S&P 500 climbs higher despite sharp growth downgrades, watch out for USDJPY intervention

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SPY S&P500 ETF, Netflix, GDP, Rates, USDJPY and USDCNH Talking Points

  • The business perspective: S&P 500 bearish below 4,375; EURJPY bearish below 134; GBPCAD Bullish above 1.6500
  • The IMF has downgraded its global growth forecast as expected, but the extremes for countries like the euro zone and Russia as well as financial warnings ring out
  • Earnings will test their sway in the market on Wednesday’s earnings after NFLX failure, but rate expectations remain a key driver for EURUSD, USDJPY and USDCNH

The clouds continue to gather for the global financial system – and now the economy – but markets seem content to resort to the same sentiment of complacency that has colored much of the past decade. While we’ve certainly seen a lot of “irrational enthusiasm in the face of overwhelming odds,” the reward one can expect for ignoring such risks grows increasingly extreme in its imbalance. As such, rallies like the one we saw from the S&P 500 in the last session look seriously suspect. Perhaps the return of liquidity to European and APAC markets has helped bolster a “sell the rumour, buy the news” response to the IMF’s growth downgrades and financial system warnings; but relief is not the basis of outright condemnation. The U.S. index is still playing ping-pong between the midpoint of the 2022 range (4,467) and the midpoint of the Feb-March recovery effort (4,377), but the six-day range is the narrower than we’ve seen since the start of the year holiday conditions. In other words: a break is likely. All things being equal, a break higher would likely be difficult, while a return to the congestion floor, a breakdown, would have more potential. Of course, these scenarios must consider what would drive either outcome.

Chart of the SPY S&P 500 ETF with 20-day SMA, volume and 6-day historical range (Daily)

Chart created on Tradingview Platform

One of the disconnects to be found in the difficult fundamental path ahead is the longer time frame for many of the highest-profile themes to overtly threaten the increasingly short-term orientation of speculative rank today. Economic gears creaking under rising inflation or higher interest rates driving up the cost of funds on already leveraged exposure is a measure of months, if not more. The convenience of convenience has been a serious performance factor for years now. That said, more immediate and perhaps closer-to-the-source confidence cracks from a seemingly self-sustaining U.S. stock market engine could shatter the calm. That’s why I’ll be paying close attention to how the major indices trade before the open and in the first few hours after. Netflix’s disappointing earnings report. While EPS of $3.53 beat expectations (by $2.90), the first net loss of subscribers led to a nearly -26% drop in after-hours prices. Although perhaps one of the least influential members of the FAANG, he still holds representation at a critical time for broader conviction.

Chart of Netflix with 20 and 200 day SMAs with after-hours (daily) performance

S&P 500 climbs higher despite sharp growth downgrades, watch out for USDJPY intervention

Chart created on Tradingview Platform

What drives the markets…and what “should be”

For at least one session, the main focus of the markets had shifted away from the race between inflation and monetary policy speculation. The IMF has released its updated growth forecasts for the world and major economies/regions. The cuts were severe, but not exactly a shock given the accumulation of circumstances that were particularly exacerbated by the Russian invasion of Ukraine. The global forecast for 2022 was cut by -0.6 percentage point (ppt) to a pace of 3.3%, with the Eurozone finding a reduction of -1.1 ppt (to 2.8%); the United Kingdom down -1.0 ppt (to 3.7%); Japan fell -0.9 ppt (to 2.4%); China lost -0.5 ppt (to 4.4%) and the United States was perhaps the best with a drop of only -0.3 ppt (to 3.7%). This contrast is on top of pictures like the EURUSD where Russian growth, rate and rollovers continue to diverge. Moreover, the sharp increase in inflation expectations from the WEOs as well as the warnings from the GFSR (Global Financial Stability Report) speak of a landscape of which we have probably not taken into account all the future sufferings. Nonetheless, markets appear to be holding up against the update through Tuesday’s close. That said, if the conviction falters, it will quickly turn into gasoline for the fire.

Table of IMF growth forecasts for major economies

S&P 500 climbs higher despite sharp growth downgrades, watch out for USDJPY intervention

IMF WEO Outlook Update Table January 2022

Where the IMF’s economic and financial updates failed to gain traction in the markets, more mundane and familiar issues seemed to be getting a serious reaction. In addition to earnings season volatility, interest rate speculation has put additional pressure on key markets. I focus again on USDJPY and USDCNH below; but more generally, the dollar again benefited from a concerted effort by FOMC members to signal their intentions for May 4and before the media blackout begins this Saturday. One of the more dovish members of the group – Chicago Chairman Charles Evans – said he expects a benchmark rate of around 2.50% by the end of the year, which would allow him to support two rate hikes of 50 basis points. This is the lower end of this group’s expectations with Bullard’s forecast for 3.50% and a possible accelerated withdrawal of stimulus targeting the upper end. The market is pricing around a benchmark of 2.65% by the end of the year, suggesting it is not overstretched even by Fed standards.

Calendar of major economic events

S&P 500 climbs higher despite sharp growth downgrades, watch out for USDJPY intervention

Graphic created by John Kicklighter

Watch USDJPY intervention and USDCNH intervention easing

USDJPY continues to soar as the world’s second most liquid pair posts its biggest single-day gain (1.2%) since November 9and, 2020 during the last session. It’s a notable acceleration on an already incredible road to two-decade highs. This accusation likely reflects some level of belief in the market that authorities have no will to step in and rein in a market that is reacting to burgeoning fundamental shortcomings. There were repeated remarks from senior Japanese finance ministry and central bank officials saying they were watching the yen, but there was no official announcement of intervention. More likely than not, they won’t say they’re acting in the market, but there’s a good chance they will – or perhaps have already done so. There are potential fallouts from the G7 if they are seen as manipulating exchange rates, but there is also the risk of making an effort and the market simply rolls over the action. Loss of credibility can be a difficult thing to overcome (just ask the SNB). Keep an eye on how the USDJPY in particular trades going forward.

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USDJPY chart with 20-month SMA, 1-month ROC and COT (monthly)

S&P 500 climbs higher despite sharp growth downgrades, watch out for USDJPY intervention

Chart created by John Kicklighter with data from IG

Meanwhile, where I think Japanese officials are moving closer to intervention, it appears Chinese leaders have slacked off to a more active role in guiding their own currency. After the PBOC announced rate hikes, Shanghai shut down its economy to contain a Covid outbreak and the IMF granted China deeper growth forecast cuts; USDCNH finally broke through the 6.40 level. It is the combination of a 200-day moving average, an inverted head-shoulder neckline, and multi-year trendline resistance. This is a technically important step. That said, tracking is very different from just pausing under normal circumstances – and that’s far from normal.

USDCNH chart with 500 and 200 day SMA (daily)

S&P 500 climbs higher despite sharp growth downgrades, watch out for USDJPY intervention

Chart created on Tradingview Platform

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