Regime Shift in Volatility?
The Volatility Index (VIX) closed at its highest level since the first days of July on Friday, and it also broke the dominant trendline that has been in place since March. As the US stock market has the most important safe-haven for bulls for several months now, with the rest of the world entered a grueling downtrend, a persistent shift in volatility could signal troubles ahead for risk assets globally.
VIX (US Volatility Index), 4-Hour Chart Analysis
The VIX fell as low as 11, in September, and now it should return below 14 quickly to avoid a regime change that could lead to a deeper correction in stocks. The trigger of the move was the swift rise in Treasury yields, but form a broader perspective, the fundamental reason of the turmoil, as in the case of emerging markets, is the slow shift to Quantitative tightening by the central banks. This month will mark the turn when the global “extraordinary” monetary operations enter negative territory, and financial markets might already be starting to show the symptoms of that.
Trendlines Broken in the US, What’s Next?
S&P 500 Futures, 4-Hour Chart Analysis
The first few days of the week saw a push to new highs by the major US indices as we expected, but the narrow rally abruptly halted and the market rolled over in the second half of the week. While small-caps were already signaling troubles ahead, large-cap US stocks were only broken by the historic break-out in Treasury yields, multi-year highs cross the curve.
The rising short-term trendlines are now violated by all of the crucial benchmarks, following in the tracks of the Russell 2000, which already tested its 200-day moving average on Friday. While it’s early to say that the longest bull market in history is ending, we have been urging a defensive long-term positioning for investors despite the bullish technical setup. Valuations are still sky high in US looking at every historically reliable measure, but until a confirmed trend change, traders could still buy the dip, as soon as the indices get oversold.
EUR/USD Headed for Test of Lows?
EUR/USD, 4-Hour Chart Analysis
The most traded forex pair breached the 1.15 level this week, as we speculated, and although the Euro ended the week on a slightly positive note, technicals now point to a test of the August lows in the near future. The debate surrounding the Italian budget, coupled with the rising US yields created a hostile environment for the common currency, and the US-Canadian trade agreement removed a huge risk factor with regards to the Dollar.
While a valid argument can be made that the fiscal expansion in the US should hurt the Dollar, the Euro’s structural problems are of a different magnitude, and a broader risk-off shift will likely favor the Dollar, especially if US growth remains strong.
Emerging Market’s Leading the Way Lower Again?
EEM (Emerging Markets ETF), 4-Hour Chart Analysis
While emerging markets haven’t shown the same panicky signs that we witnessed in August, the US selloff and the Dollar’s weekly gains still hurt the segment. We expect weakness in Chinese assets next week, as the US midterms are approaching and President Trump will likely go all-in on the trade war following the US-Mexican-Canadian trade agreement.
The People’s Bank of China eased monetary conditions over the weekend, by cutting reserve rates and releasing liquidity to get ahead of a possible Monday rout, but the Dollar/Yuan pair will still likely see fireworks next week. That said, given the selloff in equities in the US, this time around we expect larger moves in stocks too. In any case, investors should keep a close eye on the most vulnerable countries, since they might lead the way lower yet again.
US CPI and PPI on Tap, Surge in Yields to Continue?
It will be a relatively quiet week with regards to economic releases, but given the few crucial inflation related events, huge swings are still possible across asset classes. The US CPI and PPI indices will be the most important indicators coming out, and after last month’s lower than expected numbers, analysts expect a monthly rise of 0.2% in both measures.
Treasuries could remain volatile especially in the case of an upward surprise in inflation and that could have a profound effect on global markets. The European Central Bank’s Policy Meeting Accounts might be important to forex markets too, but all-in-all technicals could be more important next week.
Major Stock Indices
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Nikkei 225 Futures, 4-Hour Chart Analysis
Shanghai Composite Index CFD, 4-Hour Chart Analysis
USD/JPY, 4-Hour Chart Analysis
GBP/USD, 4-Hour Chart Analysis
EUR/GBP, 4-Hour Chart Analysis
AUD/USD, 4-Hour Chart Analysis
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