The Daily Fix: A huge week ahead in the making

Head of Research

27 Feb 2020

While we still have to clear this weekend’s China PMI data, and the South Carolina primary, the central focus next week will remain on the spread of the Coronavirus above all else as it has gripped the financial markets.

We do also navigate through Super Tuesday, where a third of delegates will be up for grabs from the various Democrat nominee runners. I don’t touch on this in the video, as we will be putting a greater focus on this in a separate video on the US election and the process going forward here.

I focus in greater depth on implied volatility, as it has become incredibly high here, with some punchy moves implied through options prices. So, whether I am looking at vols, or my internal equity euphoria/pessimism equity model, we are now at extremes. Is it time to buy risk for slight mean reversion in price? It’s certainly looking compelling, albeit incredibly brave.

NYSE advances and declines

Source: Bloomberg

I touch on rates pricing and as we can see from the chart below, expectations have become incredibly rich and there will be some huge opportunity when we get a disconnect between central bank views and a market with a high conviction that lower rates are coming. Consider we saw an interview in the FT with Christine Lagarde and she basically spelt out that a rate cut is not imminent.

The chart that has garnered so much attention today is that of the S&P 500, with price smashing through trend support and the 200-day MA. Strange things happen below the 200-day MA, but how long it can stay below here is now key. But we’re insanely oversold and unloved levels, but timing the move is the clear issue, and on current news flow the question is how high reversion goes before you take profit and flip to shorts again.

S&P 500 daily chart

One to watch, but with vols sky high and equity and credit getting taken to the woodshed, carry structures in FX have been chopped up and it has hurt those who haven’t reacted. A big week ahead though, with some key event risks to navigate your portfolios through, the week ahead video above is designed to offer some light here.

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