Nasdaq, Gold, EURUSD Points:
- The first official trading day of July, the third quarter and second half of 2020 offered a very uneven ‘risk on’ picture with a record high Nasdaq suggesting sheer speculation
- We are facing a prominent liquidity drain with Friday’s US holiday, but a special day for June NFPs will attempt to compensate for volatility
- My expectations for risk trends are limited – even for the likes of the Nasdaq 100 and Gold – but low boundary EURUSD and AUDUSD breaks may fit the bill
An Uneven Risk Appetite Bid Leverages a Fresh Nasdaq 100 Record
We are heading into holiday trading conditions to end this week which conflicts with the heavy fundamental themes that are pushing and pulling at the markets. First and foremost, my interest is focused on the backdrop of risk appetite which is typically the ultimate arbiter of speculative markets. There remains a backdrop of overt optimism in the global markets, but the more recent intent should be put up to greater scrutiny. For example, the US-based Nasdaq 100 this past session posted a fresh record high on an intraday and close basis. That contrasts however relative to other measures of speculative conviction – even the other benchmark US indices like the S&P 500 which offered a very modest advance or the Dow after Thursday’s -0.3 percent slip.
Chart of the Nasdaq 100 with the 200-Day and 50-Day Moving Averages (Daily Chart)
Chart Created on Tradingview Platform
As I’ve highlighted before, there is a reflection of the speculative skew to be found in the relative performance of different measures of risk appetite. My preferred measure of underlying conviction is a broad (high correlation) and strong charge in assets that carry the banner of sentiment. This past session, there was an underwhelming show by the likes of global equities, emerging market assets, high-yield fixed income and carry trade. There was, however, a notable appetite for the momentum favorite US equities market. The ratio of the S&P 500 to the VEU rest of world equity ETF has jumped this week. Yet, Wednesday brought a particular demand for US tech shares – one of the favorite categories for those looking for momentum rather than value – as the Nasdaq 100 outpaced even its close cousin S&P 500 with a record high for the ratio between them.
| Change in | Longs | Shorts | OI |
| Daily | 4% | 2% | 3% |
| Weekly | 0% | -8% | -6% |
Chart of the Nasdaq to S&P 500 Ratio Overlaid with the S&P 500 to VEU in Green (Daily Chart)
Chart Created on Tradingview Platform
Downplaying Recession and COVID Fears to Follow the NFPs
To facilitate a sustained risk appetite, or otherwise see it collapse, motivation would be best served by a fundamental driver. The conditions of global economic health were stirred this past session with a range of manufacturing activity reports. While the Chinese Caixin, second read developed world Markit figures and flash emerging market updates were all noteworthy; they all carried they questioned enthusiasm seen in recoveries from the extreme contractions registered in April and carry over in May. The US-based ISM report was no different. The June update was in solidly ‘expansionary’ territory. Those already entertaining the notion of a ‘V-shaped’ recovery took in the news eagerly, but the skeptics didn’t seem to put much more stock in the update.
Chart of S&P 500 Overlaid with ISM Manufacturing and Non-Manufacturing Indices (Monthly)
Chart Created by John Kicklighter with Data from ISM and Bloomberg
Another fundamental reminder against the backdrop is the persistent headlines around the spread of the coronavirus. While global cases of the devastating virus eased modestly for a second day through June 30th, there is hardly relief to be seen in the resurgence of the pandemic. Traders would do well to keep close tabs on headlines around this scourge as its impact on confidence can quickly regain traction.
Graph of Worldwide Cases of Coronavirus (Daily)
Chart from Google with Data from Wikipedia
Through the upcoming session, there will be a very particular fundamental focus from the US docket: the June nonfarm payrolls (NFPs) and accompanying statistics. The volatility in this data is inevitable given the forced shutdown and subsequent reopen of the world’s largest economy. As with many other indicators that act as guide to economic health, there could be a significant degree of ambivalence to this data. However, the scale of expectations we have seen develop lately could also set this series up to a greater impact should it disappoint. Following May’s significant ‘beat’ with a 2.5 million addition to national payrolls against an anticipated 8.0 million losses, there is now a forecasted 3.0 million increase to work against. Meeting this figure would probably not impress in the way such a number would insinuate. On the other hand, missing the mark could prove serious.
Chart of Change in US Nonfarm Payrolls and Level of ‘Surprise’ (Monthly)
Chart Created by John Kicklighter with Data from BLS.gov
Technical Moves that Are Practical Given Market Conditions
Even if the US employment data surprises relative to expectations, the market-moving consideration will likely be skewed by the anticipated liquidity drain that we face through Friday trade. We are heading into a well-known US holiday period: the Fourth of July market closure. While only a holiday for a single major financial center, history has shown global investors take note of the conditions and throttle back their activities in the market. Against this kind of backdrop, I am tempering my expectations for the likes of the Nasdaq 100 to extend its record-breaking rally or even for gold as a skeptical safe haven to make a productive run on 1,800 and overtake 8 year highs.
| Change in | Longs | Shorts | OI |
| Daily | 6% | 5% | 6% |
| Weekly | 13% | -15% | 3% |
Chart of Gold with 20-day Moving Average and COT Net Speculative Futures Positioning (Daily)
Chart Created on Tradingview Platform
More practical considerations in this kind of environment is range candidates or narrow breakouts where the anticipation is not for an overriding follow through. It is always possible that sentiment forges a systemic move during this particularly deflated period, but it would be the exception to the rule. There are a number of ranges to consider, but I am particularly interested in pairs like the EURUSD and AUDUSD where near-term technical break threats can push us into established ranges.
| Change in | Longs | Shorts | OI |
| Daily | 6% | 6% | 6% |
| Weekly | 10% | -17% | -2% |
Chart of EURUSD with Retail Speculative Positioning from IGCS (Daily)
Chart Created on Tradingview Platform
If you want to download my Manic-Crisis calendar, you can find the updated file here.
.
