S&P 500 Extends Tumble on ‘Good Data’, EURUSD Feels Rate Competition, EM GDP Ahead

S&P 500, Risk Trends, Liquidity, EURUSD and USDTRY Talking Points:

  • The Market Perspective: S&P 500 Bearish Below 4,100; USDJPY Bearish Below 134.00
  • Another slide in the S&P 500 this past session reflects a progression in risk trends that is not exactly supported by the conviction of robust sentiment trends
  • EURUSD is a must watch benchmark as the ECB and Fed talk rate paths, but recession fears are a particularly prominent theme with Chinese PMIs and EM GDP due

And the S&P 500 Slides Back Below its 50-Day SMA

There has been some remarkably traction behind the slide in ‘risk leaning’ assets this past week. The drop is particularly remarkable given that it overrides the liquidity restrictions with which we continue to struggle, relying on a serious of fresh fundamental ‘disappointments’ to urge the markets along the course of ‘risk off’. What was particularly interesting this past session was how the benchmark sentiment measures responded to supposedly strong data. Both the US consumer sentiment survey and labor market reports released Tuesday were offering favorable economic readings, yet the S&P 500 lead other sentiment measures with its own -1.1 percent slide. For context, that wasn’t the biggest drop in any meaningful time period, but it did drop us back below the 50-day moving average which stood as a tipping point for conviction last month. Oh, how the technical mighty have fallen.

Chart of S&P 500 with 50 SMA, Volume and 50-Day Disparity Index (Daily)

Chart Created on Tradingview Platform

One of the most important aspects in evaluating the depth of conviction is to find the systemic root for the motivation. You can track a fundamental catalyst, but tracking the breadth of its influence can find clarity in an otherwise abstract assessment. Looking to the ‘risk’ spectrum I track, the slide up through Monday was a fairly broad move. Global indices, emerging market and junk bonds were very notably pressured lower. Yet, the contrast offered by carry trade and commodities suggest that inflation and international capital flow restrictions are still capable overriding factors. I’ll be watching the sentiment ebb and flow moving forward to see where the conviction lies.

Year-Over-Year Risk Asset Performance (Daily)

Chart Created by John Kicklighter

Liquidity Versus Event Risk

I remain a firm believer in the restrictive element to the markets found in the seasonal liquidity drain. There is an expected swell in market participation over the coming weeks after pass the artificial barrier of the US Labor Day holiday. Yet, through this interim period, we have experienced some remarkable volatility. I believe the thinned liquidity in the financial system these past months – just look at the open interest in S&P 500 emini futures below – will lay the bed for serious disruption. Thin volume tends to amplify short-term volatility influences, and we are facing some of the most ramped up conditions in well over 10 years.

Chart of S&P 500 Overlaid with Emini Futures Open Interest (Weekly)

Chart Created by John Kicklighter

To override the numbing effects of seasonal norms, the best sparks are to be found on the economic calendar. The past session, the US docket released a bigger than expected improvement in consumer sentiment via the Conference Board’s survey results for August. Funneling an improvement in both expectations and current conditions lead to a jump in the headline reading rising from 95.3 to 103.2. Adding to that favorable turn, the JOLTs quits figures slowed to 4.179 million Americans and openings rose to 11.239 million. If you are looing for market movement heading into the second half of the week one would do well to mind the potentially explosive backdrop.

Global Calendar of Top Macro Economic Event Risk for 48 Hours

Calendar Created by John Kicklighter

From the Most Liquid Dollar Pairs to One of the Most Volatility

At the top of my watch list moving forward is EURUSD. Some trades may look at the chop around parity and think it a statement on the balance the two most liquid currencies have found on a fundamental value – but it is just as likely a by-productive of their respective, enormous reach. As I pointed out recently, the benchmark FX pair has not moved far despite – or perhaps because of – the rapid increase in interest rate speculation. That is likely because there is a jump in rate forecasts on both sides, but it is the ECB that is seen to be performing a very serious reversal of course. With the recent rebound in German-to-US rates, it will be worth watching how much of the speculative rank will embrace the nuance of fundamentals moving forward.

Chart of EURUSD with 50-Day SMA with German-US 2-Year Yield Spread, 20-Day Correlation (Daily)

Chart Created on Tradingview Platform

As we monitor the balance of power for the Dollar-based majors, I am also keeping close tabs on the economic and financial health of the largest emerging market economies. The full health of the global economy is unlikely to flourish if only supported by the likes of the US and its largest counterparts. It is worth tracking the general perceived health of the major emerging market set. Given the surge in US inflation, loans rates and local currency advantage, there are serious concerns/questions being directed our way. If the Chinese PMI data, Turkish and GDP 2Q GDP reports are tap Wednesday, be mindful of the already deflated levels of the currencies and anticipate that subsequent volatility to be potentially larger.

Chart of the USDTRY with 50-Day SMA (Daily)

Chart Created on Tradingview Platform

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