Crosses of the Nasdaq 100, Yields, Dollar, AUDUSD, and Yen Points to Consider: After an extended US holiday weekend, liquidity has returned, but increasing market depth would not contribute to a stable trend for stocks like the S&P 500. While the Nasdaq 100 was one of the few significant stocks to show a ‘risk’ increase, Yen crosses displayed widespread ‘risk aversion.’ The June ISM service sector activity report fell dramatically, causing rate projections and Treasury rates to fall sharply…but not the US Dollar. The Reintroduction of Liquidity The Return of a Preference After the Holidays This session saw markets fill out following the extended holiday weekend in the United States. While the general sense of hesitation that has emerged as a structural limitation in recent months has persisted, there was some noticeable volatility in a few important markets this week that warrants our attention. My focus will be on the US Dollar, which has defied an unfavorable interest rate prediction, a few currencies where monetary policy normalization is already underway, and Yen crosses, where the current move toward risk aversion has been highest. Then there are the indices in the United States. On the one hand, the S&P 500 had its first bearish close in eight trading days, bringing an end to the stock market’s biggest bull run in months. Previous iterations of such rallies haven’t resulted in a significant reversal, so I won’t be reading too much into this one. The Nasdaq 100’s – and to a lesser extent its local peers’ – mid-day recovery, on the other hand, suggests that the ‘buy the dip’ mentality remains a powerful force. The tech-heavy index made a 1% intraday recovery from Tuesday’s lows, leaving a bigger lower wick. Chart of the S& Another important aspect of the NDX to consider is the size of its charge in comparison to its competitors. The performance of the Dow Jones Industrial Average relative to the ‘value’ Dow Jones Industrial Average registered a one percent rally as a measure of ‘growth’ (in the sense that stock investors use the term). This is the highest level for this relative indicator since mid-February, extending a near-critical technical breakdown two months earlier. This performance is much more accentuated when compared to other risky assets, such as global stocks, emerging market assets, carry trades, and so on. While some may argue that this is due to a declining demand for sheer momentum at work, I believe it is due to a devolving appetite for sheer momentum. The Nasdaq 100 to Dow Jones Ratio (Daily) chart was created using the Tradingview platform. The US growth reading has slowed, and the rate forecast has slowed as well. The release of the ISM’s service sectory activity report for June was the top event risk with the US markets back online this past session. The United States has the world’s largest economy, with its service sector accounting for the majority of its output. As a result, this indicator has a significant impact on the overall economic health of the crucial economy, where the official 2Q GDP data will not be available for some weeks. The service sector reading dropped significantly quicker than predicted, dropping from 64 to 60.1, following in the footsteps of the manufacturing miss this week (the economist forecast was for 63.5). The employment reading dipped into contractionary territory (to 49.3), and the prices paid component declined 1.1 points to 79.5, which doesn’t dampen the upbeat attitude too much. ISM Service and Manufacturing Activity Overlayed on S&P 500 Chart (Monthly) Chart ISM data was used to create this chart by John Kicklighter. For those assets that are extremely sensitive to interest rate expectations, the inflation component of the service sector activity report is particularly relevant. Despite the fact that there is still a significant charge for the Federal Reserve to weigh in its policy mix moving forward, there is at least some reprieve from the most pressing sense that a rise must happen soon or risk entrenching worrisome inflation. As a result, Fed Funds futures implied rate expectations (the difference between the December 2022 contract and the active nearby contract) showed a further decline in prediction to 18.5 basis points, from 25 basis points (a full hike) late last week. As a result, the 10-year Treasury yield fell below 1.40, returning to levels seen in late February. Despite this, the trade-weighted ICE Dollar Index (DXY) ended the day with a significant gain. This could be due to a general expectation of global monetary policy normalization or a sudden increase in sensitivity to safe haven demand, but it is exceptional. Recently, the 20-day correlation between the rate forecast until the end of the year and the DXY has been extremely strong. Through 2022, a chart of the DXY Dollar Index with the US 10-Year Yield and the Implied Fed Rate Hike (Daily) Tradingview platform was used to create this chart. Volatility and Rate Speculation Looking more closely at global monetary policy, there has been a noticeable movement from outside the US that may offer the Federal Reserve more discretion in moving forward with ‘normalization’ without causing the same kind of panic that occurred after the taper announcement in 2013. The Bank of Canada reduced its monthly asset purchases in April, while a number of emerging market central banks (in Brazil, Mexico, and elsewhere) raised rates in June. The Reserve Bank of Australia (RBA), while dovish in its rate decision Tuesday morning, made it apparent that it would lower its weekly asset purchases (from A$5 billion to A$4 billion) beginning in September, adding to the momentum. These are small but measurable steps that add up. Rather of being regarded as going it alone and creating a value contrast, the Fed could simply be a part of a bigger global trend. We’ll have to wait and watch how the market reacts to this in the future. Graph of Major Central Banks’ Relative Monetary Policy Positions John Kicklighter designed the graph. The Australian Dollar launched an aggressive attempt early Tuesday to rise back into the AUDUSD head-and-shoulders congestion pattern that lasted virtually the entire year of 2021, despite the RBA’s dovish reassurance. However, that attempt fizzled out, leaving us with a massive upper tail or wick. That’s an intraday reversal signal that many technical traders will notice and pay attention to, especially considering the H&S’s ‘neckline,’ which we’re still arguing. The USD’s rally aided the turnaround in this pair in particular, although the Aussie’s decline was measured in a variety of other crosses. I’d also recommend looking at currency pairs like AUDCAD and EURAUD. Chart created on Tradingview Platform of the AUDUSD with 200-Day Moving Averages (Daily). USDJPY was another Dollar-based major that stood out. The strength of the dollar was not obvious in this cross, which could lend the safe haven appeal of other pairs like EURUSD more weight. In summary, the Yen crosses have had a pretty fruitful session this past week. Some currencies, such as the EURJPY, are seeking to break through support that dates back to the epidemic reversal low. These pairs are either threatening a reversal or seeking to persuade us with recent technical advancements, but given our general market limits, is that practical? This week, I’ll be keeping a close eye on these crossings. On the Tradingview Platform, a chart of the USDJPY with a 100-day moving average and COT Net Speculative Positioning (Daily) was created./n
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