S&P 500, VIX, USDCNH, Recession and Dollar Talking Points:
- The Market Perspective: S&P 500 Bearish Below 4,100; USDJPY Bearish Below 134.00; EURUSD Bullish Above 1.0100
- A noteworthy break of its 2022 range midpoint on Friday didn’t translate into a strong follow through to open this new week, and liquidity is likely to culprit
- USDCNH rallied smartly after China’s July data run reflected a struggling economy, but a so-called ‘housing recession’ for the US didn’t hurt the Dollar…maybe earnings will change that
Where was the ‘Follow Through’ on the S&P 500 Break?
Despite the impressive technical progress made by the S&P 500 – as a lead for speculative appetite – last week, the motivation for follow through seemed to collapse with restoration of active trade this past session. In part, the lack of follow through likely has some connection to the unflattering fundamentals we have registered, including the troubling run of July economic data from the world’s second largest economy and the provocative headlines trumpeting a US ‘housing recession’. However, it is likely that underlying market conditions, including a lack of core liquidity, is doing far more to throttle any serious move to support conviction. As for the US index itself, the 0.4 percent gain through this past session dramatically downplays the technical ‘achievement’ from Friday of charging through the midpoint of the 2022 range that pushed us from record highs to official ‘bear market’. By rudimentary technical analysis books, a break like this could urge follow through; but that likely failed to metabolize in these thin markets. The next, large technical levels to monitor above are the 200-day SMA (at 4,328) and the technical line where we would re-enter a ‘bull market’ (4,400 as a 20 percent increase over June 16th’s close).
Chart of S&P 500 with 200-Day SMA and Volume (Daily)
Chart Created on Tradingview Platform
What role does liquidity play in the market’s difficult in cementing a more productive trend – particularly in this phase where the bulls and bears have strong arguments to make on each side of the table? Participation is a critical element for forging meaningful market movements whether it be momentum behind an existent trend or say attempting a major reversal. Market trends arise when bullish and bearish interests give out to one another or find themselves in general balance (where we find chop or range). Trends can form or struggle amid a rising tide of participation or as it is fading. In some ways, seeing a slide in turnover can be practical as a directional phenomenon. The S&P 500’s volume Monday was the lowest in five weeks, but there tends to be less activity with a bullish move. On a larger scale, however, the participation measured in figures like open interest for the popular ‘emini’ futures contract shows that there remains remarkably low exposure to a representative of ‘the market’ despite the significant price developments this year. That may be in part a reflection of seasonality, but it seems more prolifically an absence of larger market participants (eg institutions, fund managers) who are put off by recession and more constricted financial conditions. Their general absence indirectly amplifies the impact of the retail trader that has produced questionable groundswells like the ‘meme stock’ craze these past few years.
Chart of S&P 500 Emini Futures with Aggregate Volume and 20-Day SMA on Open Interest
Chart Created on Tradingview Platform
No Avalanche of Recession Fears, But Surely Some Key Tremors
While I believe that liquidity and market conditions in general is at the core of how the markets will develop moving forward, that doesn’t mean fundamentals are at a standstill until the ‘professional’ interests return from their holidays. To start this week, it seems the outlook for economic activity will be the most prominent concern. For China, the world’s second largest economy, the run of July data dealt some serious concern. Fixed asset investment slowed to a 5.7 percent annualized pace of growth, industrial production to 3.8 percent and retail sales 2.7 percent. All of those are positive, but keeping an economy like China running at the kind of targets the government sets requires pace far in excess of these figures. The housing inflation report, meanwhile, was outright problematic with a -0.9 percent contraction that reminds of headlines around Evergrande. Add to the news the unexpected announcement by the PBOC that it was cutting its benchmark lending rate (from 2.10 to 2.00 percent) and USDCNH registered its biggest single-day rally since March 2020 – during the pandemic. Interestingly but perhaps not surprisingly, the Shanghai Composite didn’t show much concern.
Chart of USDCNH with 50 and 100-Day SMAs, 1-Day Rate of Change (Daily)
Chart Created on Tradingview Platform
The disconnect between China and the global market is that despite the country’s size, there are serious opacity issues and regulatory curbs such that its problems don’t readily cascade into Western financial systems. This is not to say they are impervious, it just isn’t easy to track the spread. But what about fundamental troubles in the world’s largest economy and overt developed world leader, the United States? There wasn’t much in the way of top tier US event risk this past session, but the NAHB Housing Market Index for August seemed to hit the ‘right’ wrong tenor to register with macro watchers. The index dropped for an 8th consecutive month with those assessing the report using the stirring assessment that the country may be in a “housing recession”. That is a very provocative term to use at this juncture and we should keep an eye out for how readily and frequently the use of ‘recession’ is thrown around.
Chart of the US 10-Year to 2-Year Yield Spread Overlaid with the NAHB Housing Market Index (Weekly)
Chart Created on Tradingview Platform
What to Watch Ahead: More Recession and a Little Monetary Policy
While the fundamental waters churn beneath the surface, the shallow liquidity is keeping our boats slowly rising. Yet there is no telling when an errant update may start an avalanche of sentiment in the flippant speculative ranks or urge the sidelined big players into the market. From the economic docket through Tuesday’s session, my focus will general remain with economic health assessments. The UK employment data for July and Eurozone economic sentiment survey (ZEW) for August are fairly direct economic reflections. I will put more of my attention on the US however – though not on the industrial production and housing starts. Of course, the NAHB and ISM reports that have crossed the wires recently make this data generally important. However, if we want a picture that is more suited for outlook rather than lookback, the earnings and forecasts from Walmart and Home Depot could be much more important.
Global Calendar of Top Macro Economic Event Risk for the Coming Week
Calendar Created by John Kicklighter
While the majority of the data on tap for the next 24 hours is centered on growth considerations, it is important to track monetary policy projections as well. The most explicit central bank event this week for me is the RBNZ rate decision that comes out Wednesday morning Wellington time with an expected 50bp rate hike. Yet, in addition to that decisive event, we also have Canadian CPI today and UK inflation. Recall the BOC surprised with a 100bp rate hike at its last meeting and the BOE surprised with a recession forecast. In the meantime, the Dollar’s Monday bounce doesn’t seem to align to a modest pullback in rate pricing (via Fed Fund futures) for a 75 bp hike at the September 21st meeting; but it is a relative consideration and the Greenback also plays a safe haven role.
Chart of DXY with 50 and 100-Day SMAs Overlaid with Implied Fed Rate * VIX (Daily)
Chart Created on Tradingview Platform
