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S&P 500 Rally Stalls on Doubts of Russian De-Escalation, US Dollar Retreats

S&P 500 Rally Stalls on Doubts of Russian De-Escalation, US Dollar Retreats

John Kicklighter,
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S&P 500, Dollar, EURUSD and USDJPY Talking Points

  • The Trade Perspective: USDJPY Bearish Below 121; USDMXN Bullish Above 20.00
  • Risk assets like the S&P 500 are still generally pointing higher over the trajectory of three weeks but conviction for lift is growing difficult to come by
  • While intervention speculation around USDJPY is high-level speculation discussion, EURUSD is more tangible event risk with key data on both sides ahead
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A Speculative Lift Giveth and It Can Taketh Away

Overall, the performance of risk-leaning assets has been fairly favorable for this week – but it has been exceptional over the course of the entire month. For the S&P 500, that equates to a tally of 1.3 percent and 5.2 percent respectively. On these scales, ‘the market’ is doing well; but my assessment for intention of positioning for the future is far more critical of the situation. Just this past session, the same US index dropped -0.6 percent (with a sharper loss for acutely ‘growth’ oriented indices like the Nasdaq 100) as something of a counterbalance to Tuesday’s rally on borrowed enthusiasm. While there were a few fundamental contributions to the previous session’s charge, reports that Russia was planning on withdrawing forces from two major Ukrainian cities – seen as a major step towards de-escalation – hit reality of an unbroken siege. The market’s half life for responding to breaks in the geopolitical clouds this situation represents seems to be far less than a full trading day at this point. And thus, the need for a tangible fundamental momentum arises. But where will we find more conviction? A true ceasefire would a boon for the world, but plotting its eventuality can be costly for investors. Instead, I will be focusing on quarter-end activity as well as central bank currents to assess broader fundamentals for the rest of this week.

Chart of S&P 500 ETF with 20 and 100-Day Mov Averages, 1-Day Rate of Change (Daily)

Chart Created on Tradingview Platform

As we seek fundamental drivers for the global markets, one of the most promising, medium-term themes remains monetary policy. There is a relative quality to leaders and laggards on this dimension, but the general safety net quality of the world’s largest policymakers in providing stability should not be underestimated. Interest rate expectations are still exceptionally high across the developed central banks and that is unlikely to change so long as inflation soar without a discreet financial crisis to beg off the responsibility to tackle this sticky problem. However, interest rate hikes is a fairly dull instrument for impacting the market given that we are starting from essentially zero. To have more of a real-world influence, quantitative tightening efforts will carry far more weight in this opening phase of the changing of the guard.

Chart of S&P 500 Overlaid with Aggregate of Major Central Banks’ Stimulus Programs (Monthly)

Chart Created by John Kicklighter with Data from FRED

Why Monetary Policy is Top of the Watch List

While I am a firm believer that the psychology of the masses does not need to anchor itself to a tangible driver nor meet the standards of logic for the average person, it should be something that we have a handle on – and preferably a dominant theme for which we can general prioritize. As it stands now, the Russian attack on Ukraine continues to emit market-disrupting headlines; but they remain unpredictable bursts. The withdrawal of extraordinary support via stimulus is a course setting that much the world seems to be on and the consequences of neglecting the fight are increasingly clear. That said, the rate forecast for the Federal Reserve continues to firm. Below is the probabilities of rate moves by the Fed via futures. The probability of a 50bp hike at the next meeting (May 4th) stands at 66 percent while a further 50bp or greater move at the June 15th meetings hovers at approximately 70 percent. That is aggressive. Yet, it is also not that far ahead of its major counterparts. The relative advantage for the Dollar is less severe than the implications of the collective liquidity drain. One area of concern is the supposed inversion of the US 10-year to 2-year Treasury yield curve – ‘supposed’ because it did not flip on my charts, though it is close. There is a strong recessionary signal to this event, but conditions are certainly different in a number of ways to previous instances over the past half century. That said, the underlying factors could still lead us into the economic dark.

Probabilities of Fed Rate Hikes Through 2022 Meetings

Table Created at the CME’s FedWatch Page

Speaking of monetary policy, there are a range of events over the coming 24 hours – which is also the close of March and the first quarter – which we should be mindful of as traders. While there is event risk that can tap into multiple currencies’ or regional assets’ perspective, my attention will be on the US and Eurozone. For the former, the Fed’s favorite inflation indicator is due in the morning hours of the New York session. The PCE deflator doesn’t earn the press that the CPI draws, but this GDP-based calculation is a bug light for the US central bank. Meanwhile, the Friday NFPs will receive far more market attention, but it will speak far less to the actions of the FOMC going forward. As for the ECB’s path, the Eurozone unemployment rate for February will be accompanied by Germany’s jobless change for March. There was a charge in consumer inflation expectations for the region Wednesday and the Eurozone CPI will certainly fuel the perspective for one of the most dovish policy authorities on the global spectrum.

Chart of Major Macroeconomic Events

Calendar Created by John Kicklighter

The Relative Fundamental Pictures to Watch

Speaking of the US PCE deflator versus Eurozone unemployment rate for Thursday, EURUSD has tracked out an impressive two-day run. This is in part due to the Dollar’s slide as relative rate forecasts have eased somewhat amid fears of what global growth trends have to bring. At the same time, the Euro has been able to make gains more broadly than just against the Greenback – such as EURGBP where there is also a distinct yield advantage in favor of the counter-current. I believe EURUSD simply was due a technical break and the short-term fundamental developments were enough to justify a bullish resolution. It may not be a break with the prevailing trend, but it was a range more easily traversed. Given that perspective, I am not keen to chase the bullish case with this critical cross.

Chart of EURUSD with 20, 100-Day SMAs, 5-Day Range and 5/20 ATR Ratio (Daily)

Chart Created on Tradingview Platform

There is a similar fundamental case of dramatic monetary policy (and thereby returns) contrast to be made with USDJPY. While the markets have been pressuring the ability of the ECB to maintain an explicitly dovish policy course in the face of rising inflation, there remains little skepticism around the Japanese authorities’ warnings that they do not intend to budge their core monetary policy bearing. That presents a case for fundamental lift on USDJPY and other Yen crosses, but the swell cannot continue forever. Eventually, the tepid carry to be offered will grow expensive according to the level of the market. I think we met that tipping point; and the Japanese policy authorities has made it a point to project that shift in comfort. There has been speculation that the Ministry of Finance and perhaps the BOJ were intending to intervene on behalf of the Yen as USDJPY pushed 125. Thus far, we have tested and held that ceiling and there hasn’t bee a strong fundamental corollary to the reaction. It wasn’t like ago where Japanese officials admitted to intervening to benefit Japan only to walk the statement back after drawing the ire of the developed world. Authorities’ transactions can warp the market, but risk aversion could more earnestly turn tides.

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Chart of USDJPY with 20, 100-Week SMAs and Wicks (Weekly)

Chart Created on Tradingview Platform

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