The S&P 500 is probably bouncing back on liquidity, but what about the pullback in the dollar?

Talking Points on the S&P 500, Liquidity, GDP, Chinese Dollar and EURCAD

  • The business perspective: S&P 500 bearish below 4,000; GBPCAD Bullish above 1.6000; EURUSD bullish above 1.0650
  • Liquidity likely contributed to the rebound in “risk assets” like the S&P 500, so can markets sustain their ascent into the new trading week?
  • A dense economic record will respond to lingering pressures behind troubled growth forecasts and relentless rate forecasts both weighing on markets

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A real recovery for the S&P 500 or a temporary by-product of the holiday trade?

The S&P 500 – my favorite measure of flawed, one-eye “risk” measures – is looking to halt a painful slide. A positive close to the week ends a 7-week fall for the US index, the worst consecutive fall for the benchmark in an 8-week period through March 2001. While this is statistically significant, it enough to end a significant one-way streak decline does not indicate that a full reversal is underway. In fact, given the fundamental context of the evolution of the economic and financial system, the revival of a bull market seems like an unlikely path. Looking more broadly at the financial system, a recent rebound is visible across all regions and asset types. This is just as likely a relief move in a broader downtrend than the top US stock index. The question is: how long will the corrective phase last?

Chart of the S&P 500 with 20-day SMA, daily wicks and 20-day ATR (Daily)

Chart created on Tradingview Platform

By delaying the recovery of the market, it is logical that we are witnessing a corrective drift with a known context of thinned liquidity. We’re heading into an extended holiday weekend anchored by the US Memorial Day shutdown on Monday. While there were updates around the two main systemic fundamental themes last week, it was not intense enough to sustain the momentum against pullbacks from market participants. Over a longer period, we have seen a leakage of open interest from professional and retail traders. The latter is more casual in nature and has a credo of “buying the dip” and “diamond hands”, but they lack the depth and therefore influence of the former. For professional interests, we’ve seen open interest in emini S&P 500 futures fall to the lowest levels since 2008. Sticking to historical expectations, the month of June we enter on Wednesday has averaged the second worst performance of the calendar year for the same index. view historical trends.

Chart of the VIX Volatility Index overlaid with S&P 500 Open Interest (Daily)

The rebound in the S&P 500 is probably linked to liquidity, but what about the decline in the dollar?

Chart created by John Kicklighter with data from S&P

A return of liquidity and a return of heavy event risk

With the return of market depth over the coming week, we will also face a significant increase in timed event risk. The list of upcoming “high” importance data and events is a multiple of what we had to work with last week. More catalysts doesn’t necessarily mean it will fuel a bearish view, but the underlying trend has fueled a view of deteriorating conditions for the past few weeks. It is likely that the most recent updates amplify the problem. Overall, events with the greatest global reach represent the greatest potential for market impact. In particular, the status of the United States, China and the Eurozone is my top priority.

Calendar of major world economic events

The rebound in the S&P 500 is probably linked to liquidity, but what about the decline in the dollar?

Calendar created by John Kicklighter

At the convergence of most major fundamental themes is the US dollar. The world’s most liquid currency reflects the economic health of the largest economy, records the course of the Fed’s monetary policy against its most important global counterparts, reflects the weight of key commodity prices in an environment of high inflationary pressures for four decades and can also act as a main safe haven when speculative winds are particularly strong. However, having this kind of fundamental influence can also make it difficult to discern what is driving the market. The DXY Dollar Index recorded a second drop of the week after a six-week straight leg of gain through May 13and peak. Take notes: The White House warned of the changing economy, commodity prices moderated, risk assets rebounded as previously reported, and Fed rate forecasts eased. These themes tend to overlap, but it can be a “chicken and egg” consideration in determining initial motivation. Given the correlation between the currency’s performance and the Fed’s rate forecast derived from fed funds futures (or the 2-year Treasury yield), I’ll look at that first and last. After a few months of steadily rising rate speculation, we finally seem to be feeling some relief from the pressure. The likelihood of a fourth rate hike of 50 basis points in September is now considered unlikely. After the PCE deflator, I’ll be watching for final comments from Fed speakers over the coming week as they try to get their last message across before the media blackout period before June 15th.and The FOMC decision is made.

DXY Dollar Index with 50-day SMA overlay with implied rate change from May to September (daily)

The rebound in the S&P 500 is probably linked to liquidity, but what about the decline in the dollar?

Chart created on Tradingview Platform

Market influence across major themes

Focusing not on individual assets or regions, but rather on the main motivations, I think it is important to closely monitor the overall health of economic activity and the course of central bank tightening. On economic fragility, we have received all kinds of warnings of a troubled future. The IMF had already lowered its forecast in the spring session update, but its director warned that the outlook has already darkened further in recent weeks. There aren’t many official growth updates from the largest developed nations, but there are some critical metrics to watch. The ISM’s Services Sector Activity Report, the Conference Board’s Consumer Confidence Survey and the May NFPs provide a solid snapshot of the United States. For the world’s second largest economy, the Chinese government is due to release its May PMIs (composite, manufacturing, services) – and the previous month’s update already reflected serious concerns over covid lockdowns. For more isolated influence, industrious traders should also keep an eye on Q1 GDP updates from Australia, Canada, Switzerland, Brazil, India and Turkey.

Chart of composite PMI figures for major economies (monthly)

The rebound in the S&P 500 is probably linked to liquidity, but what about the decline in the dollar?

Chart created by John Kicklighter with data from S&P Global

While growth is still a wide-open avenue of speculation and subject to change with each new element of risk, I consider that interest rate speculation still carries significant weight when it comes to influencing currents deepest global markets. The market has been hypervigilant to changes in monetary policy trends and there is a very active effort to assess any perceived statistical changes in the probabilities of the pace of rate hikes, but circumstances continue to evolve with market forecasts. . In addition to the Fed speech and the Eurozone CPI, there are a series of inflation statistics for small economies. This is fodder for relative movements in exchange rates, but it can also bundle up or down egg risk trends. For the official political decision, the Bank of Canada is the undisputed champion of scheduled events. The group is expected to raise its benchmark rate another 50 basis points, and the Canadian dollar has risen significantly in recent months to suggest that. This loonie seems to have built up a considerable premium and is very similar to its American counterpart, which is now in retreat. If the BOC throws cold water on expectations of subsequent 50 basis point moves, will the CAD succumb to the same fate in the near term?

Chart of the EURCAD overlaid with the 2-year yield differential between Germany and Canada (daily)

The rebound in the S&P 500 is probably linked to liquidity, but what about the decline in the dollar?

Chart created on Tradingview Platform

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