The S&P 500 has fallen to a multi-year low, but this does not constitute a complete “break.”

Sep 28, 2022 10:10AM +05:00
VOT Research Desk

Discussion Points

The View from the Market:

Volatility and the S&P 500: Risk Aversion Without Critical Technical Milestones Markets rarely move in a straight line, despite the fact that there are characteristics of a financial backdrop that can usher in a self-sustaining risk aversion.

It is not unreasonable to assert that bears have exercised serious control in light of the advancements in risk benchmarks throughout 2022 and this past week. On the other hand, the usual channels of emotion that I monitor did not reveal a complete breakdown. The Dow Jones Industrial Average, the German DAX, the UK FTSE 100, and the Hong Kong Hang Seng indices all extended their declines after receiving the official “bear market” label at the beginning of this week.

The EEM emerging market ETF, the HYG junk bond measure, and a variety of Yen-based carry trades all contributed to the decline; and the winds appear to be quite clear. However, the S&P 500 was unable to truly break out of the swing on June 17.The close on Tuesday was lower than the close on June 16 and the intraday low was higher than the 17th.However, from a technical point of view, it does not appear to be a complete break, and this is on top of a six-day slide, the longest since February 2020.Is this symbolic reticence due to spreading, or is it just a matter of time before momentum pulls it lower?

Although technical barriers can act as market catalysts on their own, it appears that systemic fundamental themes and more fundamental market conditions are currently exerting a greater influence on the financial system. The state of stability in core asset classes is the area in which I am currently most concerned. That core health is influenced by liquidity, but volatility is just as important. Additionally, conditions are remarkably extreme in terms of activity levels.

Traders are most familiar with stocks and the VIX volatility index, but the asset’s expected (implied) levels are far from the capitulation that many are trying to spot. The number is above 32 and at its highest level in three months; however, I believe that a “flush” is more closely associated with charges closer to the 50 mark. The level of implied volatility in the FX market and Treasury yields, which indicates issues closer to the financial system’s foundation, is currently more intriguing.

There is a phenomenon in markets in which positive news can result in a “negative” market response and vice versa. This is true even though the US data is getting better and the dollar is still the safe haven. That atypical response, which I interpret as a sign of “market conditions,” is more frequently a skew in underlying priorities rather than a deep complexity in the data.

There were two significant US economic updates this session that could have easily been used as fuel for the bears. The Conference Board’s consumer confidence survey for September improved more than anticipated (from 103.6 to 108), and new home sales increased by a remarkable 29% throughout August—the second largest leap in notional change on record.

Although there is a great deal of skepticism surrounding the course of both data streams, it could collectively be viewed as additional motivation for the Fed to maintain its aggressive inflation fight. That could be seen as a benefit for maintaining the economy’s strength.

Notably, the DXY Dollar Index reached new two-decade highs for the third session in a row through Tuesday thanks to data released this past session. The Greenback plays a few important roles, and knowing which path we ultimately take can provide valuable insight into the financial system .Interest rate differences are important, but the probability of the fourth 75 bp rate hike at the meeting on November 2 has dropped back 15 percentage points to 57% this session.

There is a significant degree of skepticism regarding the reliability of the housing and sentiment data for the world’s largest economy, which has contributed to the relative growth advantage that has kept EURUSD in control. This leaves the US currency’s appeal as a safe haven. There is an increased desire for the Dollar’s harbor, which includes Treasuries and money markets, as volatility rises. We’ll keep an eye on the DXY’s relationship with the VIX and EVZ.

There is significantly less overwhelming fundamental event risk set for Wednesday’s release, looking for the fundamental motivation to trigger full technical breaks and exacerbate the market conditions that have created such a risky backdrop. The trade balance, retail and wholesale inventories, and pending home sales figures are just a few of the US data that I will be keeping an eye on to see if they provide any insight into the economy.

However, that is not a high-level or immediate event risk. Another area of interest is the language of the central banks, particularly the Fed, ECB, and BOE; However, serious escalation is necessary to either reverse or exacerbate the fear. We will prioritize systemic discussions, followed by headlines and the economic calendar.

S&P 500 Time : 27/09 market close