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The Eur/S&P Futures Link Holds True

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Trade Desk Thoughts

The Euro/ S&P Futures Link

The vast majority of time at the trading desk is spent watching the global markets move in sync through bouts of risk tolerance and risk aversion, as investors shift from one phase of risk to the other. This has wide implications in the financial market, since different financial assets exhibit a high degree or correlation, or even co-integration, which traders can use for arbitrage (the buying and selling of the same asset class, in different markets) trade.

This is also the case with Eur/Usd and its link with S&P Futures trade, which have a high degree of correlation over the last few months. As seen in the attached chart, the two assets move in the same direction most of the time, and even managed to bottom around the same period, back in March.

Investor’s tolerance towards risk is the main theme that drives this correlation, since institutional investors become eager to carry risk on their balance sheets, as money flows out of the safety of the Treasury market towards higher yielding assets like shares (thus the S&P appreciation), and more specifically towards foreign assets; something that weakens the greenback against its main counterpart the euro.

The relationship between S&P futures and the euro is very important, especially now that the market has struggled to push the euro above the 1.4300 area for about ten weeks, and the dollar index below the 78.00 support area for a similar period. The answer to the question “Will the euro make it and when?” hinges on the behavior of S&P futures over the upcoming period, especially whether it is able to break above the 1015 resistance area.

A rejection around the 1015 level may trigger some automated selling as the strong optimism seen up until now will from positive earnings season feed-back, will be tested (remembering, there is only a small step from euphoria to despair). However, the upbeat earnings reports may still provide some strong traction for some parts of the market, so in the medium to long term, the outlook clearly sits on the upside.

If S&P futures can manage to pull the move and break above the 1015 level, the forex market might follow this uptrend and make the finial push that will send the dollar index below 78.00 support.  For the equity markets, the break will set a new high for the current year and it would clear the road towards the 1060 area.

TheLFB Eur/SP Link

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