S&P 500, VIX, Dollar, Liquidity, Rate Decisions and Recession Talking Points:
- The Market Perspective: S&P 500 Bearish Below 4,100; USDJPY Bearish Below 134.00d
- With the extended US Labor Day holiday weekend, we are crossing the assumed threshold from the ‘summer doldrums into active fall trade
- While averages don’t ensure consistency, we have plenty of overriding, systemic event risk including recession fears and rate hikes to quickly stoke the fundamental fires
There are Fundamental Charges Awaiting the Seasonal Restoration of Liquidity
We closed out this past week with some serious fundamental event risk, but the transition we are making is far more significant than just a move from an NFPs-backed Friday into yet another trading week. We are passing through what is consider the threshold of ‘summer doldrums’ into a significantly more active fall trading period. Of course, there is nothing that demands that we must live up to these averages; but a restoration of liquidity doesn’t find us in a particularly favorable fundamental backdrop. Recession risks are building as central banks make a very explicit commitment to fight inflation at virtually all costs. Through this past week, another -3.3 percent slide from the S&P 500 pushed one of the most ubiquitous ‘risk measures’ to the second most aggressive three-week slides since the pandemic plunge. If this tempo and fear carry over to a more speculatively-populated backdrop, it wouldn’t be a surprise to see the bears take over moving forward.
Chart of S&P 500 with 50-Week SMAs Volume and 3-Week ROC (Weekly)
Chart Created on Tradingview Platform
As we move into September in earnest, the burden of historical averages will be chasing expectations. For most, the focus will immediately fall on the S&P 500’s average loss through the month looking back to 1980 considering it is the only month of the calendar year that has averaged a decline. Yet, if you look back at the actual September of the past five years, you would quickly find that the average is far from a reliable baseline for a negative performance from this benchmark measure. That said, I’m more interested in activity and volatility measures. Historically-speaking, volume behind he US index sees a more reliable climb in turnover as measured by the activity measure; and the VIX activity measure tends to crest through the September to October period with greater reliability. I am a firm believer in the ‘this time is different’ ethos, but activity measures are less prone to the directional flippancies. As such, I will be on high alert heading into the new trading week.
Chart of Calendar Month Average S&P 500 Change, Volume and Volatility from VIX
Chart Created by John Kicklighter
Outside of Seasonality, Core Fundamentals are Churning
While most market participants will unwittingly fold the critical liquidity conditions ahead into a fundamental or technical view, there is no misinterpreting the heavy event risk inherent in the forthcoming week as a passive run for the financial system. While there are a slew of high-profile, individual events that are worthy of our attention moving forward, the general themes surrounding monetary policy and recession risk remain principal concerns. Looking out over the coming week, there are three major central banks that are due to update their policy bearings, but the official measures of economic health carry just as much weight for the investor. Official GDP readings are limited to Australia, Switzerland and South Africa 2Q updates. None of these come anywhere close to a systemically indicative measure for global growth. Nevertheless, the regional volatility that can result from this high-profile event risk ahead should be designated on our threat radars.
Global Calendar of Top Macro Economic Event Risk for Next Week
Calendar Created by John Kicklighter
Among the fundamental themes that we should be cognizant of when tracking volatility, monetary policy expectations should be a top priority. Top individual event risk for me over the coming week is the ECB (European Central Bank) rate decision. There is a significant probability of a 75bp hike from the world’s second largest central bank next week – a scenario that seems to have been fostered by a run of the group’s members this past week referencing their concern that they have fallen behind the inflation curve. As for the forecasted 50bp RBA and 75bp BOC rate hikes, there is certainly regional volatility potential from these events; but I will not hold my breath for an escalation to systemic influence.
Spectrum of Monetary Policy Stance by Major Central Banks with Year-End Rate Forecast via Swaps
Chart Created by John Kicklighter
Keep a Close Eye on the US and the Dollar
While we are working out the seasonal transition and the scheduled event risk, I will keep a particularly keen eye on the world’s largest economy and its currency. From the perspective of the Greenback, the DXY Dollar Index has advanced to its highest level in two decades. Technically speaking, EURUSD represents a disproportionately high ratio of this measure for the largest currency; but the cross has not forged any significant progress below parity. Instead, USDJPY has climbed to fresh 24 year highs while GBPUSD is moving on lows not plumbed since 1985. How long will it take for the world’s most liquid FX cross to fall in line – particularly if the ECB cannot keep pace with its hawkish counterpart?
Chart of EURUSD with 50-Day SMA and Net Spec Futures Positioning from COT (Daily)
Chart Created on Tradingview Platform
Speaking of the Dollar, there are multiple fundamental facets to consider. For the interest rate advantage, the US central bank has seen its officials warn that it was willing to keep up its inflation fight despite the recessionary risks that may arise. We will see if that belief holds out this coming week with a range of central bank speakers scheduled to update with their views. Then there is also the relative economic health consideration that compete with the currency’s ultimate safe haven status. In the former consideration, the world’s largest economy has escaped an official recession reading not just through the NBER adjustment of its definition, but there has also been a resiliency from measures like the ISM survey measures. As for the ‘haven of last resort’ status, there is an inherent and difficult-to-gauge status that awaits the panic of global investors.
Chart of S&P 500, US ISM Manufacturing and Service Sector Activity with Official Recessions (Monthly)
Chart Created by John Kicklighter with Data from FRED St Louis Federal Reserve Database
