After a solid week previously, US stocks look to end the week down modestly this week. These moves were not unanticipated- as the FOMC’s indications of staying the course on tapering weighed on markets as w expected. Nonetheless, we think this week adds a good buying opportunity for pr- growth assets, which continues to be the dominant trend in global investment markets:

As we can see above, global markets have indeed had a deflationary tilt to them over the last month, and this has been reflected in the FX markets as well:

We see further evidence of this in our Currency Bloc Monitor, which aggregates 42 currencies based on their economic bias and correlation into the major regions or “blocs,” thereby allowing us to implicitly understand the flow of global capital:

Emerging markets have largely seen outflows, and we think the culprit behind these moves is the synchronized tightening of global liquidity and economic growth. We show how global growth has been resulting in a steadily weaker set of economic data relative to expectations:

Amidst all this, we think US equities be the safest place to hide on a risk-adjusted-return basis. This has been borne out by history, i.e., during the last taper, US stocks were the best performing asset due to the stable profitability of US corporations. We expect a similar dynamic this time around. Therefore, we think of today as a buying opportunity, as confirmed by our Trading Tools Report:

Recall:

• Trading Range: These ranges represent a trading bank within which a currency should trade based on multiple market factors. If we are long- prices above the upside range indicate the asset is expensive, and prices below the downside range suggest that they are cheap and vice versa if we are short.
• Year-to-Date Returns: This is the price performance of a given currency over the course of the current calendar year, in percentage terms. We also compare the current price to the 52-week high and low for reference.
• Price Momentum: This looks at cumulative rolling returns for a selected lookback period.  Positive momentum is good if we are long and bad if we are short. 
• Implied Volatility Discount/Premium: This tells us what the market expects in volatility relative to the history of volatility. If we are long a currency, we typically want market implied volatility to be higher than historical volatility and vice versa if we are short.

As a reminder- it is not just enough to have the technical tools we provide here. You need to know the fundamental developments in markets that are driving these moves! Head to https://www.fxdd.com/mt/en to get access to our research and analysis.

Our team will take a break from daily commentary today- but here is the updated systematic data:

We start with our Market Regime Monitor, which infers the growth and inflation regime implied by major global investment markets:

Next, we show movements in major currency pairs, gold, and commodities versus the dollar:

Finally, we show our Currency Bloc Monitor, which aggregates 42 currencies based on their economic bias and correlation into the major regions or “blocs,” thereby allowing us to implicitly understand the flow of global capital:

Until tomorrow!

The FOMC meeting concluded today with Chairman Powell’s press conference. Listening to Chairman Powell’s views, we think we are on the path we have been laying out since February, i.e., that we are likely going to have a taper of asset purchases around December. Looking at price action today, markets largely took the information in stride, particularly our favored risk expression, i.e., US stocks, which are up approximately 0.15% following the press conference. Global asset pricing added to inflationary signals at the monthly level:

From a capital flows perspective, we largely saw gold and the Euro weaker on a one-day basis:

Overall, the dollar remained bid versus major currencies & commodities:

We think the Fed’s moves today reassured us that we are indeed moving towards a taper scenario much like 2013- i.e., where growth and inflation stabilize (albeit at high levels). Today’s meeting told us that the FOMC committee expects inflation to decrease along with unemployment, with the latter being their predominant concern. According to our estimates, the labor market conditions for a taper would be met around December 2021- March 2022:

Therefore, we think that our base case remains, i.e., that we will have price action occur much like the 2013 taper of asset purchases- where US stocks were one of the most resilient assets globally. The major risk to this view is the potential for substantially higher than expected inflation while growth slows. Thus far, based on our forecast models and market-implied pricing, this view seems unlikely. Resultantly, gold looks deceptively cheap, as we show below via our Trading Tools Report. While there is potential for a stagflationary environment in markets, we need more evidence of inflation persistence to trigger a buy on gold. Nonetheless, we are watching carefully:

As a refresher:

• Trading Range: These ranges represent a trading bank within which a currency should trade based on multiple market factors. If we are long- prices above the upside range indicate the asset is expensive, and prices below the downside range suggest that they are cheap and vice versa if we are short.
• Year-to-Date Returns: This is the price performance of a given currency over the course of the current calendar year, in percentage terms. We also compare the current price to the 52-week high and low for reference.
• Price Momentum: This looks at cumulative rolling returns for a selected lookback period.  Positive momentum is good if we are long and bad if we are short. 
• Implied Volatility Discount/Premium: This tells us what the market expects in volatility relative to the history of volatility. If we are long a currency, we typically want market implied volatility to be higher than historical volatility and vice versa if we are short.

