S&P 500 Run Looks to Earnings, Dollar Tumble to Rate Forecasts, Bitcoin to Market Stability

Nasdaq 100, Dow, Bitcoin, Event Risk and Dollar Talking Points:

• The Market Perspective: USDJPY Bearish Below 146; EURUSD Bullish Above 1.0000; Gold Bearish Below 1,680
• Volatility was wide spread this past week, but the charge from the US CPI and crypto market turmoil doesn’t necessarily have to carry over to the new trading week
• There is plenty of event risk on tap next week to potentially fuel further activity including: inflation reports; 3Q GDP updates; the UK financial statement and consumer share earnings

S&P 500 and Nasdaq 100 Post-CPI Surge Eased Off

The markets experienced some serious volatility this past week between the surprise developments in the crypto market and the scheduled release of the US consumer inflation report. Seasonal norms would suggest that we are moving into territory that naturally moderates in tempo and momentum (referring to the monthly norms of the S&P 500, volume and VIX), but each year can unfold differently. As we look into the new trading week ahead, there is a wide array of event risk that stretches into official growth updates, central banker speeches and earnings among other known listings. For guidance on risk trends, the SPX saw a very marked downshift in volatility Friday, after the biggest single-day rally (5.5 percent on Thursday) since the height of the post-pandemic recovery. While the moderation in the market’s favorite inflation indicator – the CPI – was bigger than expected, it didn’t push the measure much closer to the Fed’s target of 2.0 percent. A slightly lower terminal rate for the Fed may matter more significantly to the relative value in the Dollar or emerging markets, but risk assets may struggle to squeeze more juice out of that event. As such, we likely need another, possibly different, shove to get the market’s moving again.

Chart of the Nasdaq 100 to Dow Jones Industrial Average Ratio and 1-Day ROC (Daily)

Chart Created on Tradingview Platform

Bitcoin, UK Fiscal and ECB Financial Stability Risks

While there is plenty of scheduled event risk and high-profile major macro themes to tap into moving forward, it is worth keeping a cautious eye on the lurking threats around the edges of the financial market. The most prominent such threat is the uncertainty in the crypto market. While Bitcoin may have bounced on Friday (perhaps in conjunction with traditional risk assets like US indices), the full fallout from the FTX drama does not seem to be fully played out. There were calls from various defi influencers and even news outlets for those in the market to move their crypto off of exchanges – presumably to avoid getting embroiled in further unforeseen liquidity runs. It may be a new market, but it seems to experience the same types of panic from the old ones. Meanwhile, crypto exchange liquidity problems aren’t the only area of possible threat. The UK’s fiscal plan is due Thursday and those monitoring UK yields or the Pound back in late September no doubt remember well the crunch from the mini-budget news. There is also an ECB financial stability risk report due provisionally mid-week which will draw naturally on economic concerns.

Chart of BTCUSD with 7-Day Volatility Measure and 1-Day Rate of Change (Daily)

Chart Created on Tradingview Platform

Top Scheduled Event Risk with GDP and Earnings

For top scheduled event risk, there are a few categories of that should be monitored closely for its volatility potential. I’ll save the inflation and Fed speak for the Dollar conversation below, but growth concerns remains a lumbering if abstract threat in the distance. The US Treasury yield curve inversions have long ago flipped the yellow threat light on, but we have yet to see an official call from the NBER. Data like the US retail sales and NAHB housing market index report are important updates, but not likely to resolve the United States’ economic status. For the US capital markets, the earnings calendar will be a bigger focus of mine this week. Walmart and Home Depot will reflect on consumer trends and inflation, while Alibaba’s report will give a China perspective. China’s economic situation is typically obfuscated, but the October data should be registered nonetheless and Presidents’ Biden and Xi meeting on Monday will be important. Add to that 3Q GDP readings for the Eurozone and Japan, and we are going to get a fairly comprehensive update on global health.

Critical Macro Event Risk on Global Economic Calendar for Next Week

Calendar Created by John Kicklighter

Dollar Faces Particular Risk of Trend Should Fed Speak and Inflation Expectations Throttle Rate Forecasts

Where indices and other measures of sentiment are looking for another fundamental motivator to carry forward, the US Dollar may see its own significant move in the second half of this past week find easier follow through. The DXY Index’s break below the 100-day simple moving average was a historical event. It called to an end 366 trading days for which the index held above the longer-term average. The break was significant in technical terms with one of the biggest single-day declines in years while the week’s-3.9 percent was the biggest since March 2009. There are three general themes that motivate the Dollar including the currency’s safe haven role and relative growth potential. However, the pullback in the expected Fed terminal rate through mid-2023 is likely a productive matter among FX observers. The NY Fed’s consumer inflation expectations report on Monday will be followed by lots of Fed speak throughout the week. Make sure to have your Webster Fedspeak thesaurus on hand.

Chart of US Dollar with CPI Release Dates, 100-Day SMA and 1-Day ROC (Daily)

Chart Created on Tradingview Platform