S&P 500, Dollar, EURUSD, GBPUSD and USDCAD Talking Points:
- Risk appetite showed through clearly on the US indices with the Dow, S&P 500, Nasdaq 100 and Russell 2000 all notching record highs Friday
- Speculative appetite reached well beyond US equities, but the reach on for the likes of global indices, emerging markets, carry trades and other measures are tracking different intensity
- If there is one trend that can compete with the risk-on unfolding, it is the Dollar slide which has put in for last-minute struggle with EURUSD and GBPUSD at critical levels
Risk Appetite Ends Week on an Undeniable Charge
Though I remain of the opinion that risk appetite is pushing the bounds of reasonable (traditional) fundamental justification, there is no denying the hallmark of speculative intensity to close this past week. All four of the major US indices that I have been monitoring these past weeks for nuance in their relative performance – S&P 500, Dow Jones Industrial Average, Nasdaq 100 and Russell 2000 – were all pushing record highs through Friday’s close. We haven’t seen a simultaneous best from this group since the very beginning of 2018. Meanwhile, global stock markets excluding the weight of the US-based shares market (I like the VEU ETF) was also ending with bullish momentum. Commodities, junk bonds and carry were also throwing their weight behind conformity if not conviction. The question is not whether risk trends are currently being fed but whether the momentum can be sustained.
Chart of the S&P 500 with VEU ‘Rest of World’ Equity Index (Daily)
Chart Created on Tradingview Platform
I am of two minds when it comes to the speculative appetite of the masses. On the one hand, there is very little on the fundamental spectrum that looks appealing for long-only investors. The outlook for economic activity and rates of return are troubled at best and abysmal if we run through practical scenarios. Alternatively, logic has done little to hold back the charge of FOMO – fear of missing out – that has defined markets so effectively these past years. Most investors are in the market to turn a profit, not simply be proven right on a mere thesis. That said, a practical question to ask oneself: would I add at these levels.
At record highs with extremely thin interest income potential, the risk/reward does not look remotely appealing. Central bank and government stimulus only goes so far in filling the gap. And, if you are dubious of risk appetite, why would other market participants be more cavalier with their funds? There is record level across these markets. Broker level (investment) leverage is at or near records. Consumer (credit), government (deficit), business (equity fueled debt) and central bank (balance sheet liabilities) leverage is all a record highs. Where is the tipping point?
Chart of S&P 500 and NYSE Broker ‘Leverage’ (Monthly)
Chart Created by John Kicklighter
Dollar Tumble Hits Some Interim Support, But Will it Hold?
As robust as the US indices climb was this past week, the country’s currency took a similarly intense pounding. The Greenback was suffering against most counterparts, though not all were pushing serious technical boundaries. That said, the support for the Dollar was seriously strained if not outright overridden against the Euro, Pound, Australian Dollar and Canadian Dollar. That accounts for a vast majority of the currency’s liquidity. For the benchmark EURUSD, however, a potentially inspiring technical hold seemed to take loose hold to end this past week. The midpoint of the 2014-2017 bear leg of the pair coincides with the center of the cross’s historical range around 1.2150. While not convincing as a turn, Friday’s performance will at least offer a moment of pause and speak to recognition of resistance.
| Change in | Longs | Shorts | OI |
| Daily | -5% | 5% | -2% |
| Weekly | -5% | 7% | -1% |
Chart of the EURUSD (Daily)
Chart Created on Tradingview Platform
Ultimately, there was little in the traditional chute to bolster the Greenback. Risk trends deflate any need for an extreme liquidity haven while the spread of the coronavirus is threatening as intense an economic fallout of America as it is anywhere else in the world. On the data front, the ISM service sector activity report this past Thursday and the November NFPs miss on Friday do little to correct its short-comings. Ahead this week, we have a run of sentiment data like the NFIB business and University of Michigan consumer surveys, but I will not put too much expectation on these figures. Instead, I will watch stimulus and coronavirus headlines.
Chart of US Nonfarm Payrolls and Difference Between Actuals Versus Survey (Monthly)
Chart Created by John Kicklighter with Data from Bloomberg
The Fundamental Sparks Ahead Spell Volatility for Pound, Loonie and Yuan
While relative growth, Covid-19 response and fiscal considerations will hold considerable fundamental potential in the performance of relative FX performance, there is another theme that I will be watching owing to scheduled event risk: central bank actions. The European Central Bank (ECB) decision is perhaps the most potential of the major groups for potential policy shift. Expectations of a December commitment to more accommodation have growth. The question is whether that is priced in and will the market treat more stimulus as a boost to growth potential or a direct supply-demand weight to the currency?
Chart of Major Central Bank Balance Sheets in Billions of Dollars (Monthly)
Chart Created by John Kicklighter with Data from Bloomberg
The Bank of Canada (BOC) rate decision is the other meeting of prominence on my radar. This central bank is not expected to alter its extremely accommodative benchmark interest rate nor expand its bond buying stimulus program. Yet, I doubt the market is assuming this is the case with the USDCAD’s drop this past week below 1.3000. These seems a fundamental ‘freebie’ where the impact of the event is likely overlooked or carries the outlier possibility of urging an acceleration of the prevailing move.
| Change in | Longs | Shorts | OI |
| Daily | 5% | 6% | 6% |
| Weekly | -40% | 37% | 0% |
Chart of the USDCAD with 1-Week Rate of Change (Weekly)
Chart Created on Tradingview Platform
GBPUSD is another pair that deserves a close watch into the coming week. This past week saw the balance of confidence in the Sterling absolutely buffeted with a swing between a collapse in relations with the EU to the verge of a breakthrough on a post-Brexit trade deal. From the end-of-day retreat and ultimate daily tail from Cable to secure Friday’s candle, it seems markets were of the min that the outlook had darkened. Technically, the legal transition date is January 1st, but officials have suggested that Monday is a critical date for finding any agreement to have the time to set up the necessary administration. Early next week may be volatile for this pair.
| Change in | Longs | Shorts | OI |
| Daily | -5% | 4% | -2% |
| Weekly | -8% | -5% | -7% |
Chart of the GBPUSD with Daily Wicks (Daily)
Chart Created on Tradingview Platform
Finally, I will keep a steady eye on the Chinese Yuan and markets moving forward. There are a few notable events on the country’s docket like trade and foreign reserves; but these figures rarely surprise in a material way to generate a strong market response. Instead, I will watch USDCNH and the Shanghai Composite as a statement on what the Chinese government is looking to do with trade struggles, economic unevenness and an effort to let out pressure of the contained financial system through strategic corporate defaults. This country is so large that cascading troubles are high probably and high risk.
Chart of USDCNH with Shanghai Composite (Daily)
Chart Created on Tradingview Platform
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