Talking Points:
• The S&P 500 gapped lower to start the week and other benchmarks followed suit in a broad 'risk aversion' shift
• Normal 'checks' in extreme speculative position is to be expected with many instances falling short of a full bear trend
• Event risk will continue to accelerate after the BoJ decision, but the high profile events will motivate true trend
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A substantial deleveraging for the global financial markets is overdue, but that fundamental reality doesn't make the cleansing fire inevitable. The reach and build up behind speculative trends is just as important to account for with tentative corrections as it is for assessing extension of prevailing trends. Projecting the sustained climb behind stocks, government debt, Dollar and other risk or policy-charged assets is difficult to sustain given existing departure from fundamental 'value'. But that deviation is just as important when it comes to picking a true turn in tide on the way to the inevitable risk aversion. Yet, one day's correction from the S&P 500 or jump from an extremely low VIX is far from a clear signal of such a critical turn.
Sentiment trends remains the most capable and opportune, market-wide theme to tap however. While the thematic roots of Monday's developments is questionable, it is important to keep tabs on its potential. Not only did the SPX and VIX make significant moves; we saw a slide in global stock indexes, emerging market assets and currencies, high-yield markets, the Dollar and Yen crosses. That correlation is significant. To keep the fire to the market though, the masses have to be motivated to wholesale deleveraging. Though the event risk ahead is weighty, it may not prove influential in the right areas. Key rate decisions, sentiment surveys and the fast pace of policy changes may not necessarily spur change in sentiment. The deterioration of trade relationships and competitive monetary policy are more serviceable, but may not be able to carry the scope of unwind for the build up accumulated over the years.
For scheduled event risk, the Bank of Japan (BoJ) rate decision is only the second major central bank rate decision of the year. But the extreme lean from the dovish group has already raised questions of effectiveness and created limits for what the group can further enact. The Bank of England's (BoE) and Federal Reserve's meetings later this week likely face similar restrictions. For event risk like the Euro-area 4Q GDP, SNB currency allocations and Canadian growth figures over the next 24 hours; the capabilities for market influence are even more reserved. Nevertheless, should deep currents change; there are plenty of opportunities to prepare. Even if the course is event-drive volatility, technical patterns or rebalancing moves; there are options to consider. As a result, the Swiss Franc and Australian Dollar may offer better trade candidates than the Dollar and Pound. We discuss the start to this active week and what the landscape looks like immediately ahead in today's Trading Video.
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