Dow, Dollar, GBPUSD Talking Points:
- A risk aversion wind swept in Thursday, driving a 6.9 percent tumble from the Dow which cleared the 200-day moving average on the gap alone
- Sentiment was so battered this past session that the Dollar reverted to its safe haven status with a firm rally, though gold seemed to drift from its role
- While the Fed’s update may have disappointed, headlines of rising COVID cases in the US have jumped and the OECD warned of deeper recession; risk appetite seems in control
Sentiment Takes a Hard Bearish Turn
Risk appetite took a nasty fall through this past trading session. While there were a host of fundamental issues that various market participants (and observers) could readily attribute the collapse in sentiment, I believe risk appetite itself may be in the driver seat. And, that may reflect a more troubling state of affairs for our path forward than the opposite. Taking stock of the shift, my first look was to the benchmark US indices. The S&P 500 slipped below its 200-day moving average by the close and even the resilient Nasdaq 100 would succumb to the pressure. However, I was most impressed by the blue-chip Dow’s -6.9 collapse. Not only did the gap that started the day drive us below the 200-day, the scope of the drop was the fourth worst single-day loss since 2008 – with the comparable three days outpacing this reflecting the worst of the Pandemic crisis selloff. That alone is concerning.
| Change in | Longs | Shorts | OI |
| Daily | 13% | -8% | 2% |
| Weekly | 35% | -16% | 5% |
Chart of the Dow Index with 200 Moving Average and Consecutive Day Moves (Daily Chart)
Chart Created on Tradingview Platform
What is even more unnerving is the breadth of the ‘risk off’ mentality. There was no isolation to the fear as it swept the capital market. There seemed to be little in the way of restriction in the deleveraging move. Global equities, carry trade, emerging market assets/currencies, junk assets and commodities would all take a hit. That is the kind of wide reaching move that suggest that sentiment itself has shifted. In genuine risk aversion, perspective can shift the focus on negative data to feed the fire, rather than positive an advance as it was before.
Year-Over-Year ‘Risk Asset Benchmark’ Performance (Daily)
Chart Created by John Kicklighter with Data from Bloomberg
What Could Add Fuel to the Bearish Fire
While I believe that sentiment itself may be in command of markets, that doesn’t mean fundamental influence isn’t a critical driver, whether it accelerates the drop or stalls it out. In the aftermath of the FOMC decision, I asked Twitter what they believed the next driver for traders may be and the majority was clear. Fear over virus related headlines easily outpaced pure sentiment, data or ‘other’.
Twitter Poll for the Next Market Driver
Poll from Twitter, @johnkicklighter
Looking to the headlines this past session, it seemed FinTwit was right. There was an inordinate focus on the resurgence in COVID-19 cases judging by Google News headlines. According to various outlets, up to half of all US states are experiencing a rise in cases as they ease ‘stay at home’ policies. That would be a serious concern for markets, because the revival of the US (and global) economy depends heavily on the ability to revert to some sense of normal.
Chart of US Coronavirus New Cases (Daily)
Chart from Google, Data from Wikipedia
Speaking of economic health, the Fed’s outlook for the US economy was not met with much enthusiasm. A -6.5 percent contraction in 2020 isn’t exactly a surprise giving the circumstances, but that wasn’t the only warning on hand. The OECD’s recent update brings a new fold to the situation. The group downgraded its global forecast to a -6.0 percent slump for the world, but it went on to warn that a second wave of the pandemic – which it considered a distinct possibility could increase the pain to an exceptional -7.6 percent collapse. The present reading is already the worst economic showing during ‘peace time’ in over a century.
OECD 2020 Growth Forecast
Graph from OECD.org
Keeping Track of the Dollar and Pound Through Week’s End
In the current tumult of risk aversion, there have been some interesting realignments on the safe haven side. Gold for example, despite holding remarkably buoyant through the risk-on phase, was notably weaker against the Greenback this past session. The benchmark currency was one of the more prominent benefactors of the bearish view Thursday, adding weight to the perspective of systemic fear. Yet if Dollar is overriding gold, could it be a sign that the situation is so intense that liquidity is the principal concern?
| Change in | Longs | Shorts | OI |
| Daily | -3% | 3% | -1% |
| Weekly | -10% | 16% | -2% |
Chart of DXY Dollar Index Overlaid with the VIX Volatility Index (Daily)
Chart Created on Tradingview Platform
I will be watching both Gold and Dollar in the final session of this week for risk considerations. For the currency, there is scheduled event risk to consider as well. The University of Michigan consumer confidence survey for the month is on tap – a figure that could readily factor into the anticipation of economic recovery against the backdrop of the pandemic. However, if we were operating on sheer volume of high-level event risk, the UK docket would carry the most weight. There are two monthly GDP estimates on tap, trade figures, industrial production and construction activity. Will that (along with reports of a restarted UK-EU trade negotiation next week) be enough to trigger a strong and clear Sterling move?
Chart of EURGBP with 50-Day Moving Average (Daily)
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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