Daily Fix: Implied volatility rising, and this could be very telling
As we head into the guts of the week, the market has started to pay up for implied volatility (IV), with the VIX index pushing to 16.28% and Nasdaq 100 IV towards 20%. Changes in volatility structures are always of interest, as volatility is the epicentre of markets. It defines what currencies we trade, what strategy we employ and how much risk we take on, as well as helps us achieve correct position sizing.
If we contrast the slight grind higher in US equity index IV to the sizeable increases in implied volatility in gold (white), bonds (green), FX (purple) and oil (red) as factored year-to-date, we can still see implied volume in equities, while turning higher, is still far lower than other markets. Will that change like we saw in May?
Equity volume is turning higher, though, as traders feel price moves will divert increasingly from a mean. Variance will therefore pick up. If I look at the Nasdaq 100 (NAS100), we can see a strong underperformance overnight, with a fall of 1.7% vs a 1% decline in the S&P 500. The daily setup looks interesting, with price having printed a bearish momentum crossover, as price closed through the recent uptrend. A break of 7600 takes the index to 6934 (the major double-bottom). And if risk aversion does pick up from here as we navigate through the G20 summit, the Nasdaq 100 would be the weapon of choice for me.
While we tend not to look backwards, the overnight US consumer confidence report requires attention, with the headline reports dropping a sizeable 9.8 points to 121.5. While this needs in-depth investigation, when we overlap US consumer confidence (white) with the S&P 500 and periods of recession (in the US), we’re suddenly paying attention here, especially given turning points in US consumer confidence have played out before key drawdowns in the S&P 500 — one the equity bears will now be keen to follow.
We can also look within the consumer survey and see the “labour market differential component,” which looks at respondents (of the survey) who said “jobs are plentiful” versus “jobs that are hard to get.” Here, I’ve inverted the chart (the white line) to better highlight the correlation with the US unemployment rate. We thus find the move lower in this survey (we see this chart higher) could lead to a higher unemployment rate. Another red flag to watch going forward with the labour market, as it’s in most other economies, is key.
While having heard from Federal Reserve Governor Jerome Powell, another talking point was comments from St Louis Fed Governor James Bullard, which had stolen the limelight, causing US two-year Treasury yields to push up about five basis points, and USDJPY 50 pips, although traders eventually faded the move. Along with Nael Kashkari, we know Bullard is the big dove on the Fed board, so it won’t surprise that he’s arguing for an insurance cut at the July FOMC meeting.
But when the market has gone some way to pricing in a 50bp (or 0.5ppt) cut at this meet, and they hear Bullard say the “situation doesn’t call for 50bp,” we take notice. It’s a reason why we’ve seen a doji candle and indecision in the USD index (USDX), with a rejection off the 200-day MA. It’s why USDCHF has stabilised, although price printed a lower high and remains contained into the five-day EMA, as well as why EURUSD has moved back to 1.1357.
We’ve seen gold sellers, and that’ll not surprise given how frothy things had become. We’d seen price push into US$1,440, which was a full 100% extension of the measured move off the May lows. If the market is questioning a 50bp cut, then that in itself has been enough to see a few gold longs take some exposures off the table. The market wants to buy dips here, though, so we look at US$1,400 (the 23.6% fibo retracement of the 31 May rally) ahead of US$1,376 (38.2% fibo).
USDCAD is on high alert, with price looking like it wants to break the double-bottom at 1.3150. Flip to the four-hour chart, and we can see how price has reacted to these horizontal support/resistance levels. A break of 1.3150 on the four-hour would be a trigger. But, of course, when we’re trading, it’s all about how the price behaves when we do see these breaks that matter most.
Expect shorts in AUDCAD to get attention, too — specifically, should price close firmly below the recent double-bottom.
The CAD has performed well in G10 FX in the past two sessions, largely as a result of a better feel to crude, which found a bid on the back of the API (American Petroleum Institute) crude inventory report overnight showing a 7.55m barrel draw. Traders will see the API inventory report and extrapolate this outcome to the more influential DoE (Department of Energy) inventory report. The DoE report is due 27 June at 00:30 AEST, two hours after the US durables good report. With consensus estimates calling for a 2.83 million barrel draw in crude inventories, US crude probably needs to see a drawdown of over four million barrels — or the risk is we see sellers. Should we see over four million barrel draw, it could hold push CAD through these key levels.
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