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Dollar Versus S&P 500 Volatility as Stimulus Deadline Passes, Election Focus Sharpens

Dollar Versus S&P 500 Volatility as Stimulus Deadline Passes, Election Focus Sharpens

2020-10-21 03:00:00
John Kicklighter, Chief Strategist
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Dollar, S&P 500, VIX, Tesla Talking Points:

  • The deadline for a stimulus compromise that could offer the US relief before the Nov 3 election passed with limited fallout
  • A stimulus infusion is still probable over time, even if it isn’t immediate, with an approval presenting the most intense scenario and the Dollar my top volatility candidate
  • Meanwhile, election anticipation has some imminent milestones, the coronavirus cases are climbing and earnings moves from a Netflix disappointment to a Tesla update
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An Artificial Stimulus Deadline Passes Without a Market Collapse

This week began with an ultimatum. House Speaker Nancy Pelosi warned negotiators from the White House and in the Senate that they would not be able to delivery support to Americans before the US Presidential election before the November 3rd election if they did not find a compromise by Tuesday’s close. Well, that deadline came and went without an utter collapse from US indices, much less broader risk metrics – though I would note that the Dollar extended it retreat on the day. Do market participants believe that market performance – and perhaps the economy itself – can sustain itself without further fiscal stimulus? Or is this instead evidence of an unshakable assumption that relief will come eventually? The S&P 500 did bow to recognition that stimulus would at least be delayed through the New York session. A nearly full reversal of the day’s gains left the larger ‘upper wick’ or ‘tail’ in six months. Not itself a definitive sign of lasting reversal but a warning shot to bulls that are too confident.

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Chart of S&P 500 with 50, 100-Day Moving Averages and Daily ‘Tails’ (Daily)

Dollar Versus S&P 500 Volatility as Stimulus Deadline Passes, Election Focus Sharpens

Chart Created on Tradingview Platform

When it comes to the question of US stimulus, there are two more probable scenarios. It is unlikely that the plug is truly pulled and all hope lost – despite the President’s tweet two weeks ago suggesting just that until he cleared it up 8 hours later. Instead, we are likely to see the process continue to draw out and the accumulated damage of inaction build over time. Eventually there may be a tipping point to risk aversion but it will be hard to gauge ahead of time. Alternatively, an approval may be a lower probability but it is nevertheless the more binary scenario. That said, the more intense scenario would seem to cater to ‘risk on’ and relative Dollar strength. Given a benchmark like the S&P 500 is just off record highs, I would contend that its charge from an approval is likely to be more staid. The Greenback on the other hand is trading at a significant discount over the past year and could response to a positive spark.

Chart of S&P 500 withVIX October-November Spread (Daily)

Dollar Versus S&P 500 Volatility as Stimulus Deadline Passes, Election Focus Sharpens

Chart Created on Tradingview Platform

Politics is a Pressing Issue That Draws Our Attention – and Conviction - Forward

Anticipation is a powerful force in the markets. And, while the US Presidential election is still two weeks away, it can reach that far ahead to draw traders’ attention owing the scale and scope of its outcome. The campaigns are going strong for both candidates and a number of swing states remain highly contentious. That is something that needs to be factored into the equation before operating on a one-dimension conviction following the polling figures. Real Clear Politics’ aggregate polling figure put former Vice President Joe Biden at an 8.6 point lead over President Donald Trump but the electoral college has been a very prominent deciding factor in recent elections.

Chart of Google Search Ranking in the US for ‘Election Volatility’ and ‘Stimulus Hopes’

Dollar Versus S&P 500 Volatility as Stimulus Deadline Passes, Election Focus Sharpens

Chart created by John Kicklighter with data from Google Trends

Despite the uncertainty of the election outcome next week, there is still a strong probability that the results are contested and the issue drawn out. That in particular has raised concerns among market participants that a clear outcome and execution of clear policies will result soon after the tally is done. We have seen that result in the VIX holding above 20 for 167 trading days, a wide spread between October and November VIX futures contracts and frequent reference to the risks in Google searches. Yet, perhaps the market has ‘bought the news’ in risk terms. According to options in the volatility contracts, the put-call ratio has swung to the most pressing expectation of a implosion in volatility after the election in 11 years. Of course, I would be remiss not to point out that net short volatility has been a constant and an acute hit as that view held through recent charges.

Read more on how the VIX has acted around previous US Presidential elections in our special report analyzing the ‘fear gauge’ during this cycle.

Chart of VIX Put-Call Ratio from Twitter

Dollar Versus S&P 500 Volatility as Stimulus Deadline Passes, Election Focus Sharpens

Chart from Twitter, @SarahPonzek

Currencies to Watch and Events That are Active

When it comes to fundamental potential, there is certainly build up behind the likes of the British Pound as a coronavirus shutdown procedure unfold and trade talks continue behind closed doors. However, I would say that the Dollar has the greatest potential through the near future. There is scheduled event risk like Thursday evening’s last Presidential debate but the stimulus question is arguable one of the most potent events on tap.

Chart of DXY US Dollar Index with Trump-Biden Crypto Differential (Daily)

Dollar Versus S&P 500 Volatility as Stimulus Deadline Passes, Election Focus Sharpens

Chart Created on Tradingview Platform

On a fundamental theme, stimulus and elections aren’t the only matters that can generate market movement. The US earnings season will be navigating some dangerous straights with the speculative crowd. After Tuesday’s close, FAANG member Netflix kicked off the tech sector’s quarter with a disappointing $1.74 earnings per share (EPS) versus $2.13 expected by analysts on a lower subscriber numbers. Among the FAANG members, this is perhaps the least influential participant; but it will put traders on edge. Tesla on the other hand is much smaller but it has been a very prominent retail speculative favorite. If it falters, there is greater risk of a fallout. I will be watching CSX as it is a far better proxy to economic activity in my experience, but that isn’t likely to make it a true market mover.

Chart of CSX, Tesla and Netflix (Daily)

Dollar Versus S&P 500 Volatility as Stimulus Deadline Passes, Election Focus Sharpens

Chart Created on Tradingview Platform

Among market-moving currencies, the Dollar and Pound have potential; but the Euro and the Aussie are moving now. For the former, the matters are stimulus, decisions for pressing tariffs against the United States and taking the role as an alternative liquidity haven to the Dollar. Whichever issue it is treading on, the Euro managed an impressive climb with EURUSD, EURJPY and EURGBP. Perhaps the most impressive of the crosses is EURAUD which combined a motivated Euro bid and an active Aussie drop. It is equally unclear as to what is charging the Aussie slide – carry fallout, risk sensitivity, domestic health, trade conditions with China – but it is proving persistent. I will watch this pair closely after the noteworthy 1.66 break.

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Chart of EURAUD with 200-Day Moving Averages (Daily)

Dollar Versus S&P 500 Volatility as Stimulus Deadline Passes, Election Focus Sharpens

Chart Created on Tradingview Platform

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