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S&P 500 Climb and Dollar Reversal: How Far Will Markets Go Between Doldrums and NFPs?

S&P 500 Climb and Dollar Reversal: How Far Will Markets Go Between Doldrums and NFPs?

John Kicklighter, Chief Strategist

S&P 500, Bitcoin, Monetary Policy, Dollar and AUDCAD Talking Points

  • Market conditions remain an overriding feature of the trading landscape as we move into one of the most reserved weeks of the entire year according to seasonality
  • The Fed’s Powell did not offer a conclusive timeline for the central bank’s taper decision, but shifting the onus to data will surely amplify the sentiment survey and NFPs
  • Risk trends are an outlier for significant trends this week, but the Dollar represents greater potential while emerging markets, the Aussie and Canadian Dollars are due key data
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S&P 500 and Nasdaq 100 Records to End the Week

A taper is coming. At least that is what Fed Chairman Jerome Powell intimated to the market at his Jackson Hole Symposium speech to end this week. And yet, despite these intentions, the market would still push forward with its risk appetite habits with a record S&P 500 to anchor the risk-inclined. Perhaps this charge is a reflection of the market’s interpretation that the central bank’s tempo is less aggressive than what was anticipated or otherwise the start to the pullback in asset purchases has already been discounted. I believe there is some measure of anticipation in this response along with the relentless influence of seasonal liquidity. This will prove a difficult headwind to deal with in the week ahead. We are passing through what is arguably ‘peak quiet’ in the week ahead while the debate over when US central bank will begin its strategic retreat will shift onto the release of key data including the Friday payrolls release. So, even if we don’t see a systemic trend develop in the week ahead; there is at least a tangible risk of targeted volatility.

Chart of the SPY S&P 500 ETF with Volume, 50 and 100-Day SMAs (Daily)

Chart Created on Tradingview Platform

Through the end of this past week, my – and it seems, the market’s – attention had fallen fully on the speech to be given by Fed Chairman Jerome Powell at the Jackson Hole Symposium. The central banker was due to weigh in on the tempo of withdrawal from the central bank’s extremely accommodative monetary policy position and expectations were already skewing towards the hawkish. In his prepared speech, Mr. Powell suggested that the threshold for a reduction of asset purchases had already been met via inflation requirements and there was further “clear progress towards maximum employment”. Echoing a growing consensus among the central bank’s members, the taper seems to be on the agenda before the year’s end. Yet the Chairman’s voice wasn’t the only one to come out of the summit Friday. Patrick Harker voiced the 2021 taper consensus view as well, but he would further go on to opine whether monetary policy was the appropriate vehicle to close the further unemployment gap. That is not as pointed as James Bullard’s concern that maintenance of extreme easing may be fueling a housing bubble, but it is in the same vein. Perhaps more anchored in action, voter Christopher Waller remarked that ‘one more strong jobs report’ could be sufficient to trigger the start of the taper.

Table of the FOMC Members with Their Perceived Policy Bias

Chart Created by John Kicklighter

A Weak of Split Motivations: Illiquidity and Key Event Risk

While it may look like the markets have signaled their comfort with falling into a complacent stupor to finish out the summer doldrums, there remains an unmistakable potential for event risk to generate volatility, if not produce a full trend. I will remind that we are still passing through the most reserved trading month of the year. What’s more, on more granular level, the week before the US Labor Day holiday is notorious for its quiet as investors view it as leading into the transition to fall liquidity. That will be a strong depressant for markets comfortable with their exaggerated risk exposure. However, where thinned liquidity can curb trend development, it doesn’t preclude volatility.

Chart of S&P 500’s Performance, Volume and Volatility via VIX Per Calendar Month

Chart Created by John Kicklighter with Data from Bloomberg

In fact, the week forward holds a considerable run of important scheduled event risk, with the US employment data on Friday representing the anchor for the period. However, before we event reach the August labor statistics, there are key fundamentals that can catalyze activity. This starts with the final day of the Jackson Hole Symposium over the weekend. While attention was disproportionately cast upon Jerome Powell’s remarks, there is still plenty of rhetoric that can shock the market from policymakers not so balanced in their views. I will be monitoring the headlines over the weekend, but there are few measures for which we can reference the market’s interpretation until the official Monday open. One very clear exception is Bitcoin and other cryptocurrencies. Reflecting both a ‘risk asset’ and ‘anti-fiat’, BTCUSD can be a very appropriate signal for US policy speculation.

Chart of BTCUSD with 20 and 100-Day SMA (Daily)

Chart Created on Tradingview Platform

Looking further out into the week, there is plenty of event risk to charge both the Dollar and broader capital markets. On the US side alone, we are likely to see a meaningful debate over taper speculation come through the run of high level data on tap. Given the remarks of Waller and some of its colleagues to suggest that another strong employment report could tip their hand to vote for a September (22nd) start in asset purchase reductions, there should be a clear interest in the end-of-week data. That said, the potential is not just between the status quo and a more hawkish future. There is also the risk for concern to grow into a more dovish perspective. Concern over the rise in Covid cases and its economic fallout is a stated risk from the Fed and the recent UofM sentiment survey insinuated the connect the data can have. We will see if that connection is thoroughly anchored with Tuesday’s Conference Board variation. Further, the ISM manufacturing and service sector activity reports, on Wednesday and Friday, are strong overviews of economic activity.

Top Event Risk on the US Docket Next Week

Calendar Created by John Kicklighter

The Markets to Watch

If US monetary policy is a top theme in the week ahead, the Dollar is a key market to monitor. Where risk trends will be more reticent to move given the liquidity conditions, the currency is more consistent with its market depth. What’s more, compared to the high threshold of reversing the deeply complacent indices pushing record highs, the Greenback is generally dealing with ranges. The DXY trade-weighted index having retreated from 93.75 has a sizable span to work within. That aligns nicely to EURUSD’s breaking the descending wedge above 1.1775 to end this past week with a ceiling significantly higher at 1.2250. That said, I am more interested in measured ranges like those from GBPUSD (1.3800 to 1.3600) and USDCAD (1.2600 to 1.2950).

Chart of DXY Dollar Index with 50 and 100-Day SMAs Overlaid with Fed Funds Futures Implied Hikes (Daily)

Chart Created on Tradingview Platform

Outside of the Dollar and risk assets gravity, there is a fairly dense run of event risk that can rouse targeted volatility. Overall, there is a theme of emerging market economic activity which will be stirred by August PMIs. A little more pointed for fundamental health, there are also 2Q GDP updates due for Brail, India and Canada (a developed economy). Taking the title of the most loaded currency/region, Australia is over-indexed for data. Corporate profits, a consumer inflation measure and trade data are secondary to the 2Q GDP release here too. While AUDUSD is an important pair to monitor, AUDCAD has just as impressive a technical perspective and it will not carry the same measure of fundamental curb in anticipation as the Greenback which will have its attention drawn forward with Friday NFPs.

Chart of AUDCAD with 50 and 100-Day SMA (Daily)

Chart Created on Tradingview Platform

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