S&P 500, Dow, China, USDBRL, AUDCAD and dollar talking points

  • The rally that expanded beyond the S&P 500 to encompass broader risk markets in the first 48 hours of the week quickly slowed as highs returned in sight.
  • The risk of a scheduled event is slim over the next 24 hours as probable abstract themes have increasing negative risk potential – such as China
  • Monetary policy remains a productive theme after three rate decisions in last session, but anticipation of the Fed’s move next week could go against the trends

A sharp deceleration in risk trends

The impressive rally in risk assets like the S&P 500 during the first two trading days of the week came to a halt in the last session. For those who follow the American clues, this loss of traction seems either very appropriate or incredibly frustrating. The sudden change in speed of the S&P 500 can be seen in the 1-day to 5-day ATR report below (measures of volatility from “average true range”) and caused us to drift uncomfortably just short of the record high. of 4,705 closed on November 18.e and the intraday high of 4,683 on November 22sd. Notably, the Nasdaq 100 is further from its own highs and instead sits in the previous range of the “shoulder line” around 16,450 and the Dow is furthest from its top among its cousins ​​(- 2.3 percent). The same lack of progress is found in other sentiment measures I monitor, including global equities, emerging market assets, junk bonds and carry trade.

Graphic S&P 500 with 100-day SMA with 5-day ATR and 1-day to 5-day ATR ratio (Daily)

Graphic created on TradingView platform

The change in tempo from strong bullish trend to stagnation adapts to seasonal conditions where liquidity and volatility tend to slow down throughout the month of December. Perhaps more active braking is the anticipation associated with the last major event expected until the end of the year: the FOMC’s rate decision next Wednesday. To maintain a trend – up or down – I think it takes fundamental fuel to keep the fires going. These likely opportunities to pursue bullish interests appear to have played out or are fading otherwise. For example, the recent advance seems a rally of relief partly associated with reports that the omicron variant may not be as deadly as feared as legislation passed to prevent a US default scenario. next week (December 15e) has been the common expectation all along.

On the flip side, there are lingering issues that could trigger sudden problems for the risk markets. In particular, China’s struggle with Evergrande and pressure to default from major real estate developers pose a potentially serious risk as the data on the situation remains opaque at best and attention has evaporated. Not only are the headlines fewer and more widely spaced, but benchmarks like the Shanghai Composite have moved higher and the Chinese yuan has hit three-and-a-half-year highs (USDCNH low).

USDCNH Chart (Daily)

S&P 500 and risk rally decelerate, central banks are mixed on volatility, China is a threat

Graphic created on TradingView platform

Central bank actions generate unexpected activity

There were three major rate decisions from the central bank in the last session. The most notable of these updates would come from the Brazilian political authority, which announced a 150 basis point hike to 9.25%. This is a serious improvement over the benchmark and genuinely reinforces its appeal as a carry currency, but Real’s response didn’t seem to recognize the swell. While the USDBRL recorded an impressive -1.4% decline during the session – only the largest single-day decline in four weeks – most of the move occurred before the announcement of the real politics. Why the disconnection? The market had long awaited the movement of this already hawkish group. Notably, the BCB tightened its policy several times this year, with the currency generally falling (rising USDBRL). Although the income associated with the currency has increased, the perceived risk around the economy and its assets has outweighed the lure.

USDBRL Chart (Daily)

S&P 500 and risk rally decelerate, central banks are mixed on volatility, China is a threat

Graphic created on TradingView platform

Apart from the policy of the Reserve Bank of India (RBI) and the maintenance of forecasts, the Bank of Canada (BOC) decision turned out to be the most progressive in the market of the three updates. Here we have witnessed the exact opposite scenario to the response of BCB and Real. The Canadian central bank kept its benchmark unchanged at 0.25% and its forecast implying a first rate hike towards the end of the first quarter or the beginning of the second quarter. There isn’t much change in this result, but the market had built a seriously hawkish forecast through Canadian rates and the loonie in the previous months. Therefore, the status quo does not exactly support the bullish stretch. The Canadian 2-year yield fell 7 basis points (-5.8%) from a 21-month high. In turn, the Loonie backed off. Of course, for pairs like USDCAD and CADJPY where there were fundamental cross influences, the impact was lessened. But for AUDCAD where the RBA response was moderately bullish, the impact was magnified.

AUDCAD chart overlaid with 2-year AU-CA yield spread, 20-day correl and 1-day ROC (daily)

S&P 500 and risk rally decelerate, central banks are mixed on volatility, China is a threat

Graphic created on TradingView platform

Strong dollar reversal potential but lacks motivation

While there is an ongoing interest in US monetary policy, the growth and health of the capital market; the US dollar did not generate much traction. In a twist, the greenback’s shift to the role of a carry currency in recent times has seen the currency struggle to head against its typical safe-haven moorings. In the last session, the US 2-year yield (as an indicator of the Fed’s rate forecast) edged down from its pre-pandemic high, but only modestly. Nonetheless, the dollar posted its most definitive move of the month so far in a technical breakout to the downside in an already permeable wedge. The slide does not translate into a significant reversal for EURUSD yet, but there are other pairs that are poised to capitalize on a bearish reversal of the USD, such as GBPUSD, AUDUSD and USDDCAD. . With the decision of the FOMC on 15e and the US CPI on Friday, the potential could stay the same until the catalysts hit.

Graph DXY with 50-day moving average overlaid on the 2-year Treasury yield (Daily)

S&P 500 and risk rally decelerate, central banks are mixed on volatility, China is a threat

Graphic created on TradingView platform

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