S&P 500 reversal and dollar rally stall before condemnation sets in – what’s next?
S&P 500, USDCNH, Dollar and NFP talking points
- Despite first closing below its 100-day moving average in 228 trading days last week, the S&P 500 did not engage in a bearish breakdown
- Risk aversion has been fueled by fears of contagion from China, a US fiscal cliff and a tightening of global monetary policy for much of the past few weeks; but the transition failed
- The main risks of the events of the coming week include rate decisions of the US NFP, RBA and RBNZ, central bank speech and more; but I think traders should follow the sentiment itself.
A breakdown that would not catch up
How many false starts have we seen in the markets in recent months. The two promises of an accelerated bullish view of risky markets and the amplified threat of a sentiment reversal have fallen far short of the pull traders are looking for. On the one hand, this consistency can be seen as a relief; but for me and many others it is more of a frustration. There are serious, systemically important fundamental issues at play in the global financial system, but the market is reluctant to play the expected adjustments. Rather than reflecting a market impervious to fundamentals, I see this as a situation where pressure continues to build until the complacent control is broken with volatile results. We have a lot of serious issues that will continue into the coming week that need to be followed up. The risks of a Chinese financial struggle, the recognition of a context of normalization of monetary policy and the existential threat of a US sovereign default will haunt hopes in the coming week as the techniques continue to create nightmares and the risk. event threatens to trigger panic.
SPY Chart S&P 500 ETF with volume, 100-day SMA and ROC 1 day (Daily)
Graphic created on TradingView platform
Over the past week, we have had a contrast in the performance of risk assets as it reflects intention. On the one hand, the week itself saw an undeniable collapse in market sentiment, but Friday’s trading session dampened the tide of a veritable wave of deleveraging. For the S&P 500, this manifested in the technical picture of a head-to-shoulder advance that would also see a close below the 100-day moving average until Thursday’s close. Yet, just on the cusp of a full bearish change, the bulls managed to muster a rally that pushed the index back above the aforementioned technical limit and calmed the impatient bears. While I would certainly say that the US indices painted a provocative picture last week, the inconsistency of risk-oriented assets remains an issue. While there will always be a leader in the broader trends of the global financial system, it is more likely that outliers that do not rally support for “fear” in asset and peer regions are more likely to. weaken. In other words, before I join a real trend, I want to see a broad “risk” movement.
Graph S&P 500, Global Equities, Emerging Markets ETFs and Other “Risk” Assets (Daily)
Graphic created by John Kicklighter with data from Bloomberg
What should we expect to stimulate the markets
As I look into the week ahead, there is a lot of risk of programmed events and three open fundamental themes that can easily generate volatility or take overall control with the right motivation. However, a combination of overlapping influences and the disruptions inherent in anticipation (such as awaiting Friday NFPs) can create difficulties in following a clear pearl in fundamental analysis. That said, a more rudimentary aspect of the market can step in to steer the financial system amid the confusion. The closures last week lived up to seasonal expectations. September marked the S&P 500’s first bearish close in 8 months, while the same benchmark slipped -2.2% on the week itself. It fits in well with the seasonal expectations I have referred to so often. If we were to track these same statistics in the future, the 40e week of the year shows a modest gain on average, while October is solidly positive for the index. Of course, these are averages with marked highs and lows over the years. However, market players find their advice in different areas.
Historical weekly S&P 500 chartPerformance
Graphic Created by John Kicklighter with data from Bloomberg
While lingering problems with the U.S. fiscal position and monetary policy data likely keep these two systemic issues at the forefront over the coming week, I want to raise unlimited risk that hasn’t been resolved even though it has decreased. out of the headlines. Chinese real estate developer Evergrande has missed several payments on its debt in recent weeks and is therefore in a grace period. So far the government has not solved the problem and made the clients / investors whole; but I still don’t believe the CCP will allow a systemic crisis. That said, the problems are not confined to a single company. Excessive lending and shadow banking exposure are deeper and more opaque issues. This is further compounded by energy shortages and government efforts to quell the problems of the Western world. Adding to the cornucopia of problems for Chinese assets and the yuan, the USTR (Office of the United States Trade Representative) announced Friday evening that the country was not living up to the Phase 1 trade deal. and that the government was considering action. It must be said that the USDCNH is one of my favorite opportunities for the fourth quarter.
Graph USDCNH (Daily)
Graphic created on TradingView platform
The US Budget Struggle and Monetary Policy
Apart from the persistent threats of Chinese contagion – which will necessarily intensify “out of the blue” given the opacity of the government – the ongoing battle to lift the US debt ceiling and the slowness of monetary policy extremely accommodating will remain irritating threats. For the United States’ financial situation, the government has managed to avoid a standstill with an interim bill that covers expenses until December 6e, but that doesn’t resolve the deficit cap that Treasury Secretary Yellen says will be reached by Oct. 16. I still think a default is a very low probability or even an accident, but a downgrade by a rating agency for the obvious should be seen as a possibility. The form of the fallout would be extreme, more than offsetting any relief sought in terms of likelihood.
Graph of the DXY dollar index overlaid on the 10-year U.S. yield (daily)
Graphic created on TradingView platform
A more active fundamental theme for the coming week given the items on the agenda is global monetary policy. I think it’s clear that the mainstream is starting to drift away from the extreme accommodation that has built up after the pandemic and only a serious threat on the horizon is likely to move us back from that normalization. Either way, I don’t think monetary policy supports the bulls much more. From the Fed and the ECB, there are some central bank speeches that could help us move on to the next meetings. For firm rate decisions, the RBA and RBNZ decisions are clearly marked on the calendar. The first debate about his tone and whether he wants to project a new cone mentality. The latter is expected to hike its benchmark rate by 25 basis points – although the Kiwi dollar seems unimpressed by the notion.
Relative position of the monetary policy of the main central banks
Graphic created by John Kicklighter
For the individual elements of event risk, there is a fairly dense schedule to consider. While there are many data points that need to be tracked, some indicators are worth a closer look than others. In particular, the United States and the dollar are the most beset. While there are sentiment and trade indicators as well as speeches from the Fed, my attention will be focused on September’s ISM Services Sector Report and Friday’s NFPs. The first is a strong proxy for US GDP (jobs and service output account for the vast majority of US employment and growth) and the second is one of the Fed’s dual mandates. Systemic impact is possible, but these updates are more powerful for the potential for volatility.
Risk calendar of major economic events
Calendar created by John Kicklighter