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Dollar and S&P 500 Bullish Chart Potential Fades as Stimulus Hopes Drop, Earnings and Growth On Tap

Dollar and S&P 500 Bullish Chart Potential Fades as Stimulus Hopes Drop, Earnings and Growth On Tap

John Kicklighter, Chief Strategist

Dollar, S&P 500 and MSFT Talking Points:

  • Risk assets seem to be firmly in the gravity of next week’s elections risk with the S&P 500 carving out its second smallest trading day in two months
  • With US stimulus off the board for the immediate future, the potential for a sharp Dollar or US indices rally has dropped sharply
  • Growth measures may be the most potent fundamental event risk for volatility before the Presidential election between 3Q GDP readings and earnings on tap
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Risk Trends Build Even More Pressure

Anticipation was already a critical aspect of the global markets this week, but the mix leveraging pressure managed to amplify even further this past session. Technical proliferation and trend restriction seem a common mix for the financial markets, but once again the US indices seem to lead the way for this unappealing mix for traders. From the S&P 500, Monday’s potential technical breakdown – a close below the 50-day moving average and multi-week lows following regression – seemed to urge little speculative urgency. In fact, Tuesday’s trading session carved out the second smallest daily range for the benchmark in two month. That is a measure of inactivity comparable to late September when many of the current fundamental pressures were not present and election concerns were still far enough into the future to allow for the natural ebb and flow of speculative activity.

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

Dollar and S&P 500 Bullish Chart Potential Fades as Stimulus Hopes Drop, Earnings and Growth On Tap

Chart Created on Tradingview Platform

For speculative mix, the risk spectrum seemed to have lost a critical candidate for sudden bullish ballast. While market participants maintained a healthy measure of skepticism around the anticipation of follow up US stimulus these past weeks, there was always the possibility that a compromise could be struck and speculative appetite could be triggered to the benefit of short-term interests. Yet, with the countdown to the US Presidential election passing the one week market, it seemed clear to those involved in negotiations that a settlement for Americans would not be found. As such, the authorities indicated that an agreement was not likely until some time after the election results were in. That is a serious hit to latent bullish risk trend scenario tree as well as the Dollar’s own opportunity to overcome anticipation with a possible rally. For USDJPY where both a scenario for a bullish risk and Greenback turn have been undermined, double fundamental lightning has struck.

Dollar and S&P 500 Bullish Chart Potential Fades as Stimulus Hopes Drop, Earnings and Growth On Tap

Chart Created on Tradingview Platform

While I reference the US index and currency most frequently with these developments, the potential for global risk measures will ultimately feel the impact of this shift. For Germany’s DAX 30, which has stretched into a deeper technical slide, the dampened potential for a bullish pop takes a very different connotation. The index is leaning more heavily into a signal for a technical break. Further, speculative interest seems to be mounting a serious fade. According to IG’s retail positioning measure for DAX interest, long interest among retail CFD traders have hit a new high as has the net positioning read – overtaking the March counter-trend peak.

German DAX Index Overlaid with IG Retail CFD Positioning (Daily)

Dollar and S&P 500 Bullish Chart Potential Fades as Stimulus Hopes Drop, Earnings and Growth On Tap

Chart Created on Tradingview Platform

Systemic Themes Still Warping the Speculative Fabric

Fundamentals can work as much to influence the markets with anticipation as it can to spur volatility with an actual release. With that said, the most prominent event on the horizon remains next Tuesday evenings US election. Given the stakes of economic policies, trade relations, and so much more; it is natural for the markets to hold their breath before the key decision. I am starting to believe that while the event is absolutely drawing our expectations forward, it will not offer resolution to the weighty expectations with a clear outcome. A reference to one of our polls show the heavy debate over the outcome and the market’s response. The expected outcome of Trump versus Biden is almost 50/50 while the Dollar’s response bullish or bearish across the scenarios is approximately 60/40 (bullish/bearish).

How could US elections impact the markets? Click here to see our aggregate report on the market reaction to election.

Twitter Poll Asking What Election Outcome and Dollar Reaction Is Likely

Dollar and S&P 500 Bullish Chart Potential Fades as Stimulus Hopes Drop, Earnings and Growth On Tap

Poll from Twitter.com, @DailyFX

Another theme that is almost certain to outlive the election is the status of the coronavirus. We are seeing a rise third peak in the United States while many of the major European countries are experiencing records of their own. This is a serious concern on the economic side. Collectively, the resurgence of the pandemic is a serious threat to latent risk trends, but there is also the relative aspect to consider. The market impact is not linear to number of cases between the two powerhouses, but the economic fallout anticipated through shutdown procedures that would hurt local economies in near-term. Reports overnight that France’s President was considering a one-month lockdown raised the concern for the likes of EURUSD.

Chart of US Coronavirus Cases (Daily)

Dollar and S&P 500 Bullish Chart Potential Fades as Stimulus Hopes Drop, Earnings and Growth On Tap

Chart from Google with Data from Wikipedia

Nearer Term Fundamental Catalysts

The spectrum of possible outcomes for the reaction to US elections and the unfolding of another wave of the coronavirus is an open ended risk. In contrast, there are more discreet timelines and perhaps market outcomes when it comes to anticipation for economic activity and the earnings. For the former, the US GDP reading on Thursday is starting to gain serious prominence. It is possible that this indicator crosses the wires with a bullish penchant, but the market’s view of where the fourth quarter is heading would quickly undercut any enthusiasm that would follow that outcome. I’ll watch this data and the anticipation for its release closely.

Chart of Total GDP and Annualized Quarterly Change (Quarterly)

Dollar and S&P 500 Bullish Chart Potential Fades as Stimulus Hopes Drop, Earnings and Growth On Tap

Chart and Data from Federal Reserve Economic Database

The other interim spark to account for in both anticipation and impact potential is the US earnings docket. Germany’s largest (and the world’s third biggest) software company, SAP, cut its profit guidance owing to the uncertainty of the coronavirus rise. That seemed to unnerve conviction in the global tech sector – that is not just a German affliction. However, Microsoft’s earnings figures afterhours Tuesday at $1.82 EPS versus $1.55 seemed an opportunity to soothe fears short-term. That said, afterhours trade in MSFT reflected very limited enthusiasm. Meanwhile heavy equipment maker CAT (Caterpillar) reported a 54 percent drop in profit as a closer connection to GDP and shares slid for the trouble. What does this mean for FAANG earnings afterhours Thursday?

Chart of Microsoft Overlaid with Caterpillar (Daily)

Dollar and S&P 500 Bullish Chart Potential Fades as Stimulus Hopes Drop, Earnings and Growth On Tap

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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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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