As a reminder- it is not just enough to have the technical tools we provide here. You need to know the fundamental developments in markets that are driving these moves! Head to https://www.fxdd.com/mt/en to get access to our research and analysis.

After an exceptional week last week, US stocks gave back some of their gains alongside outflows from the US dollar. The bent of global investment markets remained deflationary monthly:

However, the most important signals are the long-term signals, which imply the market odds of a globally rising growth regime. Nonetheless, markets today saw capital leaving the US, as evidenced by our Currency Bloc Monitor, which aggregates currency movements across 42 global currencies into currency regions or “blocs” to help us understand the trend in global capital flows:

We can see this in a more traditional sense as well. All major currencies and commodities were up against the dollar:

These moves largely came amid a slower than expected print in durable goods orders in the US, after weaker than expected new home sales yesterday:

Therefore, while US economic momentum is positive, it seems to be decelerating. With all eyes on the Fed this week + GDP data also coming in, we remain cautious on aggressively adding. Despite these potential negative catalysts, US stocks look attractive, according to our Trading Tools report. What was yesterday in implied volatility discount in US stocks has now switched to an implied volatility premium, suggesting market hedging ahead of a potentially hawkish Fed. Our bias remains to be bullish growth assets and US stocks, but we would add very carefully here and not reach max exposure:

As a refresher:

• Trading Range: These ranges represent a trading bank within which a currency should trade based on multiple market factors. If we are long- prices above the upside range indicate the asset is expensive, and prices below the downside range suggest that they are cheap and vice versa if we are short.
• Year-to-Date Returns: This is the price performance of a given currency over the course of the current calendar year, in percentage terms. We also compare the current price to the 52-week high and low for reference.
• Price Momentum: This looks at cumulative rolling returns for a selected lookback period.  Positive momentum is good if we are long and bad if we are short. 
• Implied Volatility Discount/Premium: This tells us what the market expects in volatility relative to the history of volatility. If we are long a currency, we typically want market implied volatility to be higher than historical volatility and vice versa if we are short.

As a reminder- it is not just enough to have the technical tools we provide here. You need to know the fundamental developments in markets that are driving these moves! Head to https://www.fxdd.com/mt/en to get access to our research and analysis.

Welcome back to On the Daily, FXDD Research’s blog, where we break down and contextualize market and economic data through our research process. Recently, we espoused a “portfolio pivot” to clients, where we became substantially more bullish on US stocks relative to commodities. Last week, this move paid off handsomely, with the S&P 500 posting a 3.45% gain in one week. However, this morning, equities look a little shaky (thus far) after weaker than expected housing data. The overall sentiment in the market remains one of a deflationary bent:

As we can see above, markets have generally implied a slowdown in global growth and inflation over the last month. However, combining our various signals above, we can see that the market odds of growth rising are still strong. However, this outcome is fairly limited in geography, with US markets predominantly reflecting this environment via strong stock market performance whilst other regions lag behind.  This week will be important in determining the future of US outperformance- we receive durable goods orders data in the US (an important leading indicator), and more importantly, we will have the FOMC meeting. Going into the meeting, the last month has largely been a strong dollar environment, as evidenced below:

The confluence of a strong dollar and gold performance solidifies the idea that the wave of global risk-on and the easy “buy everything” trades are largely at an end. We see further evidence of this in our Currency Bloc Monitor, which aggregates currency movements across 42 global currencies into currency regions or “blocs” to help us understand the trend in global capital flows:

As we can see above, every Currency Bloc ceded flows to the dollar. The question before us this week is whether or not Jerome Powell and the FOMC will reinforce these moves or temper them. Earlier this year, we wrote about how our estimated target for taper initiation would be in December, based on our projections for the labor market. We continue to think this view holds- however, we do have questions about the communication window of this taper. While we know that Powell has assured markets that the Fed will communicate the taper “well in advance” of initiation, we aren’t sure how to define it- does it mean three meetings ahead, or four? Assuming the Fed decides to move in December, our best judgment would be that the FOMC communicate the change in September. Therefore, we don’t think that the Fed will shock the world this upcoming meeting, but we do think they could begin to line up taper communication. In this context, the price performance of our preferred US exposure- i.e., US equities, will largely depend on how this lineup is communicated. We stay bullish into the meeting but wouldn’t try to add aggressively ahead of the meeting, but rather ride a potentially dovish meeting. For best execution, we show our trading ranges for US stocks below, which concur with this diagnosis, showing implied-volatility discounts, i.e., incrementally less bullish signs than last week.

