Nasdaq 100, Facebook, Google, Earnings and USDCAD Talking Points
- Tech earnings managed to throw off the shackles of mediocre after-hours performance, but that wasn’t enough to earn the Nasdaq 100 a breakout this past session
- Earnings is still a top theme Thursday afterhours with Apple and Amazon on tap, but the fundamental breadth widens with scheduled event risk
- The most put-upon cross in fundamental terms may be EURUSD between the ECB rate decision and US 3Q GDP update, but traders would do well to look elsewhere
Earnings Can’t Close the Deal for the Nasdaq 100
Risk trends took an unmistakable dive this past session despite the most productive fundamental thee of the week offering a symbolic boost through Wednesday trade. While we are facing down the implications of a hawkish monetary policy and a stutter in economic expansion, the focus of late has been on US corporate earnings. The run of top market cap reporting Tuesday evening offered a firm backing for a speculative charge and active session trade this past session proved the bulls were ready to cater to the favorable headlines. That said, earnings seem to have lost their sway over broader speculative intent with the benchmark US indices, emerging market assets, junk bonds, carry trade and even commodities with a risk bent taking a troubling dive this past session. Most notable on my radar was the failed break from the Nasdaq 100 given the strength of key components like Google and Microsoft. What happens if the rest of the FAANG earnings disappoint – or even worse, the focus shifts to another, less reliable themes?
Chart of Nasdaq 100 with 20-Day SMA (Daily)
Chart Created on Tradingview Platform
As far as themes go, earnings remains an important driver to watch. This past session, both Google and Microsoft managed to leverage a greater market move than the Tuesday evening, afterhours performance led us to believe was possible. The two tickers registered gains of 4.8 and 4.2 percent respectively to both close at record highs. Given the market cap of these two tickers (among the top 5 of the developed world), it would be assumed that there is a disproportionate scale of influence to come from these charges in terms of broader risk appetite, but the indices would show struggle across the board. A disconnect from GOOG and MSFT relative to the Nasdaq 100 should raise serious flags for those keeping track of bias. It is not often Google and the tech index see a significant divergence in correlation, but the implications are rarely favorable for bulls.
Chart of Google with 50 and 100-Day SMAs and Volume, Rate of Change (Daily)
Chart Created on Tradingview Platform
Volatility and Fundamental Event Risk
I am a firm believer that high profile event risk can generate serious volatility while also maintaining deep skepticism that the masses will fully buy into traditional fundamental themes. As convenient as a textbook market development would be, there is too much speculative interpretation that occurs for a clear move across the speculative markets. A good example of the conflict that fundamentals can prompt is CADJPY. This past session, we would see a ‘favorable’ wind arise for the Canadian Dollar through the Bank of Canada’s (BOC) surprisingly hawkish stance conflict with the general risk aversion that arose among speculative assets. I’ll be watching this pair moving forward to see which theme has greater staying power – an evaluation that can payoff in other outlets.
Chart of CADJPY with 20-Day Moving Average (Daily)
Chart Created on Tradingview Platform
What are the next sparks for meaningful, event-led volatility over the coming 24 hours? That is most likely to follow a simple interpretation of the economic calendar. Thursday’s docket is an active affair. Following the BOC rate decision and the Brazilian central bank’s bigger-than-expected 150 basis point hike, we are due policy updates from the ECB and BOJ. Of course all of this mix will stir deeper considerations for next week’s FOMC decision. Growth will be another top line matter with the US economy’s progress report preceding Europe’s and Mexico’s own updates.
Calendar of Major Macro Event Risk for the Week
Chart Created by John Kicklighter
Markets and Fundamental Sparks to Watch
Looking ahead to Thursday trade, there are some serious events on tap; but determining where to express the potential and scenarios is not exactly clear. EURJPY will be an interesting cross as a representation of the European Central Bank (ECB) rate decision. The group is very unlikely to change its accommodative mix, but the market has adapted to speculate on intent. ECB officials have tried to generally project an extremely dovish policy perspective, but will the market lean into those beliefs? EURJPY is an interesting cross because it has priced in undue hawkishness and can also leverage any sustained retreats in risk assets.
Chart of EURJPY with 20-Day SMA (Daily)
Chart Created on Tradingview Platform
Another critical fundamental themes that spans scheduled and unscheduled event risk is the performance of US markets and the Dollar. We are heading into the US 3Q GDP release with plenty of speculation, but the addition of the FOMC rate decision now less than a week away gives a volatile skew to the market’s stance. Notably, interest rate expectations from Fed Funds futures rates have seen an explosion to above 50 basis points worth of hikes priced through 2022. That is unprecedented and a serious risk to the market’s climb. In economic terms, rate hikes – and the inflation that would prompt it – are growth threats which shows through well in the US Treasury 10-year to 2-year yield spread. With US 3Q GDP on tap, we will see how deep this concern should run.
Chart of US 10-Year to 2-Year Treasury Yield Spread (Daily)
Chart Created on Tradingview Platform
Taking another look at the US Fed rate forecasts, we can see from futures that the tightening through 2022 has surged to nearly 54 basis points. That may seem unimpressive if you don’t understand the context, but that is two rate hikes from the benchmark central banks after years of expansive upgrades to global dovish regimes. The firming of rate forecasts in the SU may not be a reliable Dollar charge, but it will eventually capsize risk measures like SPX.
Chart of DXY Dollar Index Overlaid with Implied 2022 Fed Forecast from Fed Fund Futures (Daily)
Chart Created on Tradingview Platform
