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EURUSD Crashes 1.1000 Support, S&P 500 Spins Its Wheels, Commodities Explode Higher

EURUSD Crashes 1.1000 Support, S&P 500 Spins Its Wheels, Commodities Explode Higher

John Kicklighter,
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SPDR S&P 500 ETF, Bitcoin, EURUSD, CPI and EURCHF Talking Points

  • The Trade Perspective: SPY Range Between 440 and 420; USDJPY Bear Below 114; CADJPY Range Between 92.00 and 90.00
  • Risk aversion was in full swing this past week, but my preferred measures (like the S&P 500 and Nasdaq 100) were outpaced by the likes of the DAX and EURJPY
  • Top event risk ahead includes the ECB rate decision and US CPI, but our fundamental radars should remain on high alert for Ukrainian headlines
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The urge to ‘buy the dip’ is a strong one in a long-biased market, so it is not surprising that traders may question the very present risks in our financial system and build up their bias by saying the risks are already discounted. That said, I firmly believe that the systemic risks – the Ukraine assault, monetary policy intentions, a cooling growth forecast, etc – are not truly priced into these markets. We are just seeing relentless speculative appetite filling the void that comes while the market awaits clarity on open-ended threats. Russia’s invasion is ongoing and the West continues to ratchet up the sanctions on the provocateur. There are plenty of signals in the financial system that show that loosely-maintained confidence is collapsing under the pressure. While the Nasdaq 100 may still be well above the technical ‘bear market’ threshold (13,412), European indices have absolutely plummeted to end this past week while emerging markets and even more unusual sentiment gauges are registering major losses. There is value in having a preferred benchmark to monitor for risk trends, but a better overall assessment of sentiment is the degree of correlation and movement across unrelated risk assets. On that front, there are some serious problems.

Chart of Risk Assets Relative 12-Month Performance (Daily)

Chart Created by John Kicklighter with Data from Bloomberg

As we look out over the coming weeks, my principal focus will be on the state of speculative appetite – at this stage, it would better be described as ‘resiliency’. While I wouldn’t say that we are witnessing a comprehensive selloff across the markets, there is certainly universal pressure with certain outlets taking a serious battering. Given that the principal disruptor of investor confidence is the situation in Ukraine, much of the tracking for volatility is unpredictable. During regular market hours, I maintain that the major US indices are critical barometers for sentiment. If these measures crash through support, it is far more likely that we are shifting into a self-sustaining bearish momentum. But how do we evaluate the landscape if serious headlines hit when markets are closed? Out of necessity, the crypto market is one of the few active markets over the Saturday-Sunday (and holiday) stretch; but it is also a fairly good measure of risk on / risk off. Looking at correlations, Bitcoin has held an impressively strong and positive correlation to the S&P 500 over time. Should BTCUSD tumble when exchanges are offline, I’ll be expecting a painful Monday open.

Chart of SPDR S&P 500 Overlaid with BTCUSD as Well as the 20 and 60-Day Correlations (Daily)

Chart Created on Tradingview Platform

Where the Ukraine Impact is Most Acute

If you are looking for the full impact of the Russian assault on Ukraine or the subsequent counter by the West, the offender country’s assets tell quite the tail of their own. The Ruble dropped 46 percent against the US Dollar (USDRUB rallied that much) just over the past week. Meanwhile, the 10-year Russian government bond yield has soared to 20 percent amid warnings that the country may default on a coupon payment for the first time since the 1998 financial crisis. Russian equities are clouded owing to the closure of local markets, but the 80-95 percent collapse in Western traded Russian-proxy assets (eg ETFs) gives a clear estimate of the situation. Outside of the Russian market’s pain, global commodities are taking a heavy hit from the situation. We have been following the US crude oil benchmark overtake 115 per barrel this past week, I have bee more impressed by the drive to record highs from wheat futures. As market prices on these necessary goods continue to rise in the market, expectations for the Thursday US CPI will continue to build.

Chart US CPI Year-Over-Year Change and Wheat Futures Prices (Monthly)

Chart Created on Tradingview Platform

Another corner of the market to watch heading into the new week as a gauge for global assets as much as it is its own options is EURUSD. The benchmark FX cross extended its slide through the end of this past week, subducting the 1.1000 figure. That is no small, technical feat given that the trendline support stretches back to the Euro’s inception. I’ll also point out that Euro volatility soared through this past week, which makes the situation even more fragile. As long as we continue to trade below the aforementioned baseline, the markets will remain on guard with regards to commitment. I see it as particularly difficult to maintain the bearish course. Perhaps a Euro pain can present more possible scenarios than a Dollar awaiting the next critical milestone (Thursday’s CPI).

Chart of EURUSD Overlaid with Euro Volatility Index and 1-Week Rate of Change (Weekly)

Chart Created on Tradingview Platform

More on the Euro and Other Major Themes

While EURUSD posted a noteworthy bearish technical breach this past session, it was far from the most impressive technical structure we could expect to find in the markets. Setting aside the Dollar and Sterling to start the conversation closer to the carry and risk elements, we find the Euro under severe strain. EURCAD may have slid, but EURAUD has dropped for 13 consecutive trading days – a record. Clearly, the Ukrainian situation carries great risk to the European region relative to its global counterparts. Along this vein, the measures of Euro instability and risk aversion push lead me to certain crosses. EURJPY has crashed year-long support with a distinctive Friday acceleration , but it was the EURCHF that still draws more of my attention. Switzerland has made clear in the past that it would not abide traditional political lines for its activities, but the county seemed to make a strong pledge against companies that profit Russia. The bid for the Frank (EURCHF retreat) will cause problems for anything less than a full recovery of carry expectations through the target pair.

Chart of EURCHF with 1-Week Rate of Change and 10-Week ATR (Weekly)

Chart Created on Tradingview Platform

While the Ukrainian theme is key to monitor general sentiment moving forward, I would be remiss not to report that there are some serious fundamental mines that have yet to take down the market. In the data series that is ahead of us, my top interest will naturally follow inflation stats first and foremost.. With inflation readings already flashing half-century highs, the US CPI helps understand where on the cusp we currently reside. Looking at the traditional economic calendar, the US consumer inflation report release Thursday will have a close bedfellow in the ECB rate decision. Those are top listings, but consider the spread of events that also includes Russian foreign exchange and Canadian employment as more unique catalysts.

Calendar of Major Economic Events

Calendar Created by John Kicklighter

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