EURUSD, S&P 500 and Gold Talking Points:
- Risk trends steadied through the past week as recession signals grew alongside increasingly sporadic stimulus efforts
- The DAX, FTSE 100, S&P 500 and other major global equity indices look at risk of technical breaks as tight congestion contrasts high volatility
- Top event risk in the week ahead includes: a heavy week of US earnings; rate decisions from the BOJ, Fed and ECB; 1Q GDP releases for the US and Euro-area
Risk Trends Settle Despite Headlines Souring
As the past week wrapped, we managed to avoid any extreme swings in speculative perspective. For some, that may seem like a detrimental or bearish result; but I considered it a slant in favor of the bulls given the surrounding fundamental conditions. Regular updates from the global docket that give clearer shape to the scale of a historical recession presents a troubling environment in which to encourage a return to speculative waters. That ability to feed enthusiasm against troubled waters – should it hold – may be on even more extreme display in the week ahead with high-profile events that will present definition to our slide into intense economic contraction while also reminding us as to the limitations of stimulus to fight this fire. That considered, the technical backdrop can look more loaded than reassuring. There seems a fairly uniform pattern across many of the charts I follow for following ‘risk appetite’. Ranges for the likes of S&P 500 (2,900 and 2,700) or the EEM emerging market ETF (36.50 – 34.75) are fairly well shaped, but the corner of the market that most stands out to me are the European indices. The German DAX’s congestion looks particularly well established between 10,800 and 10,200.
| Change in | Longs | Shorts | OI |
| Daily | 25% | 22% | 24% |
| Weekly | 33% | -8% | 10% |
Chart of DAX Index Overlaid with S&P 500 (Daily)
Chart Created on Tradingview Platform
Congestion can look more nefarious when set against a backdrop where the chances for volatility remains particularly high. If the fundamental environment perhaps doesn’t raise the threat assessment for you, then consider the resting rate of volatility measures. Measures of expected volatility continue to signal a propensity for sliding back into fast-moving markets – with a predisposition towards a tempo that aligns with risk aversion. The VIX volatility index is perhaps one of the more familiar indicators in this class. The ‘fear index’ may have slid to its lowest level since March 4th through Friday’s close, but at 35.9 it remains in at levels commensurate with the most unstable periods of the past decade.
| Change in | Longs | Shorts | OI |
| Daily | 5% | 14% | 10% |
| Weekly | 27% | -13% | 3% |
Chart of DAX Index Overlaid with S&P 500 (Daily)
Chart Created on Tradingview Platform
An Intimidating Wave of Risk from GDP Statistics to US Earnings
In the week that we have just closed, there were more than a few blatant reminders that the global economy is at serious risk. The run of April PMIs – US, Eurozone, UK, Japan, Australia – were particularly provocative with record low readings for the otherwise short series. There will be greater precedence for our stage of deceleration ahead starting with the US earnings calendar. There are various categories of firms due to report with important insight such as the economic attachments of Caterpillar or fallout from the energy sector’s unprecedented flip into negative territory for the likes of Exxon Mobile. However, the greater weight in market cap terms and the assumption for greater ability to weather the lockdown rests with the FAANG members due to report. Facebook, Apple, Amazon, Google and honorary mention Microsoft are all due to report. Can this particularly group continue to carry the market at large?
Chart of FAANG Index Overlaid with the S&P 500 (Daily)
Chart Created on Tradingview Platform
More explicit for its orientation as a health update for the global economy are the official 1Q GDP figures on tap. These are not the first of the major economies due to report this season – China and South Korea have crossed the wires the past few weeks – but the principal developed world economies are due to produce their updates this week. The United States which has a backdrop of increasingly severe forecasts from business, investor and consumer surveys should be a top concern. From the IMF’s recent forecasts, the Eurozone is on even more dire a track with a -7.5 percent projected slump for 2020. Should the preliminary stage of these likely-severe recessions prove more acute than anticipated, it could further weigh against the effort at maintaining speculative buoyancy. Alternatively, a more constrained tempo is unlikely to offer much in the way of relief given the anticipation for the subsequent quarter.
Table of GDP Forecasts from IMF
Table from IMF’s World Economic Outlook
What Can be Expected from the World’s Largest Central Banks?
The most effective offset to the crush of the deepest recession in generations is likely the financial capabilities of the world’s governments and central banks to provide enough support to carry through the economy until the economic lockdown is lifted. Thus far, an incredible effort has been made by the largest players to infuse unprecedented support into the system. How long can they keep up the pace? What happens should the economic fallout prove more severe than was anticipated or if investor sentiment forces its own second wave? The Federal Reserve, European Central Bank and Bank of Japan are all on tap for their scheduled updates this week. Given the propensity for taking action outside normal meetings and updates just this past week, there is not much expected of substance at these official gatherings. Of these authorities, I will be watching the ECB most closely.
Chart of Global Search Interest in ‘Recession’ and ‘Financial Crisis’ Via Google Trends
Chart Created by John Kicklighter with Data from Bloomberg Terminal
While monetary policy is pushing the bounds of what has been explored historically, there will still be variance in the view of effectiveness which will likely contribute to exchange rate movement. EURUSD, USDJPY and EURJPY are certainly worthy of closer observation. The ‘more accommodation equals weaker currency’ equation is less likely to be in effect in this environment given that we are very unlikely to be out of the weeds yet. That may translate into a situation where more stimulus may bolster economic potential and thereby may bolster a currency. Overall, however, my attention will be on gold’s performance as an alternative to traditional currencies which are globally deflating.
| Change in | Longs | Shorts | OI |
| Daily | 6% | -6% | 2% |
| Weekly | -1% | -14% | -5% |
Chart of Gold Overlaid with an Aggregate of Major Central Banks’ Balance Sheets (Daily)
Chart Created by John Kicklighter with Data from Bloomberg Terminal
If you want to download my Manic-Crisis calendar, you can find the updated file here.
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