Nasdaq, S&P 500, EURUSD, GBPUSD and EURGBP Talking Points:
- The effort to revive risk appetite fell apart in the afternoon hours of the New York trading session Thursday, will SPX and NDX tip full bear markets Friday?
- Top fundamental event risk will yield to open-ended themes as US CPI and UK GDP take back seat to trade wars, monetary policy and stimulus
- For top volatility candidate, the Euro experienced upheaval after the ECB rate decision but the Pound remains the most active currency with EU-UK trade negotiations faltering
Another Flip in Risk Trends but Steady Volatility
The recovery in risk-leaning assets that took root on Wednesday was quickly cut down this past session – specifically through US trade. My preferred ‘imperfect, one-look’ measures of speculative intent, the US indices, opened to bullish gaps to start the day but slid progressively through the afternoon hours of New York trade. The S&P 500 opened to a 0.4% bullish gap only to end the day with a -1.8% drop. The more volatility-prone Nasdaq 100 started the day up 0.9% and closed with a -2.1% loss. In both cases, the week’s lows would remain in place, which leaves the responsibility of follow through to Friday’s session. I would note, however, as a closer look at risk trends; the Nasdaq to S&P 500 ratio dropped this past session which denotes an ebb in risk appetite at its core.
| Change in | Longs | Shorts | OI |
| Daily | 7% | 4% | 5% |
| Weekly | -1% | 11% | 5% |
Chart of S&P 500 with 20-Day Moving Averages, 1-Day ROC and Volume (Daily)
Chart Created on Tradingview Platform
For many traders, direction is the only matter they take seriously when engaging the markets. It certainly matters to me as well; but I would put the backdrop for volatility and liquidity before bearing in an assessment of the market. Why? Markets that are volatile are far more prone to seeing frequent and sharp changes in direction. Volatility is at its root uncertainty. The greater the uncertainty, the greater the risk of sudden changes in bearing. Further, liquidity – another way of saying level of participation – can signal a propensity for establishing trends through building momentum. So, while we did see a high correlated drop this past session (equities, emerging markets, high-yield, carry trade, etc), there isn’t much of a self-sustaining drive behind this development to insinuate the development of an overriding trend.
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Chart of Risk Trend Intensity
Chart Created by John Kicklighter
With another flip in speculative bearing, it is worth returning to the ultimate result of my poll from the previous trading day. I asked whether traders in Twitter were convinced by the ‘buy the dip’ mentality that put a stopper (at least temporarily) in the a sell off that roused explanations from Softbank’s derivative unwind to the long-overdue appreciation of growth concerns. Ultimately, the majority (64%) voiced skepticism with a vote that what we had seen the previous day was a mere ‘dead cat bounce’.
Chart of Speculative Positioning in S&P 500 CFDs from IG (Daily)
Poll from Twitter.com, @JohnKicklighter
EURUSD Highlights Competition in Growth and Monetary Policy
While it wasn’t the most volatile pair this past session, EURUSD was nevertheless among the top movers. The world’s most liquid cross was little change from close to close through Thursday, but that only amplified the intraday volatility. A morning rally and reversal left the benchmark with its larger ‘upper wick’ since the height of the pandemic crisis. While the Dollar was experiencing its own volatility with jobless claims in the United States Thursday, the Euro’s own fundamental turnover was far more headline-worthy. The ECB held its policy course at this month’s rate decision but its President, Christine Lagarde, voiced a more optimistic outlook for growth.
Chart of EURUSD with 20-Day Moving Average Daily ‘Wicks’ (Daily)
Chart Created on Tradingview Platform
For investors that have been registering a tempered pace in the economic recovery for the region in timely data these past weeks, this expected reticence is a concern when the focus is on a ‘V-shaped’ economic recovery. Further, Lagarde reiterated that the height of the Euro was something that was being watched – something the ECB’s Lane said previously – though she would then make a tepid effort to play down expectations that this enters into the central bank’s calculations. Meanwhile, BOC Macklem’s remarks following Wednesday’s rate decision did little to plot a shift in trajectory for the loose carry-based currency. USDCAD has held up its bullish break of a multi-month trendline resistance earlier this week, but it hasn’t projected the move.
Chart of Major Central Bank Stimulus Programs (Monthly)
Chart Created by John Kicklighter with Data from Fed Economic Database
Where Volatility May Pop Up Through Friday
There are a host of systemic fundamental themes that market participants should keep tabs on moving forward – economic recovery pacing, monetary policy effectiveness, Covid fears and trade wars – but scheduled event risk offers more predictable sources of volatility. This past session, we saw the British Pound’s tumble accelerate as the trade relations between the UK and EU deteriorated even further. US politicians even entered the fray with Democratic leader Nancy Pelosi warning the country’s trade deal with the UK could be in jeopardy if Prime Minister Johnson didn’t uphold the Brexit protocol for Northern Ireland previously agreed upon in the Brexit divorce. This tumultuous relationship will be the key concern into Friday, but I am still keeping close tabs on the July GDP, trade balance and industrial production figures due from the UK.
Chart of EURGBP with 200-Day Moving Average, 1-Day ROC, 5-Day ATR (Daily)
Chart Created on Tradingview Platform
With Sterling volatility on tap ahead, a pair like the EURGBP is perhaps one of the most put-upon fundamental targets. These economies are at odds, which make for an important but unclear position for their respective currencies. The pair posted it biggest rally sine the height of the pandemic selloff this past session cleared 0.92 resistance in the process. As remarkable as that may be, GBPUSD may offer a more concentrated view. The Euro stands to lose for the trade dispute even if it isn’t as severe as what the UK absorbs. The Dollar is less directly impacted. With the 200-day moving average in ready view and a tentative technical break already at hand, this will be an interesting pair to watch.
Chart of GPBUSD with 20 and 200-Day Moving Averages and 1-Day ROC (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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