QQQ Nasdaq 100 ETF, EURUSD, AUDCAD and NFPs Talking Points
- The Trade Perspective: SPY Range Between 440 and 420; EURUSD Bullish Above 1.1000; CADJPY Range Between 92.00 and 90.00
- The QQQ Nasdaq 100 ETF lead a retreat among the most prolific risk-leaning assets this past session, but conditions are still better defined by volatility then traditional trend
- Top event risk heading into Friday’s trading session is the February NFPs, but how much weight will this data carry through monetary policy as the attack on Ukraine continues?
The Signal Versus the Noise in Risk Trends
If you’re sole measure of market performance is a gauge of trend development from a capital market benchmark like the Nasdaq 100, things would seem fairly steadfast in the financial system right now. Yet, with Russia’s attack on Ukraine entering its 8th day and February nonfarm payrolls due later today against the backdrop of an unrelenting Federal Reserve; we know that conditions are certainly not as quiet as that overview would suggest. Volatility is the name of the game, and this backdrop feature is over-represented in the major assets. While I still prefer more sensitive measures – US equity indices, emerging markets, junk bonds, etc – for day-to-day assessment of opportunities, the undercurrent of sentiment seems better defined by the course established by the more stoic measures of risk. On that front, we find US Treasury volatility is the highest since the pandemic (and before that 2013) while the extremely liquid EURUSD finds the Greenback playing ‘safe haven’ to the world’s second most liquid currency. That is a serious indictment of our current backdrop.
Chart of Risk Trend Intensity
Chart Created by John Kicklighter
While we keep track of the general trends we are covering over time, it is still important to evaluate market movement on a daily basis – particularly true when my preferred time frame for trades is short-term owing to the elevated state of volatility. This past session saw a wide slip in speculative assets that I follow. Global equities were in retreat, emerging market assets hit the lowest since November 2020, junk bonds tumbled and carry trade struggle. The most provocative move in my typical watchlist was from the US indices however. While the S&P 500 and Dow registered modest losses (-0.5 and -0.3 percent respectively), the growth-defined Nasdaq 100 dropped -1.4 percent. The slump in the more speculatively oriented index is telling while the so-called ‘death cross’ (traditionally when the 50-day moving average slides below the 200-day moving average) adds considerable weight to the signal versus noise debate. That said, I’m still waiting to see whether we can break out of this week’s 350-340 range (for the QQQ).
Chart of QQQ Nasdaq 100 ETF with Volume, Daily Gaps and 1-Day Rate of Change (Daily)
Chart Created on Tradingview Platform
Returning to the Intersection of Risk Trends and Monetary Policy
As far as scope of influence goes, the situation in Ukraine remains the most potent fundamental risk in the global markets. That overrides the significant speculative debates around growth forecasts and monetary policy intentions against a backdrop of extraordinary inflation. However, these elements do not develop in a vacuum. These matters will invariably influence each other. For example, at some point, a deterioration in the outlook for financial stability and growth should Russia and the West escalate their confrontation would eventually cull the Fed and other major policy authorities’ commitment to tighten their benchmark rates. That said, it doesn’t yet seem that we have really hit that threshold. This past session, Fed Fund futures extended the rebound in implied rate forecast for 2022 to 142 basis points worth of tightening (debate between 4 and 5 standard 25 basis point hikes) where we hit a low of 109 basis points on Tuesday. From EURUSD, we can see that a divergence has opened up relative to the Germany-US 10-year yield spread which shows us just how much the ‘risk’ override is kicking in right now. Is there enough cobbled together strength behind the Dollar to break below 1.10: a symbolic trendline support that stretches back to the inception of the Euro?
Chart of EURUSD with 10-Day ATR (Daily)
Chart Created on Tradingview Platform
Taking a closer look at interest rate expectations in the US, we can draw some comparisons to establish just how the Fed can be ‘so brazen as to consider rate hikes’ despite the uncertainties facing our financial system. Below is the implied forecast for 2022 via Fed Fund futures overlaid with the current futures price of wheat. I usually offer of views of energy and metals, but so-called ‘softs’ are just as important with building inflation. In fact, as a category, we have seen the biggest weekly increase in commodities this past week since the 1970s. So, while there is certainly some financial pressure from geopolitics ahead of us, it really should not be that surprising that the major central banks are pushing forward with a fight against price pressures.
Chart 2022 Fed Fund Implied Rate Forecast Overlaid with Wheat Futures Prices (Daily)
Chart Created on Tradingview Platform
The ‘Other’ Fundamental Matters – Including US NFPs
While I do advocate keeping close track on the situation in Ukraine as well as interest rate expectations, I can appreciate that those matters are so all-consuming that they can be somewhat abstract. If you want a more narrow field of view, take another look at the rate speculation around AUDCAD. I have been following the Australian and Canadian Dollars this week owing to the rate decisions from their respective central banks, RBA and BOC. The Reserve Bank of Australia held its benchmark rate unchanged at 0.25 percent while the Bank of Canada hiked rates 25 basis points to 0.50 percent, both as expected. Nonetheless, we have seen AUDCAD clear an overt trendline resistance this past session even as the 2-year yield differential between the two shifted lower. I’m not going to take this break as a clean and intentional move, but it is remarkable for defying the technical guidelines.
Chart of AUDCAD with Australia-Canada 2 Year Yield Differential and 60-Day Correl (Daily)
Chart Created on Tradingview Platform
Finally, the event risk on the docket over the final session of this week’s docket has a range of noteworthy market-movers on tap. For instance, the Ivey Canadian manufacturing report is a notable proxy for the country’s economic health. Yet, we know where the real volatility potential will lay in the economic calendar: the February nonfarm payrolls (NFPs). The US employment picture is arguably the most consistently recognizable event risk we have and its weight as a guiding light for the Fed (more through the wages component) and economic health are even more acute at this juncture. The official economist consensus is for 400,000 jobs added last month, but the ADP private payroll beat earlier this week likely shifts the market consensus higher (Dollar favorable and risk suppressing). That said, the ADP figure is notorious for its disparity from the government’s figures of late. I think the greatest potential among the different scenarios is for this data to disappoint to the downside – which would be a bigger bearish signal for the Greenback than bullish for equities and other risk assets. Yet, just because that is where the potential may be greatest doesn’t mean it is more probable.
Chart of US NFPs, ADP Private Payrolls and Differential (Monthly)
Chart Created by John Kicklighterwith Data from NBS and ADP
