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Dollar and S&P 500: The Difference Between a Break and a New Trend

Dollar and S&P 500: The Difference Between a Break and a New Trend

2020-10-09 04:30:00
John Kicklighter, Chief Strategist
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S&P 500, EURUSD and GBPUSD Talking Points:

  • A fourth consecutive gap higher for the S&P 500 and Dow has nudged the benchmark US indices into an uninspired bullish breakout
  • US stimulus talks and intensified political tensions heading into the US election dominant the risk and Dollar backdrop with uncertainty, but what will provoke true trend?
  • EURUSD has been seeded with further ECB warnings on the Euro while GBPUSD may be the most laden event risk pair for Friday with data like UK GDP and Brexit talks
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Breakouts Alone Struggle to Urge Systemic Trends

I believe it would be fair to say that we have experienced a bullish wind in risk assets these past few trading days after the US President backtracked on his Tweet that stimulus talks had been scuttled. However, that underlying bearing hasn’t exactly extended to intent in the form of moment. Lifting a manufactured speculative hurdle like Trump’s call to halt all talks on a CARES act sequel until after the election can certainly rally markets back from a building sense of fear. Pushing the markets to earnestly price in the probability of another infusion of capital into the world’s largest economy despite tenacious gridlock between the White House and House negotiators is another matter altogether. House Speaker Pelosi once again rejected a stripped down proposal – this time aimed specifically at rescue of airlines – as she apparently reiterated a demand for a broader program.

Twitter Poll on Timing of Next US Fiscal Stimulus

Dollar and S&P 500: The Difference Between a Break and a New Trend

Poll from Twitter.com, @JohnKicklighter

It is this context of conviction as a source of momentum beyond technical milestones that I’m weighing when coming across charts like those from the US indices. For the S&P 500 and Dow Jones Industrial Average this past session, we witnessed a fourth consecutive bullish gap on the open (and 6th out of the past 7). This latest charge went a step further in technical terms as it cleared a month-long range resistance. Around 3,430 and 28,350 respectively. Yet, despite this rousing effort, the there seemed to be no occasion among bullish interests to rouse the markets to meaningful follow through. In fact, the S&P 500’s daily range was one of the smallest since before the Pandemic – specifically the third smallest daily range since February19th. That hardly registers as an overwhelming trend. Meanwhile, among other risk benchmarks that I monitor – such as emerging markets (EEM), junk bonds (HYG), global indices and carry trade (e.g. AUDJPY), etc. – the urgency is even less apparent. That makes for an unconvincing backdrop for risk appetite – one of the most effective systemic drivers for the global financial system.

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Chart of S&P 500 with 50, 100-Day Moving Averages, Gaps and 1-Day Range (Daily)

Dollar and S&P 500: The Difference Between a Break and a New Trend

Chart Created on Tradingview Platform

What Motivates the Dollar May Motivate the Dow

Recently, I have been viewing the Greenback as a victim of more generalized sentiment developments. However, without speculative interest following its own course, there is a need for motivation to override the inertia. While I believe there are a range of possible sparks that could trigger such a current, many of the most systemically recognizable themes seem to trace back to the Dollar (or its fundamentals) in one way or another. The ongoing negotiations over the US stimulus follow up remains one of the few practical opportunities to urge a bullish ‘windfall’. However, there seems little motivation to complete this important infusion before the November 3rd election. Meanwhile, the world’s largest economy is showing some signs of fatigue in the effort to maintain the V-shaped recovery. For example, the weekly jobless claims reported Thursday unexpectedly increased to 840,000 – a troubling reminder of the warnings of layoffs and furloughs that have started to filter through the headlines these past weeks.

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Chart of DXY Dollar Index with Initial Jobless Claims (Weekly)

Dollar and S&P 500: The Difference Between a Break and a New Trend

Chart Created on Tradingview Platform

Alternatively, while practical expectation of a significant second stimulus effort from the United States carries forward, there isn’t much expectation that it will in fact happen in a timeline that is productive. That said, should a statement or action come along to make explicit that they will not come to a compromise in the near future, the inverse risk aversion implications may not trigger a sharp retreat. Given the shape of the docket to close out this week, it is unlikely that a singular event will urge a sharp slide on the back of economic health either. One loaded theme that may muster the influence is the continuously roiling political tension in the US. Threats of pursuing the 25th amendment which provides for an incapacitated President have been floated recently with Trump’s return from the hospital after his stay for coronavirus treatment. Though it doesn’t seem a motivated venue just yet. Nevertheless with less than month to go before the election, the potential impact shouldn’t be overlooked.

How has the Dow traded around previous US elections? Read this article to see analysis on previous cycles.

Chart of DXY with 50, 100-SMA Overlaid with Trump-Biden Crypto Ratio and 5-Day Range (Daily)

Dollar and S&P 500: The Difference Between a Break and a New Trend

Chart Created on Tradingview Platform

Euro and Pound Represent Charged Fundamental Risk

The five-day range (as a ratio of spot) from EURUSD is exceptionally low – only slightly higher than the July 1 reading over the past eight months. I would say this highlights the risk of a return to ‘normal’ levels of activity – though it doesn’t stand as a catalyst in itself. With this benchmark pair pushing resistance in the 50-day moving average, it is worth reflecting upon the ECB’s minutes this past session which weighed in on the level of the shared currency with a suggestion that it is too high. In the context of the past decade, it is fairly low in the historical range; but this is a time when external economic advantages are desperately sought amid pandemic. It is very unlikely authorities resort to intervention to trigger a currency war, but their concerns could lead to other actions like more stimulus to implicitly offset the pressure.

Chart of EURUSD with 50, 100 Day Moving Averages (Daily)

Dollar and S&P 500: The Difference Between a Break and a New Trend

Chart Created on Tradingview Platform

Meanwhile, the fundamental chart from the Sterling is a little more immediate. On the docket, Friday will bring a run of important August updates. The monthly GDP reading, trade balance, industrial production and construction output are all important milestones for economic health. The context is the expectation for throttling from the response to the rise in Covid cases in the country. That said, these current circumstances may not be fully encompassed in this more dated data. Alternatively, the ongoing talks between UK and EU officials on trade policy with the deadlines drawing closer represent an expected potential without a clear time frame.

Chart of GBPUSD with 50-Day and 100-Day Moving Averages (Daily)

Dollar and S&P 500: The Difference Between a Break and a New Trend

Chart Created on Tradingview Platform

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