EURUSD, GBPUSD and Dow Talking Points:
- Risk trends opened to a jump to start the week; but despite the vaccine approval news in the US and seasonal expectations, the Dow still ended Monday with a threat
- Liquidity through the end of the year is on a short half-life, a slip in market impact form headlines like no-deal Brexit (bearish GBP) and vaccine approval (Dow) suggest traction is suspect
- Between a seasonal expectations for fading liquidity and anticipation for Wednesday’s combination of Fed decision and global PMIs, what can markets expect now?
Risk Trends Take a Spill to Close Monday’s Session
We have kicked off a week of trading that is defined by the very juxtaposition of full fundamental influence against an oppressive seasonality. While the period we have waded into is loaded with scheduled event risk and still working through unmoored abstract themes, there is also a very clear throttle as the final full-week of the trading year that will result in a unique shape the markets we navigate. From a ‘risk’ perspective, Monday seemed to open to a mixed view, but caution early in the day cemented itself by the close of the New York session. Following bullish gaps for the major indices in the US, a quick intraday reversal led the likes of the Dow to a fairly steep 1.5 percent slide from its intraday high to further cement a short-term technical breakdown. If these were normal trading conditions whereby there was a steady course of liquidity into next week and beyond, this could be a loaded development. That said, holiday conditions and the anticipation of Wednesday’s event risk in particular are more likely to throttle ambitions.
Chart of Dow Jones Industrial Average with 20 and 200-Day Moving Averages (Daily)
Chart Created on Tradingview Platform
Speaking of seasonality, the expectations for the month of December are clear. Historically-speaking, the S&P 500 offers up a slide in volume and volatility through their period with a commensurate rise in the index itself. That relationship should make sense as volatility is considered a foundation of risk, and less participation can curb options for driving a speculative reversal. As fear abates, speculative benchmarks tend to benefit. Yet, of these three features, market performance (risk on / risk off) is the least reliable of these signposts. Thus far, December finds the S&P 500 little changed. Further, seasonality is not simply a phenomena on the monthly scale. Anticipation for the dense round of event risk on Wednesday is likely to make the markets second guess the potential of any significant moves attempted through the first two days of trade.
Chart of S&P 500 and VIX Seasonal Performance by Month Back to 1980
Chart Created by John Kicklighter with Data from Bloomberg Terminal
What Systemic Issues Hold Potential for Restricted Markets?
At the dawn of this new trading week, there were a few noteworthy themes already leaning into the market’s tempo. Over the weekend, the United States’ Department for Health and Human Services, the FDA, issued its approval of the Pfizer Covid-19 vaccine. This is generally hailed as good news as a turning point for the health of the country and a positive step to returning the world’s largest economy back to normal. Yet, this long-awaited sanction did little to ultimately to lift the Dow or the Dollar. For the former, a general boost to the speculative outlook is undermined by an uneven global emergence from the gloom and the recognition that distribution and true opening are months into the future. A relative advantage for a faster ‘return to normal’ would find more enthusiasm for the Greenback, but that seems to come up short relative to the currency’s safe haven status and general lack of suitability for an underwhelming enthusiasm for investment globally.
Chart of Global Google Finance Search Activity for ‘Vaccine’ and ‘Economy’ (Weekly)
Chart Created on trends.Google.com/trends
EURUSD and GBPUSD Top Technical Candidates to Start the Week
The relative perspective of the vaccine approval and distribution finds a very practical trip in news that multiple countries and major cities are intensifying their lockdown measures as cases, deaths and hospitalizations increase quickly. Recently, there have been warnings of closures for New York City, London and a nationwide lockdown of Germany. That does not translate well into investor enthusiasm. Meanwhile, the availability of multiple vaccines will eventually turn economies around. Yet, a stopgap is necessary to bridge that practical shift. Notably, the United States government has yet to pass any follow up stimulus its CARES Act despite the change in the White House, but Europe secured a massive commitment from the ECB’s upgrade and European Communities approval of a massive budget this past week. EURUSD continues to push on the midpoint of its historical range, but any breakouts are bound to the laws of liquidity.
| Change in | Longs | Shorts | OI |
| Daily | -5% | 4% | -2% |
| Weekly | -4% | -9% | -6% |
Chart of the EURUSD with 20 and 200 day Moving Average (Daily)
Chart Created on Tradingview Platform
The Dollar has major event risk on tap which could urge issues along as the week progresses. However, the weight of Wednesday’s Federal Open Market Committee rate decision and US December PMI readily override today’s economic sentiment survey or industrial production. This cannibalization of speculative intent is a pesky undercut of intent, but a feature that may better define market conditions better than virtually any other exogenous feature. Meanwhile, from GBPUSD, the Brexit situation passed another hard deadline without the assumed reaction. It seems the UK and EU powers believe a ‘no deal’ trade agreement is on tap for the start of the new year. That said, the Sterling didn’t utterly collapse at the news. Though prone to considerable volatility this past session, GBPUSD posted its biggest bullish gap (rare occurrence in FX) on record while EURGBP posted biggest bearish drop in years.
| Change in | Longs | Shorts | OI |
| Daily | -1% | -11% | -4% |
| Weekly | -5% | -3% | -4% |
Chart of the GBPUSD with 50 and 200-Day Moving Avgs, Daily Gaps and 5-Day ATR (Daily)
Chart Created on Tradingview Platform
Why isn’t the Pound utterly collapsing at sign that the stated deadline to work out some sort of deal between the economic powers had come and gone? For one, the markets have long discounted the expectations for post-Brexit trade – this has been a more-than four year process. What’s more, investors have grown quite familiar with the ‘kick the can down the road’ ambiguity which tends to blur the view of whether the outlook is outright troubled or otherwise stocked for opportunity. I don’t believe Monday’s developments have settled the matter, but is worth keeping tabs on performance with this in mind.
Twitter Poll on How Far GBPUSD May Drop with Further Brexit Talks Breakdown
Poll from Twitter.com, @JohnKicklighter
Despite a Limited Time Frame for Activity in 2020, Event Expectations Curb the Window Even Further
Looking a little further over the horizon, the upcoming session has more than a few high profile events listed for release and there are a number of unsettled themes that could readily find upheaval. However, the prominence of event risk through Wednesday and Thursday will draw our attention forward and warp liquidity and volatility further. The subsequent session will host the December PMIs as proxies for GDP for some of the largest Western economies. Yet, it is the Fed rate decision which will anchor a run of major central bank updates this week that really captures attention and thereby anticipation.
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Chart of Major Central Bank Stimulus (Monthly)
Chart Created by John Kicklighter
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