QQQ Nasdaq 100 ETF, FOMC, Crude Oil and Dollar Talking Points
- The Trade Perspective: Pairing Dow Bullish to Nasdaq 100 Bearish; GBPNZD Bullish Above 1.9000; EURUSD Break From 1.1025 – 1.0925 Range
- The top event risk through the immediate future is the FOMC rate decision, which is expected to result in a 25bp hike with a forecast that is expected to change
- For competing fundamental influence, the Russia-Ukraine war is a capable disruptor for global markets; but there are more targeted event risks that can impact certain markets as well
Risk Appetite Trends Just Buying Time to the Main Event
There has been a lot of back-and-forth in the global financial markets these past few weeks. An extreme level of realized volatility has been paired with confusion as to the direction the market is willing to commit. That hiatus from conviction will be put to the test at the very least – and more likely reconstitute a trend – with the monetary policy update from the US central bank, the Federal Reserve. Evidence of anticipation for this event has run rife through the speculatively-tuned assets that I follow in the global markets. Most prominent of the groupies are the US indices with the majors having carved out distinct wedges over the past few weeks. For the QQQ Nasdaq 100 ETF, the technical consolidation is the least distinct (relative to the S&P 500 and Dow); but the extreme day-to-day volatility matching to the high-level 20-day (1 month) ATR speaks to the pressure that we are working with. A break by Wednesday’s close depends on the outcome of the FOMC, but the balance of probabilities of a technical breach by the end of the week is high in my view.
Chart of QQQ Nasdaq 100 ETF with 20 and 200-Day Mov Avgs, Gaps, 20-Day ATR (Daily)
Chart Created on Tradingview Platform
Speaking of the FOMC rate decision, there are multiple components to this event and it is important to follow the hierarchy of importance in order to establish how the market is likely to respond. First and foremost, the immediate decision on the short-term lending rate is the first point for which we should take note. The market’s are virtually certain of a 25bp rate hike to a range of 0.25 to 0.50 percent at the conclusion of the meeting. Tumult from Russia’s attack on Ukraine has eroded some of the certitude of the markets, but Fed members have made an effort to ensure us that they will push forward with normalizing rates in order to fend off persistent inflation (PPI hit a record high this past session). The next metric we should take stock of is the Summary of Economic Projections’ (SEP) forecast for interest rate expectations. December offered up a median of three hikes in 2022, but has that changed with the extreme inflation measures of late? From there, the forecasts for growth and inflation will give us a better assessment of how robust those rate projections are. Finally, the policy statement and Powell press conference half an hour later will be worthy of closer interpretation to see how ready the Fed is to pursue rate hikes even if risks – like a Russia-Ukraine flare up – arise.
Table of FOMC Rate Decision Scenario Table
Table Created by John Kicklighter
Rate Expectations and the Markets That Follow Them
One of the principal connections between the situation in the Ukraine and the distorted dynamic for the Fed and other major policy authorities has been the impact the former matter has had on inflation. Key commodity prices have soared since Russia has invaded the democratic country as worry over sanctions have impacted Russia’s principal exports (among them energy goods) while also threatening production of critical goods produced in Ukraine (such as grain). The threat persists but the inflated prices have ebbed this past week. There has been a general normalization of raw material prices, but few carry the same drama and attention that crude oil prices have earned. The WTI US-based standard contract has dropped from an intraday high just above 130 to less than 100, which pushes this commodity into a technical ‘bear market’. Volatility remains the principal factor for me, but there is certainly a curb on upstream costs. The question is whether these upstream cost savings make it down to the consumer. That said, I don’t think this retreat will change the Fed’s calculus much.
| Change in | Longs | Shorts | OI |
| Daily | 10% | -11% | 5% |
| Weekly | -1% | -9% | -3% |
Chart of Crude Oil Prices with 20 and 100-Day SMAs and 20-Day Disparity Index (Daily)
Chart Created on Tradingview Platform
Speaking of the US central bank’s strategy, the markets maintain an exceptional interest rate forecast – though it is not clear that those well-established projections translate into discounted assets. While I do like to reference the two-year Treasury yield for US rate forecasts (the ‘medium-term’ time from the Fed always references), the Fed Fund futures are more form fit for this kind of job. Using the current and December FF contracts, we can calculate that the markets are pricing in 166 basis points of rate hikes between now and the end of the year. Since standard rate hikes come in 25 basis point clips for major central banks, that would translate into certainty of 6 standard hikes and debate of a seventh. There are only 7 more meetings this year after the January gathering. All that said, it will be difficult (though not impossible) to further build traction on rate premium. So, is the Dollar’s rally destined to stall and reverse?
Chart of DXY Dollar Index with 100-Day SMA Overlaid with Implied 2022 Fed Rate Hikes (Daily)
Chart Created on Tradingview Platform
When it comes to the FOMC rate decision, it is natural to tie the event back to the US Dollar and local assets. With such an aggressive forecast for the Fed via futures and swaps, it is certainly an update worth following. That said, the update from the US monetary authority doesn’t just effect the bearing and tempo of local assets. The Federal Reserve is a symbolic leader of monetary policy in the modern age – the first to go into the large scale asset purchase programs (LSAPs) in 2008 and the first major group to hike rates after the Great Financial Crisis at the end of 2015. The world is watching the Fed while the markets are extrapolating what it could mean for other major banks. There are a host of major groups that are attempting to keep pace with the Fed, but I would be particularly wary of the BOE (Bank of England) rate decision that comes out Thursday.
Chart of Relative Monetary Policy Standing with 2022 Rate Forecasts
Chart Created by John Kicklighter
The Other Fundamental Sparks that Can Start Fires
I am all for determining and analyzing a hierarchy of influence when evaluating and trading fundamentals. First and foremost, the FOMC rate decision is Wednesday’s fundamental anchor – and in all likelihood, it will be the biggest driver for the entire financial system. Yet, outside the pull of Chairman Powell and his cohort, there are a few other concentrated events that traders should mark on their calendars ahead. On the US docket, the retail sales and import inflation are noteworthy updates, but will almost certainly be overlooked in favor of the Fed’s moves. Canada’s own consumer inflation statistics, however, can exact a more significant influence on the BOC’s perceived path. If you are looking for a more explicit monetary policy update, the Brazilian central bank is expected to actually hike 100 basis points at its post-FOMC announcement. Alternatively, if you’re looking to avoid monetary policy, the New Zealand 1Q GDP could make for some interesting, if specific, event risk.
Calendar of Major Economic Events
Calendar Created by John Kicklighter
Given the reach of the FOMC decision and the unpredictable nature of the Russian invasion of Ukraine, it can be difficult to find corners of the market that can effectively escape the discreet and abstract drivers. One pair that has been of interest to me recently is GBPNZD. The technicals are appealing as a very wide range, with a move traversed with the help of soaring commodity prices. As those raw material costs ebb, the pair is more likely to extend its recent turn off of 1.9000. Add to this mix the fact that we have a Bank of England (BOE) rate decision – expected to produce a 25bp hike – on Thursday, and this is a very appropriate pair to at the very least monitor.
Chart of GBPNZD with 100-Day Moving Average (Daily)
Chart Created on Tradingview Platform
