Dollar, GBPUSD, Dow, S&P 500 Talking Points:
- The Dow and S&P 500 led benchmark risk assets to one of the smallest daily ranges since the pandemic crisis slump began back in February
- A BOE stimulus upgrade (100 billion pounds) and SNB vow of intervention remind us of how extended central banks are and a fragile dependency for speculative markets
- With a DXY turn reflected in EURUSD and GBPUSD, the possibility of reversal could also present well with the likes of AUDUSD, NZDUSD, USDCAD and USDMXN
S&P 500 and Dow Range Deflates while Risk Stretch Keeps Reaching
Fundamental catalysts are still unfolding across the market – from the expansion of stimulus to the rise of coronavirus cases to measures to raise the trade war temperature – but the barometers of risk trends continue to settle into uncomfortable trading ranges. The quiet is still nascent, but the loss of traction across the variety of speculative measures I follow is remarkably uniform. From the US indices, the daily trading is starting to standout for how remarkably quiet it presents. The S&P 500 and Dow for example put in for their second smallest daily trading range through Thursday’s close since before the pandemic-collapse was initiated four months ago. It is worth noting the one comparable day in that period (May 22nd) preceded a resuscitated bull trend.
| Change in | Longs | Shorts | OI |
| Daily | 22% | -14% | 2% |
| Weekly | 51% | -27% | 0% |
Chart of the S&P 500 with 50 and 200-Day Moving Averages and 1-Day ATR (Daily Chart)
Chart Created on Tradingview Platform
This quiet still leaves me a sense of unease. Rather than suggest a moderation that ushers in stability, lower volatility and more measured trends; it seems instead temporary pause before speculators are driven back to their fomomentum (a term coined by Ivan the K in Twitter) or reminded of the sheer risk they have taken. A reminder of that risk for me is the relative outperformance for popular tech companies. The ratio of the Nasdaq 100 relative to the impressive performance of the S&P 500 hit yet another record high Thursday. Meanwhile net speculative futures position still shows a disconnect in conviction.
Chart of Nasdaq 100 to S&P 500 Ratio with COT Net Speculative Futures Positioning (Daily)
Chart Created on Tradingview Platform
There is a general appreciation of how stretched the capital markets and the expectations underlying them are – even if prices seem to suggest a persistent aloofness. Google search interest for ‘bubble’ around the world is the highest it has been since December 2015. All it would take is an explicit reflection upon the fundamental viability behind some of the most inequitable drivers of this poorly formed risk run. Learn more about market sentiment in our DailyFX Education section.
Graph of Global Search Ranking for ‘Bubble’ (Daily)
Chart from Google Trends
The Fundamental Drivers are Still Pulling, Ready for Traders When Sentiment Catches
With a concern over the possibility of bubbles, I will of course monitor high-level catalysts that are rotating through the headlines; but my primary worry remains with the confidence built upon central banks’ efforts. This past session, we saw the confidence in the Fed’s upgrade to its recent corporate bond program fade from view while the ECB’s efforts long ago vanished and the BOJ measures didn’t even seem to register when they were announced. Add to that the BOE’s upgrade to its stimulus program budging really on the Sterling and the Swiss National Bank’s reiterated threats of massive Franc intervention smacking of desperation. The weight of this market is holding central banks hostage and they are losing capacity.
Chart of the Perceived Effectiveness of Monetary Policy
Chart Created by John Kicklighter
As systemically threatening as the failure of monetary policy to inspire risk taking may be, there are other sparks that could better get the ball rolling. The risk of a second wave of the coronavirus – along with the human and economic fallout that result – is topping headlines if not yet investors’ concerns. It was reported that Beijing had gotten its recent outbreak of cases under control, but many remain dubious. Meanwhile, the US is still registering a rise in cases for a number of states that have reopened.
Graph of Worldwide Cases of Coronavirus (Daily)
Chart from Google with Data from Wikipedia
If Fear Picks Up, the Dollar Is Already Gaining Traction
If risk aversion manages to gain any traction before the week closes, there are a host of market options that stand ready to respond. The range of ‘risk’ assets that could lose significant altitude is arguably the larger list to choose from, but there are also havens that stand to benefit. I am watching the likes of gold and Yen crosses, but the Dollar presently in a state of transition that could converge into a larger move. The Greenback started in on a hesitant bullish rebound this past session with help from pairings like GBPUSD where a weakened Sterling acted as a lever for the larger currency.
Chart of GBPUSD with 50 and 200-Day Moving Average (Daily)
Chart Created on Tradingview Platform
While EURUSD, GBPUSD and USDJPY are the most liquid Dollar-based players, the so-called ‘comm bloc’ presents some of the most interesting technical interest. AUDUSD weathered last month’s larger-than-expected employment loss in Australia, but there is a confluence of trendline, moving averages (20-day) and Fibonacci that line up neatly with recent lows. This is just one of the pairings to watch, but NZDUSD, USDCAD and USDMXN are just a few others that present interesting technical patterns of their own.
Chart of AUDUSD with 20 and 200-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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