S&P 500 and Dollar Talking Points:
- Fed Chairman Jerome Powell announced Thursday at the Jackson Hole Symposium that the world’s largest central bank would ease its policy approach even further
- While a shift in inflation targeting by the Fed is material for monetary policy watchers, in a world of tame liquidity and stretched risk assets, it may underwhelm
- Dollar volatility and S&P 500 record highs remain a top concern for Friday; but watch the Canadian Dollar and Euro through ‘regular’ scheduled event risk
S&P 500’s Solo Run Is Growing More Pronounced
With a tailwind already providing conspicuous lift for the S&P 500 this week, bulls were marching into Thursday waiting to see whether Federal Reserve Chairman Jerome Powell would provide an accelerant for the charge to record highs. True optimists were looking to see whether other risk-sensitive assets would finally fall into line with the US indices. The central banker ultimately did cast more support for risk takers, but neither broad nor concentrated risk appetite would see the benefits in the capital markets. Sticking to the benchmark US index, the market would register a sixth consecutive advance but neither tempo (rate of change) nor volume would bear out the enthusiasm that could encourage on paper.
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| Change in | Longs | Shorts | OI |
| Daily | 7% | -7% | -1% |
| Weekly | 4% | -7% | -2% |
Chart of S&P 500 with 50 and 200-Day Moving Averages and Disparity Index (Daily)
Chart Created on Tradingview Platform
As for the breadth of performance for ‘risk-leaning’ assets, there remains a distinct disparity that undercuts my expectations for reliable trends. Indices outside of the US were struggling through Thursday. The argument that the encouragement came during the US session doesn’t bear weight given that the day’s primary catalyst – Powell’s statement – happened around the New York open when European markets were still in prime trade time. Furthermore, measures that traded during the US hours (such as EEM and HYG) struggled as did 24 hour markets like carry currency crosses. It is worth noting however, that some of the more prominent carry pairs did outperform on the day and continue to do so heading deeper into Asian trade. AUDJPY and NZDJPY have been particularly impressive.
Chart of VEU Rest of World Equity ETF Overlaid with S&P 500 to VEU Ratio (Daily)
Chart Created on Tradingview Platform
My Priorities Run from Market Conditions to Fundamentals to Technicals
As we head into the final trading session of the week, it is important to remember that the hurdle that must be overcome to sustain a trend is not a simple technical barrier. Rather, the general curb on market participation and an underlying bias of suspicion around systemic fundamental issues are throttling market performance. The ‘summer doldrums’ are difficult to override when the speculative rank seems comfortable with falling back into a complacent pace backed by passive support systems like global central bank stimulus. We can see the light at the end of the tunnel of illiquidity as the typical rebound in activity post-Labor Day in the US (Monday, September 7), but what can urge the market’s to throw in their conviction now?
Chart of DXY Dollar Index with 100-Day Moving Average and Disparity Index (Daily)
Chart Created on Tradingview Platform
Fed’s Powell Offers More Accommodation and the Market Dither
In an overview of this week’s top event risk, Chairman Powell made a clear effort to satisfy appetite for more external support from the world’s largest central bank in place of ‘natural’ growth. In his Jackson Hole speech, the policymaker announced a significant policy shift to “average inflation targeting”. Essentially, the Fed has announced its willingness to allow inflation to accelerate further before they start normalizing monetary policy. That is a considerable shift from the past three decades’ status quo, but the practical implications against the current backdrop are perhaps not exceptional enough. The market’s have surged over the past decade with rate cuts, stimulus programs and other unorthodox efforts. Lengthening the ‘duration’ of easy monetary policy doesn’t exactly change the calculus at work.
Chart of S&P 500 Overlaid with Major Central Bank Balance Sheets (Monthly)
Chart Created by John Kicklighter with Data from Bloomberg
While the US central bank’s move may not be a dramatic escalation of support by the authorities, it is at least a marginal factor. That said, such an effort also draws attention to monetary policy in its totality with the ‘V-shaped’ recovery heavily suspect and rates of return leaving much to be desired. Should the mood shift in regards to the effectiveness of monetary to not only extend capital markets’ charge but to simply maintain the high perch the markets have forged thus far, there exists a risk that sentiment can collapse under its own decadence.
Chart of Consumer Confidence, Expectations and Present Conditions with S&P 500 (Monthly)
Chart Created by John Kicklighter
‘Other’ Fundamental Sparks to Consider Through Friday
Heading into the final trading session of the week, there are a few fundamental highlights that should be monitored. As an open-ended consideration, there may be no scheduled update for the pandemic’s influence or political upheaval; but the threat is material enough that investors shouldn’t ignore warnings. For more discreet matters, the docket does have its listings. For the Dollar, I am putting less emphasis on Jackson Hole day two as there isn’t another Powell-level speech due. Instead, more ‘mundane’ data like the advanced trade balance and personal spending will be on my radar. A wide range of sentiment data will make for an interesting situation for the Euro in the London session. Yet, the greatest volatility risk – though concentrated – on my radar is the June and 2Q GDP update from Canada. USDCAD has been in a remarkable slide for months, but this seems the epitome of tempo problems.
Chart of USDCAD (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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