VIX Drops 10 Though Dow Doesn't Rally, Yellen Keeps Monetary Policy Focus
- Risk appetite was stronger to start that week - with VIX sliding below 10 - but there was little progress to be found
- A sharp drop from Etherium (relative to Bitcoin) and an intraday Gold flash crash were Monday's most surprising moves
- Monetary policy was key to start the week with the BoJ and Fed opinions, Yellen and financial stability reviews are ahead
The markets were comfortable to pursue the status quo - risk appetite - to start the week. Yet, traction was once again restrained and uneven for those markets that depend on sentiment to mark progress. Global equities proved to have the hardest time Monday for making another go at fresh multi-year and record highs. The retracement of initially strong openings progressively deepened as the day wore on to the point where the S&P 500, Dow and Nasdaq carved out what pure technicians would consider opening moves for more comprehensive reversals. Of course, given the persistence of complacency and the lack of a clear fundamental driver, such initial signals should be held to deep complacency. For the more popular 'risk' rank, initial advances held up a little better. Emerging markets, high yield and carry (such as USD/JPY) kept their candles green. The reminder that we should not draw too much speculative ambition from these day-to-day moves was the VIX's move back below 10. We haven't seen a close at these extreme, single-digit levels in 16 trading days; but it certainly reminds how complacency is skewing our evaluations.
For fundamental guidance to prompt and direct the market through the session's open, we have some remarkable and wide ranging headlines. Unique headlines for the Euro centered on the news that Italy would bail out two banks that the European Central Bank (ECB) had said through the close of this past week had failed or soon would. While this curbs the immediate financial fallout of a spreading financial crisis for the region, it has drawn the consternation its EU partners who had vowed not to bailout investors with taxpayer money. This is another stress point for an already pained Union. A more familiar theme of monetary policy was tapped by the BoJ and Fed. The former released its Summary of Opinions which noted an unnamed member called for greater transparency for the group's policy plans given that the market was clearly speculating on their next moves and further marginalizing the effectiveness of their program. From the few Fed speeches, Williams was a 'standard' bull while Dudley ventured into the conversation of financial stability amid extremely accommodative policy. Both speak to deeper considerations further afield rather than the immediate flush of volatility.
Ahead, the monetary policy and financial stability focus will remain a focal point of fundamental motivation. Starting in the Asian session, the Chinese Premier is due to speak. Given the news the country's banking regulator has called on local lenders to evaluate their investments amid concern of growing systemic risk in banking, global investors will keep a cautious eye on this increasingly interconnected player. During the European hours, both Germany and the United Kingdom are due to release financial stability reports. The former's role as the EU's central player and the latter's dealing with Brexit will color the interpretation of each. In the US, a range of Fed speak will be dominated by Fed Chairwoman Janet Yellen. Her speech is not targeting domestic policy - that would likely result in boilerplate rhetoric and little market response. Rather she will speak on global economic risks, which carries significantly more potential. Compared to these slow burn, broader themes; the dramatic volatility of Gold and cryptocurrencies (Etherium and Bitcoin) should be eyed with greater caution. A 'flash crash' for the former and level of perpetual volatility for latter can make them alluring but difficult trading vehicles. We discuss these themes, markets and more in today's Trading Video.
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