S&P 500, USD/JPY, VIX Moves Raise ’Risk Aversion’ Threat/Hope

Talking Points:

• Risk-based assets and measures offered a collective 'risk aversion' move Tuesday, but conviction eased late in the day
• Where the S&P 500, Dollar and Emerging Markets recovered from losses; Volatility measures and Yen crosses held on
• Traders should keep tabs on sentiment trends versus liquidity, US inflation pressure on Fed, and a slew of Aussie data

See how retail traders are positioning in S&P 500, Oil, EUR/USD and the other majors using the DailyFX SSI readings on the sentiment page.

The temptation was high this past session. While there wasn't much depth to the 'risk' conviction in the market, there certainly was depth. Assets that run the sentiment spectrum were aligning to their more base natures despite a lack of the high profile event risk and themes we have come to expect for serious motivation. A healthy sense of skepticism has served market participant well these past months, and current conditions are no different. In this most recent swell in fear, there was certainly reason to believe that there was fundamental traction. Global equities, volatility measures, Yen crosses and the more unusual speculative exposures had all dove through the European and morning hours of the New York session. Yet, many of the benchmarks would recover from those session lows. Most notably, the S&P 500 which dove to meet 2017 trendline support, held the line and actually closed higher on the day. Global equities, the Dollar and emerging market proxies all joined the rebound.

However, not all risk sensitive markets were as keen to regain lost ground. The volatility measures across asset class continue to struggle. The S&P 500-based VIX has pushed above 15 for a 2017 first and offers up greater conviction in some ways than even the anticipation that built in the November Presidential election or the Brexit outcome. In other markets, we see the Euro-based measure soaring despite its patron EUR/USD undercutting the yielding chasing Dollar. The Yen crosses were perhaps the most remarkable FX development on the day. USD/JPY finally cleared 110 with hearty bearish day while AUD/JPY and EUR/JPY posted impressive technical moves of their own. There is appealing technical guidance to follow with these pairs, but fundamental conviction needs to be confirmed before we throw too much weight behind these moves.

Heading into the second half of the week, event risk will fill out but it fights a liquidity issue. The drain through the end of the week for the Western hemisphere will cause problems for momentum building. Risk trends when fully engaged require little fuel to burn. Yet, we aren't really at that scale...yet. It is worth expending the mental energy necessary to do a regular sentiment check though. In more mundane channels, the Dollar will see an accelerating fundamental push. A run of inflation data that starts with import prices and culminates in the market-favorite CPI starts today. The sentiment survey on Thursday will add another layer of depth for speculators. For the Aussie Dollar, a strong concentration of event risk (employment data, RBA financial stability review, inflation expectations) Thursday morning Sydney can generate strong volatility - though a lasting trend is likely beyond its scope. Pairs like GBP/AUD and AUD/JPY are early and troubled movers, AUD/USD and EUR/AUD are better boundary options while AUD/NZD may be one of the few unencumbered. Other themes like the Pound's Brexit distraction will be tough to convert into energy. We discuss jolts in the market and which have a better chance of evolving into trend in today's Trading Video.

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