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Risk Trends Start to Fracture, Brexit and FOMC Fear Running High

Risk Trends Start to Fracture, Brexit and FOMC Fear Running High

John Kicklighter, Chief Strategist

Talking Points:

  • The S&P 500 has suffered its biggest three-day tumble in four months, but that wasn't the only 'risk' metric falling
  • Brexit polls are generating exceptional volatility in the Pound and severely hampering reasonable trading
  • FOMC speculation will build over the next 24 hours with both the Dollar and global capital markets in the crosshairs

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Investor sentiment build upon the uneasy ending felt through the close of last week and outright stumbled Monday. US equities were a favored target of the risk appetite reflection, but global equities shared and other risk-oriented assets shared in the tumble. The intensity of the move is still at moderate levels - far from the panic and market distortion at the extremes. However, the conditions under which this downdraft is occurring and its subsequent side effects reflect upon a market that is dangerously unstable.

Among thematic concerns, the Brexit headlines continued to generate reckless volatility for the Pound into the new trading week. Friday's late ORB/Independent survey showing a large shift in favor of the 'Leave' camp triggered a dramatic drop from GBP/USD and the Cable crosses. Monday, a delay and rumor for an ICM update (responsible for the previous Monday's fireworks) caused volatile but directionless trade which was reset to the bears after an early Tuesday morning pair of polls. This is not likely to settle as the countdown continues. In contrast, FOMC speculation will likely focus Dollar attentions and curb convictions one way or the other until it is clear what course this complicated event follows.

With the fundamental headlines growing bolder and less predictable, complacent trading and expectations of low volatility appreciation in capital markets is an exceedingly risky strategy. Close monitoring of exposure is the bare minimum for responsible investing. That said, active and preemptive reduction of risky holdings is a strategy that can curb more risk than any return potential can outweigh. Investors should be cautious and traders oriented towards the tactical. We discuss general market conditions and active trading winds in today's Trading Video.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.