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EURUSD Awaits ECB and Yield Volatility, Nasdaq Slides Relative to Dow

EURUSD Awaits ECB and Yield Volatility, Nasdaq Slides Relative to Dow

John Kicklighter, Chief Strategist

Nasdaq 100, Dow, EURUSD, GameStop and USDCNH Talking Points:

  • Risk trends were a mixed back this past session with the Dow posting a 1.5 percent rally while the Nasdaq 100 fell -0.3 percent
  • More than the uneven asset performance, the lack of traction on upgrade growth forecasts, curbed inflation fears and fresh US stimulus raises concern
  • Top scheduled event risk target Thursday is the ECB decision for EURUSD while GameStop and the USDCNH deserve a closer look as well
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An Uneven Picture of Risk Trends

Is the market aiming higher or lower on risk trends heading into Thursday’s trading session? In my book, that is perhaps the most important question to answer for a systemic overview of the financial markets. The most prolific and persistent moves seem to either correlate to or originate from an undercurrent of fear or greed. That said, the current bearing for the markets seems to lack clarity. Using the US equity markets – a leading segmented asset class from the beginning of the recovery form the Great Financial Crisis way back in early 2009 – there was an explicit divergence in performance. On the one hand, the ‘blue-chip’ Dow Jones Industrial Average was up a robust 1.5 percent to trade at fresh record highs.

Alternatively, the typical leader in the tech-weighted Nasdaq 100 was down -0.3 percent through Wednesday’s close. That is inconsistency that points to preference for risk exposure often designated ‘rotation’ by those that observe equities; but to me, it reads like a lack of clear conviction. That indecision can certainly be the genesis of outright concern, but I will wait to see if that is the market’s judgement. In the meantime, it is hard to overlook the lack of overall bullish interest despite the series of event that would normally unleash bullish interests.

Chart of QQQ Nasdaq 100 ETF and NDX-Dow Ratio with Volume (Daily)

EURUSD Awaits ECB and Yield Volatility, Nasdaq Slides Relative to Dow

Chart Created on Tradingview Platform

Before tracking the series of favorable developments – and the lack of market response to each – it is worth doing a status check on the various risk assets that I keep tabs on for a comprehensive view on sentiment. Beyond the varying speed of US indices, global stocks were similarly indecisive with the VEU offering overview while individual regions ranged from the DAX record high to Shanghai Composite extended slide. Emerging markets would slide while junk bonds, carry trade (eg AUDJPY) and crude oil edged higher. This does not register as a clear sentiment view.

Chart of Relative Risk Performance Year-Over-Year (Daily)

EURUSD Awaits ECB and Yield Volatility, Nasdaq Slides Relative to Dow

Chart Created on Tradingview Platform

The Fundamental Opportunities to Charge Bulls Pass Unqualified

A thought experiment often brought up by the global macro traders that have navigated bullish, bearish and flat markets long enough runs like this: if a market is noncommittal on its bearings despite a run of distinctly favorable event risk, is bullish, bearish or merely undecided? I tend to believe that this is evidence of underlying bearishness. The tailwind started Tuesday with the upgraded OECD growth forecasts for 2021 and 2022. Expectations for global expansion this year nearly doubled while the US projection rose a percentage point to 6.5 percent. Despite the scale of uplift that could represent, it seemed to not even register.

Chart of GDP Forecasts for Major OECD Economies in 2021 and 2022

EURUSD Awaits ECB and Yield Volatility, Nasdaq Slides Relative to Dow

The next fundamental spark this past session would hit from the US docket. February consumer inflation (CPI) figures crossed the wires at 1.3 percent core and 1.7 percent headline. For context, that was a tick lower than forecast on the former and right in line with expectations on the later. From the central bank’s perspective, these readings are far from the levels that would force the Fed to abandon its extremely accommodative policy to head off rampant inflation. Given the detrimental impact the charge in inflation expectations have caused capital markets, that could have played out as a particularly effective boost for risk appetite. It didn’t. Nor did the tame auction of the new 10-year Treasury bond issue (the previous week’s 7-year sale spurred serious concerns). Sovereign yields did level out this past session, but they didn’t drop further. Meanwhile, inflation expectations remain elevated and rate forecasts in Fed Fund futures are still charged. If both or eitehr start rising again, beware.

