Sep 27, 2022 8:00 AM +05:00
VOT Research Desk
Arguments: –
Dow, GBPUSD, VIX, Dollar, and the EURUSD Recession:
The View from the Market: Bearish USDJPY below 141.50;Gold Bearish Below 1,680 Seasonally, volatility has continued to rise into the 39th week of the year, while SPX has historically averaged its worst loss – Monday seems to be living up to the norm For risk watchers, the tipping point of the Dow into a “bear market,” the extreme volatility of the GBPUSD at record lows, and the traction on concerns about a recession can more than just anchor fears.
Start Quiz Risk Aversion Continues into the New Trading Week Anyone hoping for a “fire break” from the risk aversion that broke out after the FOMC last week would be disappointed by Monday’s volatility and general slide in most speculative assets. In the sentiment-oriented markets, there was a lot of fighting this session, but I think the British pound was the absolute highlight.
We can only recall a handful of instances over the past ten years when the Sterling was the primary designated risk trend (generally in a negative light).In the past, GBP topped the global speculative conversion at the Scottish referendum, general election, Brexit vote, and acute flash crash. Include the 26th of September in 2022 on that list.
Some suspicious activity during extremely low liquidity was amplified by a push to record lows as a result of monetary policy discrepancy, growth underperformance, and the absence of any safe haven status. Nonetheless, the FX offerings of the world’s largest and fifth-largest economies make this the third-most liquid currency cross in the world.
We should pay attention to and be concerned about this kind of thing.
We should always keep an eye on the undercurrent, even when some parts of the financial system are fraying. The so-called “value index” has officially entered an official “bear market,” which is defined as a 20% correction from all-time or cyclical highs. The Dow Jones Industrial Average’s -1.1 percent drop this past session is a more traditional speculative milestone.
Given that the S&P 500 was given an unfavorable rating in June and the Nasdaq 100 was given an unfavorable rating in March, this shouldn’t come as much of a surprise. However, the erosion of confidence caused by complacency and justification will suffer severely. Institutions that represent larger capital pools may be persuaded to reposition as a shift from noise to signal if the headlines continue to reference this blue chip’s surrender.
The severity of risk trends and seasonality. Historically, one of the worst times of the year for the benchmark risk measures that I monitor is approaching. The only month in the year when the S&P 500 has averaged a loss since 1980 is September, when volume starts to recover and volatility peaks in this month and into October. Perhaps the volatility, combined with the backdrop of still-thinned liquidity, makes for such exceptional conditions.
As we have pointed out, the 39th week of the year, which we are currently traversing, is typically the worst of the year, and the current circumstances only make this possibility even more likely. As September comes to a close, any lingering uncertainty regarding genuine financial system concern is quickly dissipating. Even though we are not required to meet historical averages, fighting the statistically relevant is a dubious strategy.
Our “risk severity” gauge has been updated to reflect the market state. We are, in my opinion, witnessing many of the characteristics of a market environment that have the potential to stop a severe and/or prolonged unwinding of speculative exposure.
Our evaluation generally begins with a high correlation of risk-sensitive assets and severe moves from several of those key players. With global equities, emerging market assets, junk bonds, speculative commodities, and haven assets (with inverse performance) all aligning, we believe that is a fairly prolific sign at the moment. Although it does not have to keep the market in the dark, this lays the groundwork for a prolific development.
Volatility measures for the aforementioned asset classes are useful for assessing the otherwise abstract view of “risk trends” in a manner that is both more practical and relevant to the present day. The FX market has led a significant increase in expected (implied) volatility measures over the past week. With USDJPY feeling the effects of intervention, EURUSD achieving parity, and GBPUSD’s extreme volatility at record lows, Currency traders are increasing the costs of hedging because of the stability pressure placed on what are otherwise the most liquid assets in the financial system. This shouldn’t come as a surprise. We fear of a “financial crisis” will grow as these measures continue to rise.
Although price alone can certainly cause panic, fear does not arise in isolation. In point of fact, numerous systemic issues have the potential to carry on the legacy of market disruption in the future. The possibility of a global recession remains, in my opinion, one of the broadest potential threats in the global market that is far from fully discounted. The news that the Brothers party won the election in Italy has brought this aspect of risk to life, emphasizing the disparity between the generally negative outlooks for the economies of the Eurozone and the United States.
International investors are concerned that the political impasse and Europe’s economic struggle will only get worse as the group weds the Italian public and tries to allay concerns about a far-right lineage. As a carry backdrop, this backdrop appears to be more aligned with EURUSD performance than a straightforward EZ-US yield differential.
Notably, the OECD’s revised interim economic outlook did not match the political power shift. The “world” outlook remained unchanged at 3.0% from June, while Italy’s 2022 projection actually increased by 0.9 percentage points to 3.4%.China (-1.2 percentage points to 3.2 percent), the United States (-1.0 percentage points to 1.5 percent), and Germany (-0.7 percentage points to 1.2 percent) all experienced significant declines. The significant downgrade that was predicted for 2023 was fairly widespread .With this type of course, how likely is it that the world will experience a recession? A “soft landing” is becoming more and more like wishful thinking.
