Dollar Rally and S&P 500 Volatility What Drives Markets Now?

• The Trade Perspective: Bearish Dow below 33,000 and/or S&P 500 below 4,250; Bearish USDJPY below 113.50; Bullish AUDCAD above 0.9050
• The FOMC rate decision catalyzed the markets pre-existing volatility the hawkish warnings of a March hike, four possible hikes in 2022 and quantitative tightening already expected
• After the event risk shock wears off, we will still see monetary policy egging the markets on while earnings, GDP and geopolitics gaining ground on the pilot seat

It was a pretty simple equation to calculate. The markets had seen an inordinate level of volatility over the past week – and in particular, an unusually high level of price instability in the immediate 48 hours before this past sessions FOMC rate decision. I believe that it wasn't just the policy update itself that was stirring such chop, but the event made it easy to affix our fears to a particular milestone. As far as the outcome goes, the Fed largely fell in line with the (admittedly hawkish) expectations that were held out going into the event. In a vacuum, that would mean that the storm has passed and quiet could be restored; but markets are not so one dimensional. It is likely that monetary policy continues to spur debate over markets' fair value moving forward, with plenty of scheduled event risk to charge the clash. And, even if interest rate forecasting doesn't take control, we have a number of alternative, competing themes that can readily take over the imagination of market participants. As many pure technical traders often say, the reality is in the price. How the masses ultimately boil down their collective view may find a strong barometer in the S&P 500's performance over these next and final 48 hours of the trading week. As it stands, short-term volatility is still extremely high as we bounce between the 200-day moving average as resistance and a collective support around 4,275.

Chart of S&P 500 with 200-Day SMA, Gaps and 5-Day ATR (Daily)

Chart Created on Tradingview Platform

While there can be debate over just how hawkish the Federal Reserve was in its policy update this past session, I think few would argue with the statement that the group is nevertheless moving towards normalizing (or 'tightening'). In the 19:00 GMT rate decision, the Fed announced it was holding rates, which was no surprise. From the statement that was released at the time and in conjunction with Chairman Powell's press conference half an hour later, there was rhetoric to open the door wide to a possible March 16th rate hike, indicate that four hikes was very possible and that quantitative tightening is likely to start soon after rate hikes begin. A few highlights that market participants seemed to hang on was the Powell remarks that they would not rule out a 50bp hike in the future, that they would not rule out a possibility of hikes at every meeting and that there was 'quite a bit of room' to raise rates without hurting the labor market. All of this is just keeping options open, but the market is not in a charitable state for interpretation. While he did say that capital markets were somewhat elevated, he did not really delve into how much tolerance the group would maintain for a slide in capital markets before policy views were significantly affected.

Federal Open Market Committee's Policy and Market Impact Scenario Table

Table Created by John Kicklighter

So just how strong was the hawkish message from the Fed? If you were looking at the US 2 year Treasury yield or Fed Funds futures implied forecast, there was a material uplift in rate forecasts. The retreat in risk assets after the even is also a response in my book. The Dollar's rally is similarly related. But how much more robust are their commitments – or at least the market's interpretation of them – going forward? Is their a full further trend to expect from the Greenback or yields? While I would agree the Fed was more hawkish, it also seems to me to be the case that we have priced in a lot of tightening in the near future. While there may be more trend ahead in this vein, it is more likely to be a slow and choppy discovery. Alternatively, risk trend are still expensive against a normalizing backdrop relatively speaking if you use a measure like the S&P 500 and Dow as a benchmark. It is this relative sense of carry potential versus safe haven pressure that has my attention for USDJPY. I maintain that I like this pair more if were to break lower (113.50 with range support and the 100-day moving average) rather than any bullish ambitions.

Chart of USDJPY with 100-Day SMA (Daily)

Chart Created on Tradingview Platform

Looking at the scheduled docket ahead, there are plenty of milestones that can be expected to stir the deep wells of speculative inaction via different feeder concerns. Monetary policy may very well carry further waves of fundamental impact moving forward with much to be digested from both the Federal Reserve and the Bank of Canada (the BOC held rates but was seen as being hawkish enough to keep rate forecasts on a '5 hikes in 2022' diet). Friday's US PCE deflator is the Fed's favorite inflation indicator, so we'll see how much carry over this matter truly has. Alternatively, the scheduled docket has event risk oriented towards economic health and earnings ahead. The US 4Q GDP and December durable goods figures are top event risk – one for the official economic view and the latter as a supply chain gauge. For earnings, the after hours Intel and Tesla reports will see how INTC and TSLA shares trade in Thursday's active session after beats that seemed to generate limited confidence in after-hours trade. Following Thursday's close, we will get corporate reports from Apple (largest market cap), Robinhood (retail trading activity) and United States Steel (trade and supply chain).

Calendar of Top Macro Economic Event Risk for Wednesday and Thursday

Calendar Created by John Kicklighter

From scheduled event risk to the open-ended, there are a few pressing matters that represent risks that can flare up with little warning with significant consequences for certain markets. The Sue Gray report which is investigating UK government's actions during a period of covid restrictions is due any moment, and there is material risk to PM Boris Johnson. EURGBP is my go-to pair whether this is resolved without further action or balloon. Then there is the geopolitical tensions between Russia and the West over reports that the former intends to invade Ukraine. The threats of sanctions are running high with energy markets feeling the added pressure outside of the normal supply-chain inflation pressure. Crude oil prices for example hit a fresh 7-year high this past session. Then of course, we have the USDRUB (Dollar – Russian Ruble) exchange rate that is of significant consequence. These two are sporting a strong, positive relationship at the moment.

Chart of US Crude Oil Futures Contract Overlaid with USDRUB and 20-Day Correl (Daily)

Chart Created on Tradingview Platform

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