S&P 500, Nasdaq, Tesla, EURUSD Talking Points:
- Despite the tailwind from confirmation of a large EU stimulus program (750bln euros), risk trends spun their tires this past session
- With Tesla and Microsoft – speculative favorites for momentum and tech designation – reporting earnings beats, will Thursday’s take the prompt?
- Should sentiment fail to launch, concerns over persistent recession, the steady march of the pandemic and growing pressure in the US-China trade war stands ready to tear markets down
Risk Appetite Jumps from Stimulus to Earnings Focus
There was a reliable tailwind for risk appetite trends heading into Wednesday’s session in the form of the EU’s long-awaited passage of a 750 billlion euro stimulus program. That infusion of support hits a familiar nerve that has charged trends on stimulus following programs from major governments’ pandemic stimulus responses or central bank programs from the likes of the Federal Reserve. Despite the scale of the program, the risk appetite it inspired was notably limited with both the German DAX and US’s S&P 500 index flagging for momentum this past session. In case the concern was that the stimulus didn’t register at all, EURUSD’s climb suggests differently. I wouldn’t write risk trends off altogether however.
| Change in | Longs | Shorts | OI |
| Daily | -25% | 1% | -8% |
| Weekly | 13% | -13% | -7% |
Chart of DAX to S&P 500 Ratio Overlaid with EURUSD in Blue (Daily)
Chart Created on Tradingview Platform
For risk appetite, the focus is likely to shift over the coming trading session. While stimulus is still very much a systemic theme that can regain the lead on markets, it will likely require another important update. Perhaps the United States’ follow up coronavirus stimulus program following the expiration of the first infusion is the next accelerant, but that is not on a particularly reliable track at present. Instead, earnings is my principal focus heading into the open of Thursday’s New York session. After hours, this past session, speculative favorite Tesla reported its fourth quarter of profitability ($0.50 EPS) which technically earns the company a spot in the S&P 500. Given the sheer speculative momentum behind this unusual company, its headline could set the tone for the entire market. Meanwhile, tech giant Microsoft reported its own $38 billion in revenues readily beat the $36.5 billion consensus forecast.
Chart of Nasdaq 100 with 50-Day Moving Average and Tesla in Purple (Daily)
Chart Created on Tradingview Platform
The speculative charge for the likes of Tesla and market-cap leading tech leaders like Microsoft can fuel remarkable risk appetite. Then again, it can also stretch markets to ‘bubble-like’ circumstances. Sentiment without fundamental support creates an environment in which any unexpected flaw in conviction can open up a troubling fraction in loosely held confidence. Naturally, the most productive benchmarks in this environment feed the greatest risks of bubbles. That aligns naturally to my poll which asks participants which market they felt was most likely to turn into a bubble that ultimately collapsed. The Nasdaq soundly drew the greatest percentage of the votes.
Read Paul Robinson’s article on some of the most impressive bubbles in recent market history.
Twitter Poll of First Major Market to Break
Poll from Twitter.com, @JohnKicklighter Handle
EURUSD Shows a Potential Systemic Shift in Ultimate Haven Status
While the development of risk trends remains my principal fundamental focus through the upcoming session, that isn’t the only matter worthy of market movement. EURUSD touches upon competing but productive winds. This benchmark pair has extended its charge following the 1.1450 technical break with an advance to levels not seen since October 2018. While there is traditional fundamental event that can be digested for this type of motivation, the practicality of stimulus benefitting Europe while the struggle to agree on a second round of pandemic-fighting stimulus from the US government makes for a practical driver.
| Change in | Longs | Shorts | OI |
| Daily | 0% | -10% | -3% |
| Weekly | -5% | 14% | 1% |
Chart of EURUSD with Disparity Between Spot and 200-Day Moving Average (Daily)
Chart Created on Tradingview Platform
Unlike the immediate session following the news of the EU’s 750 billion stimulus program whereby the Euro was lacking for charge, the world’s second most liquid currency showed greater productivity across the board through Wednesday. From EURUSD to EURGBP to EURJPY, the shared currency threw around its weight. That said, the Greenbacks’ struggle Tuesday carried forward to the past session. The DXY Index fell to October 2018 lows, but this measure’s principal weighting is in EURUSD. With insight from pairs like USDJPY and AUDUSD, it was clear that the Dollar was doing its own significant downshift. My equally-weighted USD index is leaning heavily on a well-tested range floor dating back two full years.
Chart of DXY Dollar Index (Weekly)
Chart Created on Tradingview Platform
Keeping Tabs on Stimulus Havens and Alternative Systemic Risks
A weak Dollar can carry significant knock-on consequences in the open market. For example, the commodities priced in the benchmark can enjoy a remarkable boost. Gold seems to be taking advantage with another strong reach following the 1,820 breakout. That said, a measure of the precious metal equally weighted in USD, Euro, Pound and Yen has similarly stretched but to fresh record highs for the eighth time in 18 trading days. And, before we chalk this drive up to haven demand, silver has enjoyed an even more prolific surge suggesting speculative appetite is at work in this channel as well.
Chart of Gold with Ratio of Gold to Silver in Red (Daily)
Chart Created on Tradingview Platform
As we watch the balance of risk benchmarks and havens amid a speculative windfall for eyes glazed over by earnings, I feel it remains critical that we follow other systemically important fundamental themes. The coronavirus is only temporarily outmatched for headline space with constant reminders of the spread and its economic implications. Speaking of which, the Friday PMIs for Australia, Eurozone, UK and US can readily ground our focus. The same is true for the knock on effects of economic hardship such as the revival of the trade wars. News that the United States had pushed the closure of the Chinese consulate in Houston was a top concern Wednesday morning before earnings took over. I am always on the lookout for the convergence of fundamental and technical developments, and this news seemed to align neatly to USDCNH’s reversal from a multi-year trend channel support.
Chart of USDCNH with 20-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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