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Dow and Dollar Climb as Growth and Coronavirus Provide Relative Lift

Dow and Dollar Climb as Growth and Coronavirus Provide Relative Lift

John Kicklighter, Chief Strategist

Dow, Dollar and Gold Talking Points:

  • AstraZeneca announced Monday as Coronavirus vaccine with a 90 percent efficacy – following similar news from Moderna and Pfizer previously
  • Despite the optimism for the pandemic drawing towards its close, the Dow has registered a tepid response – but still better than many other risk assets
  • Seasonal conditions are likely weighing markets as Thanksgiving liquidity drain curbs enthusiasm, but November PMIs are pushing relative views
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The Dow and Other Risk Measures Fail to Catalyze Ready Fundamental Fuel

The new trading week opened to headlines that may have charged risk appetite on already-optimistic assets under normal conditions, yet holiday liquidity may be working against the Dow and other measures charging fresh record highs. In Monday’s news cycle we were met with a third pharmaceutical reporting success with its late stage coronavirus vaccine as well as an economic proxy datapoint that was at least beneficial for the United States. Nevertheless, the Dow and S&P 500 were registering very reserved gains amid a mixed performance for the broad suite of global assets. On the other hand, US indices managed to regain a little lost ground against global counterparts (I use the ‘rest of world’ ETF) through the opening session.

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Chart of S&P 500 to VEU Ratio Overlaid with Dow Jones Industrial Average in Blue (Daily)

Dow and Dollar Climb as Growth and Coronavirus Provide Relative Lift

Chart Created on Tradingview Platform

What perhaps catches some fundamental market participants off guard in Monday’s lackluster performance was the news before the New York open that a third pharmaceutical was showing remarkable success with late stage trial of their coronavirus vaccine. Through an interesting combination of a half dose first shot and full does in the follow up, their results showed a 90 percent efficacy. For those keeping score, Moderna announce the success of its own drug last Monday while Pfizer reported back on November 9th that its own drug was over 90 percent effective against Covid-19. Collectively, with three drugs showing success, the end of the pandemic looks closer at hand. So then why has the market not secured the next leg of its advance in anticipation of an unburdened population and economy?

Chart of Moderna, Pfizer and AstraZeneca (Daily)

Dow and Dollar Climb as Growth and Coronavirus Provide Relative Lift

Chart Created on Tradingview Platform

Seasonality Cuts Both Ways

Investors that have experienced multiple cycles in the financial markets recognize the year-end period as one averaging gains that lead to some of the best performance of the calendar year. In fact, November’s performance for the S&P 500 thus far in 2020 is accounting for a more than 9.4 percent gain. That is the second best month only to April this year – which aligns directly to the 40 year average – and the second best month overall in 9 years. This offers a backdrop already firmly in favor of existing momentum.

Chart of Seasonal S&P 500 Performance, Volume and VIX

Dow and Dollar Climb as Growth and Coronavirus Provide Relative Lift

Chart Created by John Kicklighter with Data from Bloomberg

Yet, seasonality is not always a backdrop that favors a prevailing momentum, even with a favorable spark to urge it in the same direction. Sometimes annual norms can also throttle liquidity and the further development of trends. That seems the case, at least in part, this week. On Thursday, we have the US Thanksgiving holiday. While a market break for the United States specifically, investors the world over have come to expect that the breaks are thrown during this third Thursday of the month and quiet is often universal. In a more technical consideration, if there is a gap in liquidity coming, the appeal of adding to a long-risk position when a key measure like the S&P 500 is just off record highs is significantly diminished. This risk/reward interpretation can further another norm: ‘buy the rumor, sell the news’.

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Chart of the S&P 500 with 1-Week Rate of Change (Weekly)

Dow and Dollar Climb as Growth and Coronavirus Provide Relative Lift

Chart Created on Tradingview Platform

Fundamental Catalysts for Relative Perspective and a ‘Risk’ Overview

Whether attempting to shape a lasting trend or merely stirring volatility, there is meaningful scheduled event risk and thematic matters that could continue to cause waves. We opened this week to a prominent charge in the economic backdrop through the November run of PMIs. As timely proxies for broader GDP figures, there was a notable divergence in data. On the downside, Japan registered a slide to keep it in contractionary territory for yet another month with last week’s update. The Eurozone and UK would also slip back below 50 (indicative of a shrinking of GDP) though not as sharp a drop as expected. Alternatively, Australia and the United States showed faster expansion month-over-month. The US data showed a particular impact, which may extend to the data due through the rest of the week – including consumer confidence (Tuesday), durable goods orders, initial jobless claims, personal spending and advanced trade balance.

See what key event risk is on tap for the United States and other major countries on the DailyFX Economic Calendar.

Chart of Global Economic Activity in PMIs (Monthly)

Dow and Dollar Climb as Growth and Coronavirus Provide Relative Lift

Chart Created by John Kicklighter with Data from Markit

In contrast to the definitive timing of the economic data, the unfolding of the coronavirus is exaggerated over time and doesn’t have a clear benefit or detriment. While the vaccine news is encouraging, there remains a build up of economic cost that will exact a toll. Concern over virus (through search traffic) is at a record while recognition of the influence on economic health and employment trends is still behind the curve. If not course corrected soon, that unfavorable momentum can catch up on sentiment. It can also present a more immediate relative influence on the likes of GBPUSD which initially rallied to a multi-month high – and multi-year trendline resistance – with reports the Prime Minister would lift the lockdown for the holiday period.

Chart of ‘Unemployment’, ‘Stimulus’ and ‘Covid’ Search via Google Trends (Daily)

Dow and Dollar Climb as Growth and Coronavirus Provide Relative Lift

Chart Created on Google Trends

Key Dollar Counterparts to Keep Close Watch Over

With the confines of liquidity ahead, I am looking to markets with more relative leverage to them. That puts more in the category of exchange rates where the comparative advantages and disadvantages are forefront. In particular, EURUSD has virtues in my eyes of exploiting the divergent economic picture of the PMIs and the disparity in coronavirus response (though cases for both are rising). What is particularly interesting here though is the technicals with the 1.1900-1.1600 range less restrictive to traverse rather than attempting a full scale breakout – which doesn’t align to the fundamentals at present regardless.

Learn more about ranges and technical analysis in our DailyFX Education section.

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Chart of EURUSD with 20 and 200-Day Mvg Avg with 200-Day Disparity (Daily)

Dow and Dollar Climb as Growth and Coronavirus Provide Relative Lift

Chart Created on Tradingview Platform

A less common comparison, but one that nevertheless draws on the Dollar readily, is from gold. The traditional anti-fiat seemed to take the favorable Greenback move to heart with a break below 1,850. That clears a four month range floor, but does it reasonable encourage a break with follow through where few other markets can venture? A more modern anti-currency perhaps checked by the USD bounce seems to be Bitcoin. In contrast to the metal, this cryptocurrency was advancing steadily…and aggressively. So close to record highs though, BTCUSD noticeably stumbled over the weekend and into Monday. The bulls run is not likely over, but it has certainly be disrupted.

Chart of Gold with 200-Day Mvg Avg with Disparity Overlaid with Bitcoin (Daily)

Dow and Dollar Climb as Growth and Coronavirus Provide Relative Lift

Chart Created on Tradingview Platform

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

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