S&P 500, EURUSD, USDJPY, USDCNH and Earnings Talking Points:
- Despite the charge for the S&P 500 and Dow through the close of last week, risk trends once again broadly struggled for momentum Monday
- A clear fundamental theme seems necessary for a decisive ‘risk on’ or ‘risk off’ move – perhaps Today’s US CPI will stir markets to life
- Following in the footsteps of the S&P 500 last week, EURUSD looks ready for a near-term technical break with a very tight range and data on tap
So Much for That Friday Recharge
Investor conviction has been an issue for the market at large these past weeks. With volume fading quickly in capital assets and the considerable restraint from benchmarks like the US indices through a series of upgraded growth forecasts, the it seems that risk appetite is particularly hard to muster. However, we ended this past week with a flush of optimism in the form of a decisive rally for the S&P 500, Dow and Nasdaq 100 to tag record highs. With some supportive language from a Fed Chairman Jerome Powell interview over the weekend to our back and anticipation for the US earnings season to start in a few days, the opportunity was once again laid out for risk appetite to be pressed. Instead, the market reverted back to its indecision, plagued by the uncertainty of what will carry sentiment higher or lower next.
Chart of S&P 500 with 100-Day Mov Avg and 10-Day ATR (Daily)
Chart Created on Tradingview Platform
The affliction of indecision on course is not unique to the US benchmarks. Monday’s session offered up much the same for rest of world equities (VEU or indices like DAX and FTSE 100), emerging markets (EEM and USDZAR), junk bonds and carry trades like AUDJPY. If we are to find a lasting trend rather than short-lived outburst of volatility as seen this past Monday and Friday, a meaningful run on high correlation in these various assets is perhaps my favorite signal in waiting.
Chart of 1 Month Relative Performance for S&P 500, VEU, EEM, AUDJPY and HYG (2 Hour)
Chart Created on Tradingview Platform
Yield and Rate Forecasts Find Their Opportunity to Command the Markets
If we are looking for fundamental themes to anchor speculative conviction, it is hard to argue against the prevailing trend carved out by global equities. Then again, the inability to capitalize on overtly bullish growth forecasts this past week suggests a difficulty in motivating a bullish view. That may bring about the risk that fears can work their way into the system. Recent surveys (my own Twitter poll and a Bank of America fund manager tally that is far more prolific) showed that most market participants seemed most concerned over the state of inflation and the outlook for rates. That puts the crosshairs directly on Tuesday’s US consumer price index (CPI) release for March. The headline figure is expected to accelerate from 1.7 to 2.5 percent. Consumer inflation expectations this past session ran up to 3.2 percent, the five year breakeven rate is at 2.5 percent and the Fed’s target is supposedly 2.0 percent. Would the market take a jump in inflation more seriously if it were to show up?
Chart of US CPI Year-Over-Year and the 5-Year Breakeven Inflation Rate (Monthly)
Chart from the St Louis Federal Reserve’s Economic Database
If market participants interpret a faster rise in inflation as a spark for either economic struggles or motivation for the Fed to expedite a withdrawal of extraordinary accommodation, the impact on risk assets like the S&P 500 would be bearish. Of course, the intensity of that response depends on how sensitive the markets are to forward looking fundamentals. More interesting in my book is the implications for the US Dollar. The rise in the US 10-year Treasury yield and implied rate forecast through Fed Funds futures has been a theme for months, but the Greenback has lagged the climb. That may be more difficult to overlook whether we treat the Dollar as a safe haven or more appealing carry candidate.
Chart of DXY Dollar and 100-DMA, Overlaid Fed Funds Dec 2022 Forecast and US 10-Year (Daily)
Chart Created on Tradingview Platform
EURUSD is Best Positioned for a ‘Break Out’ But Consider the Ranges as Well
As the principal component of the trade-weighted DXY Index, EURUSD will be a top pair for my watchlist for this coming session. It doesn’t exactly offer up the most prominent technical levels to estimate against. Minor fib levels, zones of former support/resistance and moving averages are either inconsequential or still a ways off. More interesting to me is the state of inertia with two consecutive ‘inside day’ patterns for this benchmark pair that has pushed range and activity levels to their lowest levels in approximately 14 months. In short, this looks due for a break; but that doesn’t denote strong follow through.
Chart of EURUSD with 20 and 100-Day Moving Averages, 4 Day ATR and Range (Daily)
Chart Created on Tradingview Platform
There are a host of other interesting Dollar based majors ahead. USDJPY is paused in a reversal, USDCHF is facing a double bottom at 0.9210, AUDUSD lingers at the neckline of a head-and-shoulders pattern and USDZAR is trading off a larger technical floor. However, my interest is most piqued by GBPUSD. It has a range to work with which fits the general pace of the market. What’s more, it has a run of data coming down for London hours including UK GDP, trade, industrial production and construction. That may not be good for a breakout with follow through, but it could readily earn a swing in an established congestion pattern.
Chart of GBPUSD with 100 DMA (Daily)
Chart Created on Tradingview Platform
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