S&P 500, EURUSD and GBPUSD Talking Points:
- The S&P 500 led a wave of risk-based assets on a gap lower and sharp selloff through Monday morning…that would ultimately retrace
- Reports that US fiscal stimulus was finally breaking through the logjam was competing with fears of a mutation in the Covid-19 virus in the UK
- Large tails for the Dollar and key pairs like GBPUSD may reflect on the Greenback’s safe haven status while a fresh Goldman Sachs rally speaks to what traders really want
A Convergence of Fundamental Storm Fronts for Volatility…But What About Trend?
Despite the well-known pull of the liquidity drain that is coming through the end of this week (via the Christmas Day market closure) and the likely curb straight through until the opening trade of 2021, we have still witnessed a remarkable salvo of volatility to start this week. Nothing short of an exceptional run of systemically-important fundamental event risk would likely have been able to muster the kind of volatility we experienced this past session. Reports that a mutation of the coronavirus (Covid-19) in the United Kingdom was prompting concerns just as vaccines roll out was competing against weekend news that the US government was finally pushing through much-delayed stimulus.
What resulted was a broad range of risk-leaning assets that would gap lower on the open with some measure through the morning. Yet, by the end of the session, hard reversals would recover significant lost ground and register large lower wicks/tails. This is a conflicting technical picture punctuated by volatility; but my overriding question is always: ‘can these markets find purchase for a lasting trend given these conditions?' I believe this would be very difficult to achieve.
Chart of S&P 500 with 20 and 200-Day Moving Average as Well as Volume (Daily)
Chart Created on Tradingview Platform
Igniting a meaningful trend – especially one that cuts across risk assets – is a very tall order this late in the year. Liquidity is essential fuel when it comes to such committed moves, and the market depth is relentlessly thinning out into the close of the year. Though Friday is the only official market closure for the US and other major markets this week, the entire week usually suffers from the anticipation. Further, expectations for the same the week after is likely to prove an even more powerful sedative for intent. Of course, nothing is impossible, but urging a quicker tempo to a Santa Claus rally when we are already this close to record/major highs would be a very high hurdle. That said, if risk aversion were to kick in, the absence of a buy side wouldn’t really stop a speculative fire from cutting down the market. It would more likely exacerbate.
Chart of S&P 500 and VIX Seasonal Performance by Month Back to 1980
Chart Created by John Kicklighter with Data from Bloomberg Terminal
The Dollar’s Recovery Falls Apart but on What Fundamental Basis?
Speaking of risk trends, I believe that is the fundamental role that ultimately won out for control over the Dollar to end the day Monday. Initially, the disruption in speculative assets to start the week catered to the Greenback’s latent appeal as a haven, but reports of a breakthrough for the US government on its long-delayed stimulus program gave a firmer fundamental footing for the currency to utilize. A $900 billion package that would include $600 direct payments, $300 per week supplementary unemployment benefits, $300 billion in Paycheck Protection Program (PPP) loans and $8 billion vaccine distribution would a meaningful support for a $1.4 trillion in government proposed funding – though many economists believe it is far too little.
Chart of DXY Dollar Index with 50-day Moving Average and Daily ‘Wicks’ (Daily)
Chart Created on Tradingview Platform
If we wind back the clock to the summer, there was a storm of fundamental event risk competing for international investors’ attention, but it seemed that the economic confidence around Europe with a greater urgency in stimulus funding relative to the consistently delayed re-up for funds for the United States would push EURUSD through 1.1600 on to 1.2000 and ultimately support the recent 1.2150 break (as the midpoint of the pair’s historical range). With that consideration, it would seem that the US stimulus counterbalance would argue a relief rally for the Greenback and EURUSD move back below 1.2150. Instead, the DXY Dollar would end with a massive upper wick (largest since June 24, 2016) and EURUSD with a lower wick that was only matched once since the pandemic. The differentiator was the rebound in risk trends which dragged the safe haven back into line.
| Change in | Longs | Shorts | OI |
| Daily | -1% | -5% | -2% |
| Weekly | -6% | 8% | -2% |
Chart of the EURUSD with 20 Day Moving Average and Daily ‘Wicks’ (Daily)
Chart Created on Tradingview Platform
If there were a Dollar pair that were even more centered upon the fundamental convergence thus far this week, it would be GBPUSD. In addition to US stimulus news and the storm of risk trends for the US currency, the concerns over UK-EU negotiations over post-Brexit trade continued to trouble, but it was the reports that a new variant of Covid-19 in the UK had appeared which truly unsettled markets. A widespread travel ban was implemented on the reports, but there is still discussion in the scientific community as to whether this mutation would not still be covered by the approved Pfizer vaccine or the other inoculations that seem soon for approval (from Moderna, AstraZeneca, etc).
| Change in | Longs | Shorts | OI |
| Daily | -2% | -8% | -4% |
| Weekly | 5% | -8% | 0% |
Chart of GBPUSD with 20-Day Moving Average, Daily Tails and Gaps (Daily)
Chart Created on Tradingview Platform
Speculative Intensity Remains a Remarkable Amplifier
As we watch these high profile themes play out, the urge to normalize as fact fills in for speculative interpretation. Through this fundamental gravity, I still believe it is important to recognize that the market is still of a default speculative risk reach mentality. Consider the global Google finance search hierarchy for the terms ‘trade’, ‘invest’, ‘tesla’ and ‘bitcoin’ – the popularity which builds in exactly that order. These don’t seem to be markets that prize value and return but rather opportunity and the alure of fast turnaround.
Google Global Search Interest in Finance for ‘Trade’, ‘Invest’, ‘Bitcoin’ and ‘Tesla’
Chart Created on Google Trends
Taking a break from Tesla – which was just inducted into the S&P 500 index – and Bitcoin for a moment, more remarkable to me Monday was the charge from Goldman Sachs and a few other major US bank stocks. The catalyst was the Fed’s stress test at the end of last week which gave these financial institutions the greenlight to do massive share buybacks – one of the market’s favorite drivers over the past decade.
Chart of Goldman Sachs with Volume Overlaid with Tesla and 60-Day Correlation (Daily)
Chart Created on Tradingview Platform
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