S&P 500 Nears Official Bear Market, EURUSD Breakout Late

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

  • The business perspective: S&P 500 bearish below 4,000; AUDJPY bearish below 90; EURUSD bullish above 1.0650
  • Another effort to mount a rally by the S&P 500 and Nasdaq 100 – among other “risk assets” – fell apart during the US session, ultimately leaving us worse off.
  • Rate speculation remains a driving fundamental theme with the slight drop in the US CPI offering no real relief, but it may be enough to push the EURUSD into a turn.

Blows will continue until morale improves

There is a pattern emerging, particularly during the US trading session, that sees fledgling efforts to muster a recovery rally crumble. It can happen maybe once or twice without developing a permanent scar on investor sentiment, but there have been many iterations of this troubling “false start and meltdown” just in the past week. We risk creating a long-lasting and dominant sense of fear that dictates the prevailing market bias. At the moment, the damage of the last session was already quite heavy. A hesitation through the opening hours of the New York session for the main US indices extended the possibility of traction a little further than what we had seen the day before. That said, confidence eventually ended in the same dismal spiral at the end of the day. Taking stock of the performance, my favorite ‘imperfect’ sentiment measures, the S&P 500, were up 1.2% from Tuesday’s close, but the effort eventually fell apart to end the day with an overall loss of -1.7% from the previous trading session. . This would eventually drive the index to a fresh 14-month low and put us within 2.8% of a technical “bear market” (defined as a 20% correction from systemic highs).

Chart of the S&P 500 with 20-day SMA, 20-day ATR and ‘Wicks’ (Daily)

Chart created on Tradingview platform

In a significantly more vulnerable position, the Nasdaq 100 was characteristically recording a bigger loss that day. Through Wednesday’s close, the tech index fell another -3.1%. Against the ‘value’-based Dow Jones Industrial Average, the ‘growth’ index continued to slide from its record high Dot-com boom/bust on Dec. 1st. This speaks to the reversal in confidence of the once best performing coins in the market. More broadly, the Nasdaq 100 is set to shed -5.7% on the week – already the second worst in a week since the pandemic, two days before the books closed. For tempo, it’s on pace with the sixth straight week of losses for this index which is the longest fall since November 2012. And, for general reference, we’re about to retrace halfway through the post-pandemic rally. from March 2020 to November. 2021, at 11,768. Keep an eye out for this unflattering benchmark.

Chart of the Nasdaq 100 with 20-week moving average and number of consecutive candles (weekly)

S&P 500 Nears Official Bear Market, EURUSD Breakout Late

Chart created on Tradingview platform

Monetary policy concerns continue to guide the ship

As for the fundamental motivation, it seems that monetary policy and its main provocateur (inflation) continue to drive the markets. The most important figure of the last session was US consumer inflation for the month of April. Initially, the drop in headline inflation and core inflation from March’s multi-decade highs fueled growing speculation among investors. optimists that the extreme price spike has peaked. That said, the modest slip in the title (up to 8.3%) and core inflation (at 6.2%) was weaker than expected. More importantly, it’s hardly a relief at all in practical terms. That said, it’s not really surprising that the financial market relief was fleeting, but there was a bit more breathing room for yields and the dollar. These data hardly call into question the forecasts given by the FOMC itself for increases of 50 basis points in June and July and movements of 25 basis points to close the year. On the other hand, it might soften the argument for a 75 basis point hike anytime this year or 50 basis point moves beyond July. Keeping an eye on the DXY Dollar Index, exploration for new 19-year highs continues, but little progress is being made.

Chart of the DXY Dollar Index with a 20-week moving average overlaid on the US 20-year yield (weekly)

S&P 500 Nears Official Bear Market, EURUSD Breakout Late

Chart created by John Kicklighter

In general, I see the dollar as a currency inclined. Establishing an extended period of congestion while reaching near two-decade highs deserves careful consideration. It is unusual to see a sudden slowing in momentum alongside a strict consolidation – more often than not there are corrections even in the prevailing trends. As such, I consider the risk of evasion associated with this congestion to be particularly high. Finding an outlet for this view should consider counterparts. There are good arguments to be made for the USDJPY, but this is more of a “risk” factor, while the GBPUSD should benefit from the risk of an upcoming event for the British Pound. EURUSD is a more immediate candidate on the basis of monetary policy. An extremely narrow 9-day range looks like a sharp breakout risk as the pair is poised to hit its own multi-decade lows around 1.0400/0350. It would seem natural that the “hawkish Fed” and the “conciliatory ECB” set the course, but there are already a lot of contrasts in this crossover. During the last session, ECB President Lagarde appeared to shore up expectations for her group’s first hike in years as early as July. While this doesn’t noticeably close the gap with the Fed’s hawkish pace, it is starting to turn expectations into a relentless deviation. Keep an eye on 1.0635.

Chart of EURUSD with 20 and 100 day SMA, 8 day range and 8 day ATR (daily)

S&P 500 Nears Official Bear Market, EURUSD Breakout Late

Chart created on Tradingview platform

Key Upcoming Event Risks: US PPI, UK GDP and Mexico Rate Decision

As far as foreground event risk goes, the last 48 hours of the trading week doesn’t offer a great list of concentrated market moves. That said, there are some legitimate sparks that fundamental traders should watch out for. On US monetary policy, we’ll be following Wednesday’s CPI release with the Upstream Producer Inflation (PPI) update for the past month at 12:30 GMT. If this data doesn’t echo – or prolong – the relief suggested by the consumer report, it wouldn’t be surprising to see the Fed’s more aggressive views of rate speculation resume once again. If we are looking for a series of more concentrated event risks, the UK data to be released will carry significant weight. As I look at industrial production, trade balance and construction activity; my main focus is GDP for March and 1Q. After the BOE’s own warning that growth could actually contract by the end of the year, the NIESR’s April GDP forecast might be the best list overall. It will be interesting to see what this data does in traditional fundamental valuation as well as rate speculation.

Calendar of major economic events

S&P 500 Nears Official Bear Market, EURUSD Breakout Late

Calendar created by John Kicklighter

Speaking of rate speculation, the sharpest update on the main theme I’m watching (monetary policy) is the Mexican central bank’s rate decision. On the heels of the Fed’s half-percent rate hike last week, its southern neighbor is expected to raise its own benchmark by 50 basis points. It wouldn’t exactly be out of place for this group and that’s no surprise given the attachment to the United States. That said, the contrasts that may arise from this monetary and economic relationship may indicate how other countries with ties to the world’s biggest player will respond to its aggressive acceleration.

Chart of USDMXN with 200-day SMA (Daily)

S&P 500 Nears Official Bear Market, EURUSD Breakout Late

Chart created on Tradingview platform

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