Within this backdrop, the equity juggernaut headed ever higher, while FX traders looked to be paid to be in positions, piling into carry trades, and seeing attractions in currencies such as the MXN and the USD.
There was a general belief that very little could derail this thematic - The coronavirus changed that, with concerns that supply chain disruptions, quarantining the public (in certain countries) and border closures will lead to lower global growth and a further deterioration in globalisation. In a market full of confidence and suddenly having to ask questions as to the extent of the economic fallout. Not to mention how to effectively price risk, market participants received few clear answers – this lack of clarity and uncertainty has caused ripples through financial markets.
GER30 – The German Dax (GER30) is somewhat less volatile than the ITA40 but is always a client favourite. The defence of 13000 to 12,900 (green shaded area) is undeniable and we're seeing that play out again today in Asia, thanks largely to Trump who has tweeted that the “stock market is looking very good to me”. S&P 500 futures sit up 0.7% at this stage and DAX bulls are defending this horizontal support. That said, 12,900 is the Maginot line and if this gives way then volatility in equities goes higher and the index should fall to 12660 and then 11860.
US500 – Similar to the GER30, the bulls are putting up a fight in this US index into 3214/12. They will want to see another snapback with price gravitating towards 3311, for a test of the 3328 gap over time. That said if 3214 gives way then expect even higher volatility and uncertainty to hit markets with a potential drawdown into 3070. One would expect gold, the JPY and the VIX index to increase should the index break 3212, so it should be on every traders radar.
US volatility index (VIX index) – For those who have not seen, Pepperstone are now offering the VIX index as a tradeable market. The VIX index is a measure of the implied volatility of the S&P 500 over the coming 30-days and is a great tool to visualise and express a view on the expected movement in the S&P 500. The higher the VIX, the greater the expected movement in the index. We can use this as a guide on concerns in the market.
Gold (XAUUSD) – Gold has had a solid run since late November, rallying some $240 and gaining in all major currencies (not just USDs). See Chris Weston’s weekly gold video on our YouTube channel, or sign up for his Daily Fix, for more in-depth colour on the catalysts of gold moves. However, gold remains a natural hedge against the economic fallout from the coronavirus and the risk of a Bernie Sanders Presidential election victory. There is a lot of love for the yellow metal at current levels, but pullbacks remain a buying opportunity.
As always when we see volatility ramp up, we look for a circuit breaker and a response to calm market nerves. While these are high level, the clear circuit breakers we see are:
Economic data - If the economic data due in the next two weeks, specifically that of China’s data flow, proves to be less bad than feared. Watch this Saturday’s China manufacturing and services PMI as key event risks, where a sizeable slowdown is expected. Will it be as bad as feared?
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