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Risk On or Risk Off…or Neither?

Earlier today, the Philadelphia Fed Manufacturing Index for December was released at 0.3, well below the forecast of 8.0 and lower than the 10.4 reading from November.  This is the same level as June, and the lowest level since February.  Upon release of the data, USD/JPY began moving lower, from 105.50 to 105.20.  This is what one would expect to happen under normal market conditions:  Bad data = risk off = lower USD/JPY.

Source: Tradingview, City Index

However, at the same time, equity index traders took the opportunity to buy the S&P 500 into the dip, and it hasn’t look back since.  Price has made all time highs again today, near 3210.5. 

Source: Tradingview, CME, City Index

So, is it risk on or risk off?  Actually, it’s most likely neither.  With the holidays approaching fast and with liquidity dying down into year end, traders are doing whatever they need to do to wrap up for the year.   Some market participants may be “window dressing”.  This may occur in thin markets, where large participants (such as mutual funds, pension funds, and some hedge funds) drive price in one direction to make their books look better at the end of a month, quarter, or year.  Perhaps is occurring in the stock market today. Others may be taking risk off the books.  For example, if someone had a large long position and was looking to end the year flat, today would be a perfect day to try and exit some (or all) of that position while stocks are moving higher.  Can you imagine what would happen if they tried to exit the USD/JPY position while stocks are heading lower? 

Source: Tradingview, CME, City Index

Be aware that typical correlations in the market, such as a positive correlation between USD/JPY and S&Ps, may decouple heading into yearend.  Don’t read too much into it, as it may just be market participants trying to wrap up trading and/or make their books look pretty for year end.


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