As a refresher on our lenses:

• Trading Range: These ranges represent a trading bank within which a currency should trade based on multiple market factors. If we are long- prices above the upside range indicate the asset is expensive, and prices below the downside range suggest that they are cheap and vice versa if we are short.
• Year-to-Date Returns: This is the price performance of a given currency over the course of the current calendar year, in percentage terms. We also compare the current price to the 52-week high and low for reference.
• Price Momentum: This looks at cumulative rolling returns for a selected lookback period.  Positive momentum is good if we are long and bad if we are short. 
• Implied Volatility Discount/Premium: This tells us what the market expects in volatility relative to the history of volatility. If we are long a currency, we typically want market implied volatility to be higher than historical volatility and vice versa if we are short.

As a reminder- it is not just enough to have the technical tools we provide here. You need to know the fundamental developments in markets that are driving these moves! Head to https://www.fxdd.com/mt/en to get access to our research and analysis.

Today, we see markets largely reverting to the major trend over the last month, with major currencies weaker versus the dollar. On a year to date basis, the dollar is the best performing currency out of the major currencies:

Interestingly, commodities have managed to perform coincidently with dollar appreciation, a typically unusual dynamic. However, this bid for commodities has not been supportive of commodity currencies, which we show using our Currency Bloc Monitor:

The dollar continues to suck capital out of major currency regions over the last month. The sum of these capital flows has resulted in an interesting mix between deflationary and inflationary market pricing. Markets are less and less pricing global deflation, from an elevated level earlier this month. At the same time, they are pricing in higher rates of economic growth. The sum of these signals means that markets are pricing in rising growth and falling inflation:

US stocks and global bond markets have been the primary benefactors of these market moves, with other stock markets lagging behind. Overall, we think this environment will continue in the foreseeable future, and current asset price moves are likely to trend further. In the backdrop, we received new data from the UK today, which likely assisted the GBPUSD weakness today- GBP composite PMI’s came in lower than expected. We think this might be symptomatic of things to come; our model projections have UK economic growth returning to trend soon:

If UK economic growth rates begin to slow further, we can expect data downside surprises to weigh on GBPUSD. While we were bullish on GBPUSD in the first quarter of this year, the monetary policy divergence between the Fed and BOE has largely closed. Therefore, we think that the current trend can continue to hold, i.e., GBPUSD weaker. However, this isn’t a high conviction/core view. Nonetheless, we provide our Trading Tools Report for your best judgment:

As a refresher on our lenses:

• Trading Range: These ranges represent a trading bank within which a currency should trade based on multiple market factors. If we are long- prices above the upside range indicate the asset is expensive, and prices below the downside range suggest that they are cheap and vice versa if we are short.
• Year-to-Date Returns: This is the price performance of a given currency over the course of the current calendar year, in percentage terms. We also compare the current price to the 52-week high and low for reference.
• Price Momentum: This looks at cumulative rolling returns for a selected lookback period.  Positive momentum is good if we are long and bad if we are short. 
• Implied Volatility Discount/Premium: This tells us what the market expects in volatility relative to the history of volatility. If we are long a currency, we typically want market implied volatility to be higher than historical volatility and vice versa if we are short.

As a reminder- it is not just enough to have the technical tools we provide here daily. Head to https://www.fxdd.com/mt/en to get access to our research and analysis! You need to know the fundamental developments in markets that are driving these moves promptly.

On July 9 in Monetary Monitor, our exclusive client-only publication, we said:

“Overall, markets continue to like the risk-on trend, but less and less so. The biggest driver in FX moves this year will likely be the divergence in the monetary policy of the US versus the rest of the world. Since the start of 2021, we have been one of the few voices calling for a stronger dollar versus other major currencies while also favoring reflation trades. However, we turn more cautious on reflation trades at this juncture, particularly commodities and commodity-related FX. We still think US equities have a foothold to be a strong performer, along with the US dollar versus the euro and yen.”

