Reset or reckoning?
In other words, after U.S. blue-chips erased one of the best January gains ever under the weight of implausible valuations, is that it? That’s the question occupying markets after two blistering stock market routs and the first sign of panic selling for two and half years. After all, the correction in itself was not surprising. It was the timing and speed that took investors off guard.
It’s the need for markets to re-familiarise with ‘normal’ volatility fast that poses the biggest obstacle to a sustainable stock market bounce. Snap shots may not be reliable. The VIX volatility gauge was down 17% at the time of writing after ending 115% higher on Monday. At the very least, we can say that uncanny calm is over. U.S. equity futures flashing several hundred points in either direction this morning may also offer only flimsy direction. Under these circumstances, the best guidance includes 1. Keep risk management strict. 2. Unless indices recoup in orderly fashion assume further sharp declines are likely. 3. Stability could trigger selective buying opportunities.
Up there, down here
A transatlantic split at the time of writing underscores the confusing near-term outlook. European markets were still sharply lower by late morning. U.S. equity futures were up. This was no ‘catch-up’ by Europe and the FTSE. Index futures here had matched U.S. declines overnight. Furthermore all sectors in Europe’s STOXX were in the red: investors were generally cashing out, not reallocating so much. Notable gainers included BP after blockbuster earnings, lifting the shares 0.3% against the FTSE’s 127 point tumble, with potential for more shareholder applause after the market settles. Looking at Austrian semiconductor maker AMS, which added 8% vs. ATX’s 2% fall, investors were signalling that strong quarterly demand from suppliers like Apple could be game changing.
Markets were also on alert for outright casualties. Attention is focused on exchange traded instruments, especially those derived from volatility measures, like the VIX. For XIV, styled by Credit Suisse as an ‘inverse VIX’, a market close of $99 was followed by an after-hours tumble of 86% to a net asset value of $4.22. A rival, ProShares’ Short VIX Short-Term Futures ETF also sank around 80%. Both instruments face questions about liquidity.
Yen bides its time
In currencies, the yen, a key signifier of risk appetite, was narrowly consolidating strides in the day before. Since Friday’s close, the yen has surged as much as 428 pips higher against the pound and 330 odd pips against the euro. The yen was still bid against the dollar after tacking on 150 pips at its best. USDJPY’s spike low in September at 107.32 is in focus for potential support. Friday’s high was 110.47.
Sterling dodges splinters
Last week’s signs of a dollar rebound were also fading against sterling. The pound was aided as fewer splinters from a fracturing Conservative Party have hit the headlines since the weekend. Cable swung higher well before $1.3914-1.393 support that was confirmed on 22nd and 23rd January. However the pair was already softening after getting 1-pip under the ‘psychological’ price of $1.40, defining a short-term range.
What dollar bounce?
As we predicted on Friday, the Dollar Index basket has reversed at closely eyed prices around 89.6, echoing failures throughout the last week of January. As part of dollar-yields-inflation complex that spooked riskier assets in recent days, a weaker dollar may smooth the recovery of stocks. Sticking points include gold that has stayed bid for two sessions, and 10-year Treasury yields that retreated no lower than 2.65% from a 4-year high just 15 basis points off 2.9%.
BoE, UK factory output, China trade
Key remaining macroeconomic events this week may be more catalytic than usual under current circumstances. The Bank of England’s ‘Super Thursday’ will now be watched in light of resumed political instability after BoE policymakers expressed optimism about the reduced likelihood of a “disorderly” Brexit. Even then, significant Statement or forecast changes look unlikely. Industrial and factory sector readings on Friday could cause more ructions for sterling; and possibly for the FTSE 100 too, as their inverse correlation has been eclipsed by jitters of late. China’s import/export balance on Thursday should also be scrutinised as the White House’s sensitivity to unfair trade practices is back to the fore. The greenback has been equally sensitised to the issue.