Chart of US CPI Year-Over-Year Overlaid with 5-Year US Breakeven Inflation Rate (Weekly)

EURUSD Awaits ECB and Yield Volatility, Nasdaq Slides Relative to Dow

Chart Created by John Kicklighter on Federal Reserve Economic Database

The third strike for engaging a sense of salvageable risk trends, was the overt lack of impact registered after it was reported that the US House of Representatives had approved the Biden Administration’s massive $1.9 trillion stimulus program. It is expected that the bill will go to the President to be signed into law by Friday. This would bring a sizable infusion of fiscal stimulus and would seem to tap a typical vein of ill-gotten risk appetite. Alas, this news fell on the same deaf ears – though to be fair, this was expected for some time. Meanwhile, the inflation concerns that would follow such injection of capital is not exactly overlooked in these markets.

Chart of US Federal Reserve Balance Sheet and US Federal Debt as Percent of GDP (Weekly)

EURUSD Awaits ECB and Yield Volatility, Nasdaq Slides Relative to Dow

Chart Created by John Kicklighter on Federal Reserve Economic Database

Top Event Risk and Top Movers: ECB, GameStop and China

Over the upcoming session and through the end of the week, I will continue to monitor the systemic issues that could gain full control over the collective sentiment with little warning. Yet, for more targeted fundamental and volatility interests, there are certain avenues of event risk that could bring about some interesting price action. At the very top of the standard economic docket over the final 48 hours of trade this week is the ECB (European Central Bank) rate decision. The group is expected to reaffirm its commitment to keep financial markets stable and growth in place, but it would be a true surprise if they decided to act on the few members’ recent calls to escalate purchases in a bid to cap rising bond yields. Furthering this expectation, a supposed leak of the group’s projections suggested they believe any jump in inflation would be short lived. The question of course is whether the status quo will soothe or disappoint?

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Chart of EURUSD with 100 and 200-Day Moving Averages (Daily)

EURUSD Awaits ECB and Yield Volatility, Nasdaq Slides Relative to Dow

Chart Created on Tradingview Platform

From the near-unprecedent liquidity of the world’s most liquid currency pair to the very limited turnover of this year’s favorite meme stock, we find GameStop was once again topping Reddit board (WallStreetBets) mentions, headlines and options depth charts. The stock was charged with long-expected news of a pivot to an online gaming model, but the rally didn’t last. A lack of volume and option interest far out of the money suggests there is overt speculative effort at play taking advantage of the otherwise indecisive backdrop. This doesn’t seem like an environment to keep the bull trend running steadily, but it doesn’t prevent volatility. Another WSB darling, AMC, was seeing similar action with after-hours earnings setting up little fundamental foothold to keep running.

Chart of GameStop with Volume, 50-Day Moving Average and 1-Day ATR (Daily)

EURUSD Awaits ECB and Yield Volatility, Nasdaq Slides Relative to Dow

Chart Created on Tradingview Platform

Finally, with a macro view in mind, I will keep a steady watch on the Chinese markets. USDCNH has been on my radar for the past few weeks and particularly after we clear 6.5000 at the end of last week. The pair has stalled, but the risk is palpable. Meanwhile, local capital markets are under outright pressure. The Shanghai Composite is attempting to bounce today, but that is following two weeks of significant retreat that has clear important technical support. Policy officials have reportedly attempted to step in and authorities are supposedly attempting to limit panic in social media feeding bears; and yet, the index is still struggling. This goes back to what I asked rhetorically before: if markets don’t advance with favorable news, are they in fact bearish?

Chart of China’s Shanghai Composite with 200-Day Moving Average (Daily)

EURUSD Awaits ECB and Yield Volatility, Nasdaq Slides Relative to Dow

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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