With the ECB meeting concluded today, we are beginning to see the beginning of monetary policy divergence. As we outlined yesterday, the meeting was nothing of a surprise to us- as we outlined yesterday, we expected a dovish ECB on the back of its new symmetric inflation target. At the press conference, Lagarde’s choice of words was interesting to us, particularly that there may be a period where inflation could run above target- much like the Fed. However, unlike the Fed, the ECB will have to keep monetary policy accommodative for long after 2021 to achieve this target on a sustainable basis. As a result of these policy dynamics, EURUSD was largely weaker today:

As we can see above, the weaker euro was enough to contribute to dollar strength. However, this was generally contrary to the major trend today, with most major regions attracting capital away from the dollar:

The sum of all these capital flows largely resulted in a deflationary tilt to asset pricing in global markets, which we show below via our Global Market Regime Monitor:

We largely think that the slowing inflation leg of current market pricing is here to stay, even if the EU experiences higher inflation rates. Further, US growth will outpace EU growth in levels and quality- thereby attracting capital away from the EU to the US. Finally, the monetary policy divergence between the EU and the US has started to show, and we think there’s further to go from here. Overall, the setup isn’t positive for EURUSD, which continues to have strong downwards momentum, albeit looking a little cheap:

As a refresher on our lenses:

• Trading Range: These ranges represent a trading bank within which a currency should trade based on multiple market factors. If we are long- prices above the upside range indicate the asset is expensive, and prices below the downside range suggest that they are cheap and vice versa if we are short.
• Year-to-Date Returns: This is the price performance of a given currency over the course of the current calendar year, in percentage terms. We also compare the current price to the 52-week high and low for reference.
• Price Momentum: This looks at cumulative rolling returns for a selected lookback period.  Positive momentum is good if we are long and bad if we are short. 
• Implied Volatility Discount/Premium: This tells us what the market expects in volatility relative to the history of volatility. If we are long a currency, we typically want market implied volatility to be higher than historical volatility and vice versa if we are short.

As a reminder- it is not just enough to have the technical tools we provide here daily. Head to https://www.fxdd.com/mt/en to get access to our research and analysis! You need to know the fundamental developments in markets that are driving these moves promptly.

Our bullish equity view paid off handsomely yesterday- with the S&P 500 giving its strongest single-day performance since the start of the pandemic. Looking at our market regime monitor, we think this is a trend that could hold. While in the immediate term, global markets have been pricing a risk-off (deflation), in the intermediate-term, the trend remains strong for rising global growth:

As we can see above, global investment markets continue to think that growth is rising and inflation is falling. However, on a short-term basis, the sentiment has been much more risk-off. This is in line with what we are seeing in major FX markets vs. the dollar:

As we can see above, most major currencies suffered losses versus the dollar- making the dollar the best performing major currency on a YTD basis. We have been of this bias since January 2021. 

As global growth has resumed/normalized, the trend of US exceptionalism, alongside potential pullback in dollar liquidity, has pulled capital out of currency regions. We show this via our Currency Bloc Monitor:

While some regions could recoup some losses intraday, the trend remains negative for currency regions versus the dollar. We don’t expect this dynamic to meaningfully change. Overall, we continue to favor global equities- with a strong bias towards US equities. We show our Trading Tools Report for the same below:

Price momentum remains strong for US equities, and while the announcement of a Fed taper would dampen this momentum somewhat, we expect it to persist through the taper period. Such a monetary policy stance would sharply contrast with that of the ECB, which meets today and tomorrow to decide its own monetary policy. Recently, the ECB announced changes to its monetary policy strategy- particularly that it has now adopted a symmetrical inflation target, i.e., that it will try to achieve 2% inflation over a period of time. However, it has been stressed that they will not aim to overshoot inflation by more than 2%.  The implications for this meeting are that the ECB will likely have to reaffirm its commitments to keeping interest rates at extremely low levels, perhaps all the way to 2023. This would be implemented through asset purchases and forward guidance, which simply compounds the likely monetary policy divergence between the Fed and the ECB. Therefore, we continue to favor a weaker EURUSD:

As a refresher on our lenses:

• Trading Range: These ranges represent a trading bank within which a currency should trade based on multiple market factors. If we are long- prices above the upside range indicate the asset is expensive, and prices below the downside range suggest that they are cheap and vice versa if we are short.
• Year-to-Date Returns: This is the price performance of a given currency over the course of the current calendar year, in percentage terms. We also compare the current price to the 52-week high and low for reference.
• Price Momentum: This looks at cumulative rolling returns for a selected lookback period.  Positive momentum is good if we are long and bad if we are short. 
• Implied Volatility Discount/Premium: This tells us what the market expects in volatility relative to the history of volatility. If we are long a currency, we typically want market implied volatility to be higher than historical volatility and vice versa if we are short.

As a reminder- it is not just enough to have the technical tools we provide here daily. Head to https://www.fxdd.com/mt/en to get access to our research and analysis! You need to know the fundamental developments in markets that are driving these moves promptly.

