| Weekly | 60% | -42% | 4% |
Chart of EURUSD with 9-Day Rate of Change and 100-Day Moving Average(Daily)
Chart Created with IG Trading Platform
Through the final trading session of the week, EURUSD is a particular focus when it comes to the noteworthy scheduled event risk on the docket. When scanning the horizon of Euro based crosses, it seems that the second most liquid currency is showing more productive and widespread progress (bearish) than the Dollar is (bullish) with performances like USDJPY’s hold at resistance and GBPUSD’s bounce. That will draw my attention more acutely to the European GDP figures on tap. Germany’s figure is uniquely important given it is the largest of Europe’s economies and comes out first for the session. Meanwhile, US retail sales will likely defer to the University of Michigan consumer sentiment survey at 15:00 GMT. Watch the calendar and EURUSD price action closely.
Twitter Poll on EURUSD Market Moving Event Risk
Poll Created by John Kicklighter on Twitter
If you want to download my Manic-Crisis calendar, you can find the updated file here.
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