Oct 1, 2022
VOT Research Desk
Key Insights and Analysis
The View from the Market: Bearish USDJPY below 141.50;Gold bearish below 1,680 Markets have come to an end for the third quarter and the month of September;
It was the second worst month for the S&P 500 since February 2008; Throughout the year, October typically marks a peak in volume and volatility; Additionally, the likelihood of financial instability has reached unfavorable levels for 2022.
Risk Trends for the S&P 500 and Our Expectations for October We are entering a brand-new period on each scale for the first time ever. The future is fraught with uncertainty due to the shifting context surrounding investor sentiment and economic forecasts. For accounting purposes, there is typically capital repositioning among funds at quarter’s end, so the plunge into Friday’s close should be taken with a lot of caution.
Although the move of -1.5 percent in the S&P 500 was not particularly significant historically, it did send the benchmark US index to its lowest close in 22 months and mark the eighth session of decline in nine trading days. Without the caveat of the quarter-end adjustments, those could be considered solid bearish credentials.
Given the epic influences of 2022’s general risk course against the persistent hopes of the investment rank, I will approach this new week, month, and quarter with some neutrality.
Technically, the US indices have finished the week with significant breaks into essentially multi-year lows, raising fundamental concerns about significant risks of a recession. The context will drastically shift if we tip the otherwise orderly concern about economic contraction into the realm of financial instability, for which we see risk on the margins of liquidity measures.
In the meantime, market expectations will be influenced by seasonal norms going forward. The S&P 500 experiences a peak in volume and volatility (via the VIX) in October, as per historical averages. That is a powerful combination for market development, which typically sees the average performance of the underlying index reduce the severity of the situation.
The SPX has averaged a significant advance through October since 1980, which tends to reduce the peak potential for volatility and participation in the event that it reverses course. However, the underlying index’s directionality varies significantly depending on the fundamental conditions of the year. However, activity levels and turnover tend to be much more routine.
It makes sense to monitor the fundamental course of risk benchmarks through monetary policy and growth measures as we enter the new trading month; however, my concerns are shifting increasingly toward the fundamental operation of the financial system. Over the past ten years, the presumption that policymakers from the government and the central bank would intervene to fix any problems the market encountered has fostered an inherent dependency. The controversial term “central bank put” was born as a result of this dynamic.
However, the transfer of risk from market participants to entities backed by the government was not a long-term solution. Furthermore, we are witnessing the ebb and flow of responsibility. Although it does not appear to be reflected in measures of financial pressure, the recognition of a future in which investors will be burdened with more of the burden of their own choices should be regarded as a serious recognition. Even though there are some indicators of tension, none of the market’s most well-known indicators of fear appear to be reaching the same levels as the worries about a recession that we are discussing.
There will be no missing progress of fallout measured by any number of risk-leaning assets when it comes to a financial system that has transformed into fear in its fundamental stability. However, going forward, the measures of core liquidity will serve as my more accurate gauge of full-scale trouble.
Chicago Fed Website
Although it can be challenging to access, participation can provide some of the most significant insights into the capacity of the market as a whole. The most popular volatility measure in the VIX index is much more prevalent in trading circles. This past week, the benchmark activity measure reached a close above 31; however, it is exhibiting little of the instability that is typically indicative of a rapid rise in the activity measure from extreme congestion to 50 handles. However, the VIX’s 4-week historical average fell to its lowest level since January 2018.Be wary of the consequences.