Our pivot to equities (away from commodities) and bullishness in the face of yesterday’s strong correction in US stocks would be paying off today. Today would have been a solid day if you had incrementally added exposure per our Trading Tools report. Looking at major FX action, the dollar continues to be bid versus other major currencies:

As we can see above, the only currency that has been resilient versus the dollar over the last 24 hours has been gold- largely due to its disposition to falling global growth. Market pricing of falling global growth was also evident in our Currency Bloc Monitor, which can be thought of as a rough gauge for capital flows between major Currency Blocs or regions:

As global liquidity conditions have begun to tighten on the back of tightening dollar liquidity- money has flowed out of riskier regions back to the dollar. As a result, Currency Bloc with emerging market/risky characteristics has seen significant outflows, as we can see amplified by the Yuan Bloc, which predominantly contains Asian FX. Combining all this together, we show how all these markets are implicitly pricing a slowing growth regime. To do so, we show our market-implied probabilities for growth and inflation along with their various permutations. On a 1-month basis, global investment markets imply a falling growth and inflation environment, i.e., deflation. However, on a more medium-term basis, market trends point to rising growth and falling inflation:

We tend to prefer signals that are more medium-term in nature (i.e., quarterly signals) as we can often have periods of time when monthly signals can provide a proverbial “head-fake As we have mentioned in the past, we still think that US equities are probably going to be the best performing asset class in the current environment. Therefore, we once again show our Trading Tools Report for the S&P 500 below:

As a refresher on our lenses:

• Trading Range: These ranges represent a trading bank within which a currency should trade based on multiple market factors. If we are long- prices above the upside range indicate the asset is expensive, and prices below the downside range suggest that they are cheap and vice versa if we are short.
• Year-to-Date Returns: This is the price performance of a given currency over the course of the current calendar year, in percentage terms. We also compare the current price to the 52-week high and low for reference.
• Price Momentum: This looks at cumulative rolling returns for a selected lookback period.  Positive momentum is good if we are long and bad if we are short. 
• Implied Volatility Discount/Premium: This tells us what the market expects in volatility relative to the history of volatility. If we are long a currency, we typically want market implied volatility to be higher than historical volatility and vice versa if we are short.

As a reminder- it is not just enough to have the technical tools we provide here daily. Head to https://www.fxdd.com/mt/en to get access to our research and analysis! You need to know the fundamental developments in markets that are driving these moves promptly.

Last week, we pivoted away from commodities to favour equities. A move that we believe in has come at the optimal time given OPEC+ recent announcement that it will begin to increase crude oil production. Now, while today has not been a great day for global equities, we still think there is significant room for equities to perform well in the current environment. Below, we show our tracking of traditional FX and currencies:

As we can see, the dollar has continued to strengthen this quarter versus other major areas. We see this trend in our Currency Bloc Monitor as well, with the dollar sucking capital out of most major regions:

Consistent with this, we see market pricing in a deflationary environment over the last month. Below, we show our market-implied regime estimates, which use the relative performance of global assets to determine what our markets are pricing in terms of global growth ( +/- G) and inflation (+/-I). Clearly, over the last month, we have seen a pivot towards slowing growth:

Overall, the last month has been when global assets have begun to favor peak inflation narratives- coincident with our economic forecasts that growth and inflation are likely to stabilize at higher levels:

Our fundamental bias still remains that inflation will remain elevated for many economies, but the rate of acceleration has topped out in our view. This is what led us last week to close our commodities preference and pivot towards equities. Particularly, we like the US equity market relative to the rest of the world. If today’s negative price action proves to be transitory, then today could provide a great buying opportunity:

As a refresher on our lenses:

• Trading Range: These ranges represent a trading bank within which a currency should trade based on multiple market factors. If we are long- prices above the upside range indicate the asset is expensive, and prices below the downside range suggest that they are cheap and vice versa if we are short.
• Year-to-Date Returns: This is the price performance of a given currency over the course of the current calendar year, in percentage terms. We also compare the current price to the 52-week high and low for reference.
• Price Momentum: This looks at cumulative rolling returns for a selected lookback period.  Positive momentum is good if we are long and bad if we are short. 
• Implied Volatility Discount/Premium: This tells us what the market expects in volatility relative to the history of volatility. If we are long a currency, we typically want market implied volatility to be higher than historical volatility and vice versa if we are short.

As a reminder- it is not just enough to have the technical tools we provide here daily. You need to know the fundamental developments in markets that are driving these moves promptly. Head to https://www.fxdd.com/mt/en to get access to our research and analysis!