The ECB’s volatility risk of EURUSD is charged, keeping an eye on VXX and VIX

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S&P 500, VIX, VXX, EURCAD and EURUSD talking points

  • They’re sinking deeper into fall trade after Labor Day, but slow liquidity hasn’t completely reversed volatility and market trends.
  • While correlations between various risk assets are my favorite measure of speculative appetite, the VXX ETF is perhaps the most sensitive measure.
  • EURUSD will be my first market to watch with ECB rate decision and speculation around FOMC rate decision in two weeks leading speculation

Still waiting for cash to hit the volatility pedal

We head into Thursday’s trade still awaiting the rush for liquidity and volatility that would meet expectations of a more active trading period in September. When it comes to virtues, patience is one of the principles that has perhaps been the most difficult to establish but has served me the best. Nonetheless, it can be difficult to see the S&P 500 continue to carve out its most reserved two-week (10 trading days) volatility pace via the ATR since the December 2019 holiday leak. tangible value of SPX. , Dow and even the Nasdaq 100 in the last session, but all immediate but critical support levels are still intact. What is needed is either a heightened sense of complacency or a catalyst for deleveraging. In the first scenario, the many temporary reinforcements in the financial system may provide an incentive to continue to rely on cheap finance, but with a slow rise on stretched assets. The alternative would be an awareness of fears – such as reversal of monetary policy trends – that sees markets fall into a potentially heavy and disruptive sell-off. Either way, it’s worth keeping an eye out for significant risks and the two recorded cases of Covid amid declining consumer confidence and a broad warning of a monetary policy current. reversed are tangible concerns.

S&P 500 monthly seasonal performance chart, volume and volatility

Chart created by John Kicklighter with data from Bloomberg

While the fundamentally curious among us can continue to monitor the global economic agenda and gauge the sentiment of the many different stakeholder groups, we can also find meaningful perspective in the charts. My favorite indicator of ‘real’ risk appetite / aversion is a strongly correlated and strong movement in the various assets that historically align with the ‘risky’ and ‘safe haven’ areas. This can be difficult for many to follow, especially when time is limited, so the S&P 500 is a good representative and clearly flawed. US stocks (indices too) tend to default on a bullish roll and resist booms in risk trends until the risks are too widespread to ignore. As a more sensitive signal, I like to refer to growth-oriented indices (eg Nasdaq 100) versus value metrics (eg Dow) to talk about the “quality” of risk appetite. There, as I pointed out yesterday, we are facing the most extreme distortion in NDX-DJI since the peak of the Dot-Com boom / bust in March 2000.

S&P 500 chart with 50 day SMA overlaid with inverted VIX and 10 day correlation (daily)

S&P 500 and VIX correlation

Graphic created on TradingView platform

For many, myself included, implied volatility may offer an earlier measure of sentiment changes. The VIX Index is one of the most recognizable indicators of confidence in the financial system, but its popularity has led to greater speculative interest in the measure itself rather than a crude measure of hedging efforts. Nonetheless, there is a very clear negative correlation between the VIX and the S&P 500 from which it is derived. This suggests that if volatility were to increase, a persistent change of pace is more likely to come from the previously mentioned collapse. Pushing even further up the sensitivity scale, the VXX Short Term Volatility ETF takes speculative interest in volatility to the limit. This constantly deflated metric is pushing record lows as volume soars as traders try to pick an activity low – and indirectly a top in the markets. If this starts to take off, then I’ll look at the mid-term VIX, then the S&P 500, and finally the correlation of capital movements between the many different risk assets that investors have favored this year.

Chart of VXX Short Term VIX ETF with 100 Day SMA and Volume (Daily)

VXX Volatility ETF

Graphic created on TradingView platform

The main fundamental themes

As we move into the second half of the week, there are two fundamental themes that concern me. Although they have taken a back seat in terms of market impact, the United States reported until Tuesday a record number of new Covid cases that exceeded 301,000 people. It did not bring the US economy to a halt as it did before, so the impact is not as dramatic in the markets. That said, consumer surveys and other opinion polls have nevertheless noted the risk. Meanwhile, monetary policy and its contribution to risk-taking has been a theme littered with critical updates lately. Although the next official Fed meeting – with the intense debate and expected forecast updates – is two weeks away, the market has digested regular reminders of the issues. Biege’s book was published in the last session and the inflation warnings were clear, as was the caution about the effects of the Delta variant – on their decision-making as well as on the economy.

Graph of the relative perception of central bank monetary policy

Permanent central bank policy curve

Graphic created by John Kicklighter

For active policy updates, the Bank of Canada (BOC) rate decision landed the proverbial plane without any significant surprises. The central bank was to keep its key rate at 0.25% as well as its asset purchases to the tune of $ 2 billion per week. In this regard, it has exactly lived up to expectations. In addition, the outlook has remained cautious, but expectations of a real return of inflation in the second half of 2022 and possibly justifying a rate hike have been maintained. It didn’t exactly prompt the loonie to a serious rally, but it did slow its descent. Perhaps a little more influential was the comment from members of the Bank of England in the last session, who suggested that the criteria for a cut and even the minimum threshold to start debating rate hikes could be at hand sooner than expected. The pound recovered as the remarks were digested but the bulls seem to be keeping their powders dry.

EURCAD chart with 50, 100, 200 days SMA and ‘Wicks’ (daily)

EURCAD chart

Graphic created on TradingView platform

For the day ahead, the focus will be squarely on the euro – and in particular, I am watching the EURUSD. The political decision of the European Central Bank (ECB) would have been a non-event in my book without the influence of speculation. Over the past few weeks, markets have clearly committed to pushing speculation of a central bank normalization course to a timeline as early as this year. This pushed up the euro across the board as well as the yield on European government bonds such as the German 10-year Bund rate. It would be very difficult for the ECB to meet these expectations given its extremely cautious stance this year. This could create a scenario in which the confirmation of a progressive discussion or the complete rejection of the concept could result in a market reaction. Moreover, with the comparative aspects of rates of return and the serious attention given to the Fed’s timetable; any idea from the ECB will weigh heavily on traders willing to speculate on EURUSD.

EURUSD chart with 100 period SMA and 10 day ATR overlaid on 10 year German-US yields (daily)

EURUSD chart

Graphic created on TradingView platform

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