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S&P 500 Dive, VIX Surge Slow but Sustained Dollar Upsurge May Draw Action

S&P 500 Dive, VIX Surge Slow but Sustained Dollar Upsurge May Draw Action

2020-03-20 02:00:00
John Kicklighter, Chief Strategist
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S&P 500, VIX, Dollar Talking Points:

  • The S&P 500 managed a modest but positive close Thursday – only the sixth gain in 24 trading days – with the smallest day’s range in 2 weeks
  • Volatility across the financial markets eased, with the exception of EURUSD, as the VXX volatility of volatility measures starts to ebb
  • One trend that continues unchecked is the Dollar’s climb, a move that may push global policy makers to pursue fresh intervention

It May Not Be Much, But It is A Move In the Right (Stable) Direction

Though the activity levels in the deepest ends of the global liquidity pool are still extreme relative to conditions just a month ago, volatility has eased noticeably from its most extreme levels of the past week. The steadying of a crisis must start somewhere. Looking across the spectrum of different risk assets and the progression of sentiment through the successive sessions Thursday, there was a noticeable reticence to fall back in the state of panic so familiar this week. On its open this past session, the S&P 500 posted a very small gap and thereafter made a general advance. The positive close was a rarity (only the sixth such advance in 24 trading days) while the day’s range eased back to the smallest course since March 6th. These may seem like small comfort, but the context is financial crisis that needs to ease out of its nosedive. Thus far, this is a firm step towards finding a permanent reduction in extreme volatility that can send the market diving with little-or-no notice. The VVIX (volatility of volatility) index extended its measured retreat.

US 500 BULLISH
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of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily -3% 22% 14%
Weekly -43% 162% 34%
What does it mean for price action?
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Chart of S&P 500 (15-Minute Chart)

S&P 500 Dive, VIX Surge Slow but Sustained Dollar Upsurge May Draw Action

Chart Created on Tradingview Platform

If left to their own devices, market participants would likely to continue to build a vicious cycle of fear and panic. However, the world’s largest governments and central banks are making an incredible effort to shore up the system. Just over the past 24 hours, we have seen discussion of further escalation of the United States’ massive stimulus program to get funds directly to small businesses and consumers at risk while the Fed has revived actions in the money market mutual fund space. The ECB’s late-Wednesday Pandemic fund (an incredible 750 billion) gives considerable heft to President Lagarde’s vow that “there are no limits” to their fight. In the UK, BOE cut rates to 0.1 percent and announced a 200 billion stimulus increase while Prime Minister Johnson suggested a workers package will come out Friday. In Asia, the RBA cut rates yet again and the BOJ bolstered stimulus. This is a massive global effort, and it seems to be beating back the sense of doom.

Chart of Major Central Banks Balance Sheets in Billions of Dollar (Monthly)

S&P 500 Dive, VIX Surge Slow but Sustained Dollar Upsurge May Draw Action

Chart Created by John Kicklighter with Data from Bloomberg

Dollar Rally May Draw Out Its Own Stimulus Response

While benchmark risk indices are cooling alongside derivative volatility measures, there is one particular charge that doesn’t seem to have come up for air: the US Dollar. The Greenback (DXY Dollar Index) posted its biggest single-day rally since the Brexit fallout. That adds to an incredible charge these past two weeks that sees this trade-weighted index pushing highest not seen in three years. When we reduced the influence of the EURUSD in the Dollar assessment, we get an even more pressing appetite. That is remarkable. The Euro, Yen and Pound are the most liquid currencies after the USD. To charge higher against those counterparts can signal problems; but it is the backdrop of retreat from less-systemically important currencies in deference to the benchmark’s performance that signals there is something truly unsettling at work. The demand for safety is uniquely fundamental when there is a scramble for US Treasuries, US monetary markets accounts and the Greenback itself. This is a point of trouble to offset the indices and more blatant risk/haven assets’ performances.

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Chart of Equally Weighted Dollar Index and One-Week Rate of Change (Weekly)

S&P 500 Dive, VIX Surge Slow but Sustained Dollar Upsurge May Draw Action

Chart Created on Tradingview Platform

When it comes to the Dollar rally, there are knock on issues that arise. In particular, the amount of exposure that world has to this principal reserve currency means repayment of USD-based debt can create its own unintended financial pressure. This could create a drive among policy makers that are already responsive to address yet another perceived issue with intervention. The pressure is market for the likes of GBPUSD at multi-decade lows, EURUSD at three years highs and USDJPY facing volatility; but the emerging market crosses are facing a particularly painful outlook should the pressure not ease on its own. Watch for intervention in these already-remarkable times.

Chart of Emerging Market ETF Overlaid with BRICS-Dollar Index (Daily)

S&P 500 Dive, VIX Surge Slow but Sustained Dollar Upsurge May Draw Action

Chart Created on Tradingview Platform

Pound and Oil Put in a Bounce from Extreme Levels

Speaking of the Cable, this pair put in for a notable bounce this past session. The move was not the motivation of Dollar relief – as was apparent with EURUSD performance – but rather reaction to the UK-based developments. The Bank of England’s rate cut and QE update may normally be a source of bearish pressure, but amid 100bp reductions and far greater stimulus efforts, this looks more likely an economic stabilizing move than a financial disruption. The question is whether it lasts to pick the key pair consistently off of multi-decade lows.

Chart of GBPUSD with Consecutive Day Moves (Daily)

S&P 500 Dive, VIX Surge Slow but Sustained Dollar Upsurge May Draw Action

Chart Created on Tradingview Platform

Another impressive counter-trend move through Thursday was made by oil. However, here, I’m far less convinced that a meaningful turn can be mounted. For one, the outlook for demand via growth is simply not in the cards for the immediate future. The supply-side factor has a new influence in the US reportedly closing on its first reduction in shale production in decades to match OPEC and OPEC+ moves that had preceded it. Nevertheless, there was enough in the day to see WTI crude post its biggest single-day rally on recent record. Yet, if you moved the measure up to a monthly chart, even with that charge, March’s collapse is the biggest on record by a large margin.

Chart of US Crude Oil with One-Month Rate of Change (Month)

S&P 500 Dive, VIX Surge Slow but Sustained Dollar Upsurge May Draw Action

Chart Created on Tradingview Platform

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

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