S&P 500, VIX Volatility Index, Earnings, Recession and EURUSD Talking Points:
- The Trade Perspective: S&P 500 Bearish Below 4,075; USDJPY Bearish Below 134.00; EURUSD Bullish Above 1.0100
- Earnings offered a fundamental backdrop for the markets to start the new trading week, but the ‘beat’ from Goldman Sachs and Bank of America couldn’t catalyze enthusiasm
- Lurking not far in the background are recession fears and accelerated rate hikes which is likely to mix with seasonality expectations to make trends difficult to resuscitate for now
Expect More Sparks of Volatility and the Same Reticence to Trend
We have entered a week where volatility can be readily spurred by key event risk on the docket, but commitment to a clear trend will perhaps be more difficult to muster. Seasonal conditions are in play at present as are expectations for top-level event risk starting next week. In particular, the first half of this week is likely to be oriented around earnings – unless something unexpected and severe were to come to pass. Among the meaningful corporate updates to hit the wires before Monday’s open were the reports by financial powerhouses Goldman Sachs (GS) and Bank of America (BAC). The former managed to beat the consensus earnings per share (EPS) of $6.99 with a $7.73 print while the later beat on profit of $25.22 billion against a $22.82 billion outlook. With the S&P 500 and Dow starting with a gap (alongside these tickers) to start the week, it seemed that bulls were ready to cater to the positive aspects of the data. Yet, by the end of the day, the mood behind both tickers and the market at large seemed to flip with the year-over-year performance atrophy (rather than analyst comparison) grew in prominence alongside the banks’ macro warnings. We are heading into Tuesday’s trading session with a -0.8 and -0.7 percent loss for the two indices respectively. Technical barriers on the past five weeks of congestion stand, suggesting commitment is not so easily won.
Chart of S&P 500 with Volume, Daily Gap and Daily Change (Daily)
Chart Created on Tradingview Platform
When it comes to earnings data, there are frequently aspects that can cater to an optimistic interpretation and those elements that can fuel the pessimists. It truly matters what kind of bias ‘the market’ is fostering when it comes to responding to fundamental developments. As previously mentioned, there are weighty fundamental risks seen out into the future; but the immediate breathing room can create unusual conditions in the short-term. With next week’s FOMC rate decision (Wednesday at 18:00 GMT) a beacon of anticipation for some and fear for others, it is perhaps not surprising that the market is willing to curb conviction for the time being. That would suit seasonal averages. I realize that over last week, I mislabeled the 29th week of the year for the segmentation I calculated for the VIX volatility index. In fact, this week is historically the lowest average week of activity for the index since the measure’s official inception in 1990. It is not good practice to assume that seasonality always has to stand, but the added fundamental curbs should be taken into consideration for immediate overviews.
Chart of VIX Overlaid with Historical Average Level of Each Week of Calendar Year
Chart Created by John Kicklighter
The Fundamentals that Matter and the Fundamentals that Move
There is little doubt in my mind that the broader concerns over economic contraction and the heady acceleration of monetary policy tightening to combat inflation are among the top matters for driving trends over the coming weeks, if not months. That said, my focus is frequently of a shorter interval and it is almost always a helpful practice to be pragmatic. As such, the current depth in earnings data will keep my attention – at least until bigger matters or moves arise. Keeping tabs on the so-called ‘value index’ in the Dow this past session, the charge and retreat of component Goldman Sachs notably aligned to the broader measure. That is perhaps not so surprising when we consider the statistical relationship between GS and DJIA – an 0.81 rolling correlation which denotes a strong positive connection. While not at all a component of the Dow, I am more interested in how the Netflix earnings are received after the close of this coming session. NFLX is one of the one-celebrated FAANG grouping, but it has certainly fallen on hard times. Nonetheless, it is worth noting how indicative the tech ticker has been of the market – even the Dow itself according to its own rolling 20-day correlation (0.71).
Chart of the Dow Overlaid with Goldman Sachs and Netflix with 20-Day Correlations (Daily)
Chart Created on Tradingview Platform
If we are shifting from the ever-interpretable influence of US earnings (don’t forget the corporate leaders’ own assessments of the macro environment) to more traditional event risk, then the docket Tuesday has a few highlights worthy of monitoring. While the UK employment statistics for June and May are worth watching if you are watch the Sterling or UK assets specifically, it doesn’t have the best track record of strong market response. I am putting more of my personal attention on the European data prints. Given that the ECB rate decision on Thursday is its own blackhole pulling our attention into its influence, the Eurozone bank lending survey is going to be an important read on economic health and financial stability before the central bank convenes. For that same reason, the upcoming Eurozone CPI update will be closely monitored even though it is an update or ‘final’ reading. With EURUSD putting two days of distance from the failed break of parity last week, a true reversal is now being heavily debated.
Chart of EURUSD with German-US 2-Year Differential and Tails (Daily)
Chart Created on Tradingview Platform
The Official Docket Ahead
Earnings and European financial conditions are two direct points of interest over the next 24 hours, but their ability to present a definitive course for the most elementary of themes (recession and broader monetary policy trends) is likely limited. Other items worth of attention over just the coming trading day include US housing starts, the BOE Governor’s Mansion House speech and even Japan’s bond auctions. That said, unless there is something unscheduled that generates heavy waves, it is likely that Wednesday’s session will present greater short-term volatility potential between the aftermath of the NFLX print and with additional insight from TSLA earnings not to mention UK and Canadian inflation as well as Eurozone consumer confidence.
Global Calendar of Major Macro Economic Event Risk for the Next 48 Hours
Calendar Created by John Kicklighter
