S&P 500, Dollar, British Pound and Japanese Yen Talking Points:
- The Federal Reserve rate decision has passed with exactly the outcome expected: the central bank held course on rates and stimulus with an ambiguous growth forecast
- More global in scope, the OECD’s global growth outlook may have lifted 2020, but the projections into subsequent years reflects deepening concerns
- The S&P 500 and NDX/SPX ratio top my watch list moving forward; but the DXY Index, GBPJPY, USDJPY and crude oil are all worth watching ahead
An Event that Can Drive Risk Appetite Versus One that Can Rob Such Momentum
The Fed rate decision this past session was an important market-moving event risk. While the potent driver didn’t take up the opportunity to drive speculative appetite one way or the other, its passing nevertheless frees benchmarks like the S&P 500, Dollar and other high-profile measure to commit to a wholesale charge. Major event risk can have influence over markets in one of two ways. In the more familiar – and familiar for many traders – dynamic, a weighty event risk can trigger an underlying market’s volatility and even a trend with the right impetus. That wasn’t the scenario – at least immediately – from the FOMC event this past session. Alternatively, the sheer potential of such an event risk can lead markets sidetrack risk trends for fear of an update that contradicts preemptive investment. With the US central bank’s policy update behind us, the S&P 500 has yet to clear its 3,425 to 3,300 range; but there isn’t the same fog of expectation build in to prevent motivation that arises through other means.
| Change in | Longs | Shorts | OI |
| Daily | -7% | 13% | 2% |
| Weekly | -12% | 17% | 0% |
Chart of S&P 500 with 50-Day, 200-Day Moving Average and Opening Gaps (Daily)
Chart Created on Tradingview Platform
Looking at a more comprehensive measure of ‘risk appetite’, a cross-market assessmentof speculative participation left this past session leaning lower. Notably, Wednesday wouldn’t allow for a bearish traction from the likes of the Japanese Nikkei 225 or German DAX 30 as those markets closed before the Fed’s decision on external support was decided. Today’s session will see fewer restrictions to any latent intent. Meanwhile, one of my preferred measures of FOMO-style risk appetite, where momentum supersedes investment decisions relative than a pursuit of value, the Nasdaq 100’s value charge relative to the S&P 500 dropped to recent ‘trendline support’. Now the real decisions are at hand.
Chart of Nasdaq 100 to S&P 500 Ratio with 50-Day, 200-Day Moving Averages (Daily)
Chart Created on Tradingview Platform
What the Fed Did and What it Has Implied
The Federal Reserve (FOMC) offered up exactly the policy that the market had anticipated (according to consensus forecasts). There was no adjustment to the benchmark rate at its range of 0.00 to 0.25 percent while its stimulus efforts will be unchanged for the near future. In the traditional outlet, the most remarkable development was the suggestion that rates would remain at their near-zero level through at least 2023. That is in itself remarkable, but not really what the market is looking for. With the S&P 500 just off record highs, there is an inference of further iterations of external support to compensate for lackluster growth and fully deflated rates of return in the market. That wasn’t truly fed this past session even with the 2020 US GDP forecast being lifted from an incredible -6.5 percent contraction to a ‘mere’ extreme - 3.7 percent collapse.
Learn more about the Federal Reserve and the other major central banks in our education section.
Table from Federal Reserve’s Summary of Economic Projections from September 2020 Meeting
Table from Federal Reserve
Just how disappointing is it that the world’s largest central bank hasn’t further escalated its infusion of monetary support to the wayward capital markets? It is worth remembering the general situation that we find ourselves between economic potential and speculative exposure. Technically speaking, the US and a host of other major countries have yet to emerge from a generation defining recession. Nevertheless, the likes of the S&P 500 are still pushing highs. Those external drivers thereby play a critical role.
Chart of S&P 500 with Aggregate of Major Central Bank Balance Sheet Holdings (Monthly)
Chart Created by John Kicklighter with Data from Bloomberg Terminal
There is more of a risk to monetary policy losing traction for speculative justification than many market participants may be willing to accept. Over the past decade, the availability of funds has acted to compensate the extreme deflation in rates of return as well as the collapse in typical measures of value. The ‘complacency’ that has developed from this unusual situation has amplified the risk in the system. This is risk that this temporary suspension of serious concern falls away and an inflated market collapses under its own weight.
Chart of Monetary Policy Effectiveness
Chart Created by John Kicklighter
Other Fundamental Themes That May Take
While the US central bank’s update may have distracted us this past session, there were other profound developments Wednesday that may carry repercussion moving forward. From the Fed’s own Summary of Economic projections, the world’s largest economy was expected to suffer less intense of a 2020 contraction, but its subsequent years of recovery were also seen as being more reserved: with a 4.0 percent expansion in 2021 and 3.0 percent growth in 2022 from 5.0 and 3.5 percent respectively. From a global perspective, the OECD eased its own warning for the world’s slump this year from -6.0 to -4.5 percent but it would also temper the 2021 recovery in turn from 5.2 to 5.0 percent.
Chart of OECD GDP Forecasts
Table from OECD.org
From the Dollar’s perspective neither the perspective of a diminished carry trade nor potential for competitive V-shaped economic performer would be roused. The DXY Dollar Index would hold to its congestion and subsequently fill the unflattering role of a ‘right shoulder’ on an inverse head-and-shoulders pattern. The implied rate forecast holds some sway here, but the Greenback is likely to draw on alternative sparks when it eventually picks its direction moving forward.
| Change in | Longs | Shorts | OI |
| Daily | -13% | 20% | 5% |
| Weekly | -10% | 20% | 6% |
Chart of DXY Dollar Index with 50-Day Moving Average with Implied Dec 2021 Fed Forecast (Daily)
Chart Created on Tradingview Platform
While the US central bank may not have upended the influence of monetary policy this past session, that doesn’t meant that the impact of stimulus influence is fully behind us. This past session, we would also have the Brazilian central bank’s decision not to cut rates for the first time in 10 policy decisions. For Thursday, we are due the Bank of Japan’s and Bank of England’s rulings on their respective policies. That should make the GBPJPY particularly interesting. That said, monetary policy may not be the ‘opportunity’ for generating volatility but it can also lose its role as encumbrance to alternative motivations.
Chart of GBPJPY and 50-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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