Dollar posts opposite breakouts with EURUSD and USDJPY, S&P 500 tiptoes among bears

S&P 500, Nasdaq 100, Dollar, EURUSD and USDJPY Talking Points

  • The business perspective: S&P 500 bearish below 4,000; AUDJPY bearish below 90; EURUSD bullish above 1.0650
  • Sentiment increasingly shifts from ‘ends’ to ‘means’ as traction on risk trends moves away from a specific fundamental motivation such as monetary policy
  • The S&P 500’s flirtation with an official “bear market” has far more potential to change the tone of the wider market than growth or interest rate speculation at this point.

The slow exsanguination of sentiment and capital market altitude

While I find it very useful to determine the most effective driver of the financial system as a whole – as it can help determine whether trends are long-lasting or temporary, subject or not to risks of imminent events – sometimes the end matters more than the means. While there are no serious indications of panic in the market slide, it appears to be increasingly guided by a bias that does not require a constant foothold in event risk. If we were in a spiral, there would be no doubt about the panic; but the rapid descent would also more likely find its bottom more quickly, similar to the pandemic crisis. Instead, the volatile and choppy decline we are experiencing may turn out to be more exaggerated and possibly more destructive to investor confidence. Friday 13and this go-around concludes that the S&P 500 closes on the official “bear market” designation (a -20% correction from all-time highs). If the headlines announce an official “bear” among the most prolific in global markets, the news – and the fear – will spread much further throughout the financial system.

Chart of the S&P 500 with 20-day SMA and 20-day rate of change (Daily)

Chart created on Tradingview platform

Sentiment isn’t just relegated to the direction provided by US equity indices – although they are my favorite shortcut to a widespread pearl in the market. When I look to get a solid assessment of the market’s risk appetite, it’s usually on a range of assets that are liquid but generally loosely linked by risk trends. We have been tracking the decline in global indices, emerging market assets, junk bonds and even Treasuries for weeks, if not months. A particularly notable outlier for me was the provocative rise in the FX carry trade. The same rapid escalation in interest rate forecasts that undermined growth and disrupted capital market metrics also offered compensation in the form of higher yields that stand out after more than a decade of environment. low or no performance. That said, there was a noticeable shift in the upward trajectory of the carry, but not an outright decline until the last session. Although the blow was wide, there was perhaps no more significant technical representation of this than the AUDJPY where the drop below 90 crossed a head and shoulders ‘neckline’.

Chart of AUDJPY with 100-day SMA and 1-day change rate (daily)

Dollar posts opposite breakouts with EURUSD and USDJPY, S&P 500 tiptoes among bears

Chart created on Tradingview platform

The intersection of risk appetite and safe-haven monetary policy

When it comes to a pair like AUDJPY or NZDJPY, the balance between appetite for higher yield spreads and fear of “risk” exposure is quite simple. Yet the calculation is significantly different when referring to something like USDJPY. This pair absolutely qualifies as a top level carry target given the Fed’s recent 50bps rate hike and expectations of two more 50bps hikes and then a steady series of moves. tightening of 25 basis points to end the year. With the BOJ making it clear that it will continue to pump stimulus to keep the Japanese 10-year government bond yield anchored, there is no more extreme contrast. And yet, there is still a sentimental connection here. Risk aversion is tugging at the carry appetite that’s fueling this pair, but there’s also the greenback’s role as a “safe haven of last resort” (a more extreme carry than the yen). With that said, we finally say that the pair is falling below its 20-day moving average for the first time in 43 trading days. The leveling of interest rate differentials has probably allowed the decline in sentiment to take over. Keep an eye out for this pair as it can be a good macro measure of priorities.

Graph of the (weekly)

Dollar posts opposite breakouts with EURUSD and USDJPY, S&P 500 tiptoes among bears

Chart created by John Kicklighter

Speaking of priorities, not all assessments can or should be made solely on price action. To gauge market sentiment, I like to look at benchmarks (like the S&P 500 or Nasdaq 100), examine deeper dives of correlation between financial assets, and gauge actual capital flows. However, there are other analyzes that can be done outside of the traditional technical and fundamental manual. One should follow the search habits of investors – and the world – for key aspects or terms that can give insight into the predisposition of the masses. Although admittedly a bit narrow in the terms used, below are the results of a search for common trader/investor jargon that has been used liberally in recent times. Not only has interest (i.e. fear) in the “bear market” recently hit its highest in months; but there is a very negative term far beyond the typical bullish battle cries like “buy the dip”, “diamond hands” and “HODL” (the crypto favorite). That in itself is not definitive in his assessment of our market, but it does add to the stormy picture.

Google Trends traffic for key business terms

Dollar posts opposite breakouts with EURUSD and USDJPY, S&P 500 tiptoes among bears

Calendar created by John Kicklighter

What to look for moving forward

While I believe this is a critical time for our threat assessment radars to be operational and on high alert, there are certainly specific issues that we should be paying closer attention to. As a metric and objective, the performance of the US dollar carries a lot of weight to my outlook. While the greenback’s fall against the yen discussed above is a significant tonal shift between interest rate forecasts and general sentiment, it remains to be seen how much fear we face as well. than the other factors driving this demand. If we were to look at the DXY Dollar Index (a trade-weighted measure), it actually rose on Thursday. A new high of 19 has been routine this week, but there has finally been some added pace in this particular session. For EURUSD, this would result in a breakout of a tight 9-day range which I was not expecting. This path of least resistance would have been a range-based retracement above 1.0635; but the drop below 1.0500 now puts us immediately on the doorstep of the lowest level for the world’s most liquid (and perhaps “asset”) cross dating back to early 2003.

Chart of EURUSD with 20 SMA, 8 day range and 8 day ATR (daily)

Dollar posts opposite breakouts with EURUSD and USDJPY, S&P 500 tiptoes among bears

Chart created on Tradingview platform

Overall, my real solution for this current phase of the market is to gauge the level of sentiment in the system. When fear or greed takes over, the data and events that arise are interpreted through a preconceived view of the world. I don’t believe we are in a self-perpetuating risk aversion where all good news is rendered moot and the need to bail out is paramount. However, we seem to be witnessing a very clear bias in which good news is ignored and negative news weighs heavily on key markets. If we tip into the official S&P 500 bear market, I think it can push us to the edge of deep fear – or maybe even push us.

Risk trend strength graph

Dollar posts opposite breakouts with EURUSD and USDJPY, S&P 500 tiptoes among bears

Chart created by John Kicklighter

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