S&P 500 Leads Three-Day Charge While Market Awaits Biden-Xi Talk on Russia

S&P 500 ETF, FOMC, Russia, Interest Rates, USDJPY and CADJPY Talking Points

• The Trade Perspective: Pairing Dow Bullish to Nasdaq 100 Bearish; USDJPY Bearish Below 117.50; EURUSD Bullish above 1.1125
• Risk assets have extended their fundamental-defying rallies with the S&P 500 symbolically leading the way with a 5.7 percent, three-day rally
• Through Friday, monetary policy will remain a principal theme as will the unsteady course of the Russian invasion of Ukraine, but be mindful of scheduled data as well

Risk Trends Defy the Fundamental Odds

There are some very prominent and serious fundamental headwinds working against a bullish climb in the capital markets, but that doesn’t seem to be putting off the benchmark ‘risk assets’. Through Thursday’s session, the major US indices have put in for a third consecutive day of a one percent or greater rally. We haven’t seen that kind of bullish run for the likes of the S&P 500 since November 2020. If you wanted to extrapolate from that historical scenario’s performance a guild for where we head next, it would be worth noting that the market struggled for a day, earned a strong bullish gap higher the subsequent session and then ultimately entered a slow but persistent bull trend thereafter. It is tempting to fall back on historical examples of statistical abnormalities and presume a repeat of history, but rarely does that hold water. In late 2020, the charge took place after a wide range rather than the deeper retracement we have seen through 2022. What’s more, the fundamental circumstances draw far more scrutiny of what lies ahead. Between the Fed’s motivation of a global fight against inflation – and more hazard – as well as the unresolved situation in Ukriane; blind confidence could prove very costly going forward.

Chart of SPY S&P 500 ETF with 100-Day Mov Avg with 3-Day Rate of Change (Daily)

Chart Created on Tradingview Platform

In the span of the three trading days through Thursday, the benchmark S&P 500 covered an impressive 5.7 percent rally. That is the strongest run in the same time frame (November 2020) and puts us in contact with a technical boundaries that can seriously change the assessment of our current bearings. An extended rally in equities and other risk benchmarks seems seriously fraught considering the easy recognition of the world’s largest central banks rolling back their respective safety nets at the same time Russia’s invasion of Ukraine persists with little in the way of tangible improvement in geopolitical tensions. It is against that backdrop that I ran the following poll. The survey was meant to garner forecasts for ‘market’ performance trying to establish a ‘breakout’, ‘breakdown’ and range environment. The significant majority of respondents expected a break on a wide 275 point range, but I consider moderation-to-the-mean a powerful force for risk taking.

Poll: Where Will S&P 500 End the Week

Poll from twitter.com, @JohnKicklighter

Monetary Policy is Shaking Things Up

A day after the Federal Reserve rate decision (in which they hiked 25bps and warned a steady rise was ahead), we find speculative appetite continues to hold up. It is certainly possible for markets to banish traditional fundamental matters to chase a more complimentary theme, but the abstract good will only lasts for so long. What is driving the S&P 500 and other risk metrics to their respective runs? I would say ‘relief rallies’ associated to monetary policy and the war in Ukraine are possible outlets for the anxious bulls, but that is far from convincing for a sustainable trend in my book. Having better definition of the risks ahead only goes so far in fueling recovery. The Fed’s own forecasts now price in a rate hike at every meeting through the end of the year. That was presumed by the markets, but to see the central bank confirm such an aggressive pace does little to suggest there is untapped potential for the true believes in the market. Rate forecasts project six additional hikes going forward which is exactly in line with the market’s view. I see that as a liability to risk trends, but it doesn’t need to reflect opportunity for the Dollar.

Chart of DXY Dollar Index with 100-Day SMA Overlaid with Implied 2022 Fed Rate Hikes (Daily)

Chart Created on Tradingview Platform

One of the most important aspects on monetary policy as a fundamental driver for the FX market is that those views are relative in nature. After the Fed’s hike Wednesday afternoon (Washington time), there was the perception of ‘precedence’ that other major groups could follow to pursue aggressive ‘nomalization’ paths of their own – whether the authorities made an effort to signal that possibility or not. If the world’s largest central bank is comfortable with hiking rates and is ready to ease its stimulus program, why wouldn’t other authorities conform – or lead the US move? The RBNZ, BOC and RBA are competing heavily with the Dollar for carry potential. The outlier may be the Bank of England which deliberated this past session. The BOE hiked rates for the third consecutive meeting, but made clear that subsequent increases would need to pass fundamental skepticism among members. That is perhaps why the Sterling dropped across the board – even against the Euro, which is one of the most exhausting doves. Keep a close eye on what the central banks are forecasting to gauge how much the markets have discounted.

Chart of Relative Monetary Policy of the Major Central Banks

Chart Created by John Kicklighter

Top Event Risk and Markets

Looking over the final 24 hours of this tumultuous trading week, there is noticeable step down in market moving potential. There are no FOMC meeting-level events on tap to close the week, but there are a range of US central bank members that are likely eager to clarify their own views on monetary policy. Outside of US rate forecasting, there are limited fundamental matters of great consequence. I will be watching the Bank of Japan (BOJ) and Russian Central Bank rate decisions closely. The former is arguably the developed world’s most dovish member. The latter is more insight into the situation in Russia. The central bank hiked rates to 20 percent, but subsequent changes will center upon maintaining financial liquidity.

Calendar of Major Economic Events

Calendar Created by John Kicklighter

For markets that best reflect fundamental themes and potential, USDJPY is currently at the top of my list. Statically speaking, the pair ended a 8-day run, which matched the strongest rallies since April 2011. Between the consideration of interest rate expectations, the intensity of safe haven status and the ebb in commodity prices from this past week’s peak, the appeal of a pair like this is seriously unpredictable. I do see a strong probability that USDJPY could roll into a reversal after an astounding run, but that doesn’t have to happen. For my risk tolerance, it is better to look for a confirmation move – a technical breakdown below a trailing support would perhaps be best served.

Chart of USDJPY with 100 and 200-Day Moving Average and Consecutive Candle Count (Daily)

Chart Created on Tradingview Platform

In general, the Yen crosses should be watched closely over the immediate future. USDJPY isn’t the only pair moving with extreme volatility. CADJPY is just such a Dollar alternative with just as remarkable a range. Helped along by data and the retreat in risk considerations, this cross seemed like a questionable performer. For scheduled event risk specifically for this period.

Chart of CADJPY and Consecutive Candle Count (Daily)

Chart Created on Tradingview Platform