SPY S&P 500 ETF, QQQ Nasdaq 100 ETF, EURUSD, GBPUSD and USDCAD Talking Points
- The risk appetite reversal that began in US indices Monday afternoon broadened but slowed this past session with the Nasdaq leading a BTD-style rebound
- Focus on US rate forecasting ebbed this past session on Powell testimony, but it will focus again with the release of the US CPI report
- Among the Dollar crosses with staged technical potential, I prefer the extreme congestion of EURUSD to the active breaks from GBPUSD and USDCAD
The Risk Appetite Rebound Broadens and Cools
We are heading into Wednesday trade with a broader participation in the ‘risk on’ wave, but a throttle to the tempo of the top performing US indices as their speculative exclusivity evaporates. As appealing as the charge may be, remember that the markets are still meaningfully responsive to monetary policy speculation; and the upcoming US session has one of the most important data points for rate forecasting: the monthly CPI release. Before diving into the inflation report, it is important to take the temperature of the capital markets. As I mentioned above, there were far more assets participating in the climb this past session as compared to Monday. In addition to global equities, there were meaningful rallies for the emerging markets (EEM ETF up 2.3 percent) and junk bonds (HYG up 0.5 percent) with some more moderate confirmation from Bitcoin (up 2 percent) and carry trade (NZDJPY rose 35 pips). While there were larger moves on the day, the most impressive in my view was the SPDR S&P 500 ETF advance. The momentum is less important to me than the technical observation of the trend channel floor, which conformed to market conditions more aligned to range and a fundamental break in the monetary policy clouds.
Chart of SPY S&P 500 ETF with 100-Day SMA and Volume and 100-Day Disparity Index (Daily)
Chart Created on Tradingview Platform
As ‘clean’ as the reversal from the SPY was, the backdrop still does not look like it has shifted meaningfully to support persistent trends. Instead, it looks like the lack of conviction in last week’s downdraft stirred volatility in the short-term reversal. There are a few names for this kind of charge: BTD (buy the dip); FOMO (fear of missing out) and TINA (there is no alternative). These are narrow speculative motivations that spur action in the absence of a more tangible fundamental drive to build up risk exposure. While there wasn’t a particularly impressive rally for the less liquid but more targeted speculative benchmarks from 2021 (eg Dogecoin, meme stocks, SPACs), there was a notable outperformance from the QQQ Nasdaq 100 ETF. The extent of its slide – into a technical breakdown less than two days ago – offered up a more severe discount for the opportunists to jump on. I will…
Read More: Dollar Conviction Better Signaled by EURUSD Windup Than GBPUSD and USDCAD