Selling Turns Panicked for US Equities, VIX Soars and Dollar Readies
- The Dow 30 and S&P 500 followed up with last week's 4 percent loss with a sharper move in Monday alone
- Particularly impressive performance was the S&P 500's biggest bearish gap on open and worst single day loss in 7 years
- Global equities, emerging markets and VIX already show a level of panic; traders should watch Yen crosses, gold and Dollar next
Fear Is Kicking In
An already intense bout of risk aversion this past week turned extreme late in the New York session Monday. Markets were already carrying forward the pain from the past week with global indices awash in red while other assets higher up the risk curve suffered different degrees of retreat. Yet, an otherwise orderly bout of risk aversion turned into a mild panic through the afternoon hours of trade in the New York session. Benchmark US equity indices accelerated their respective declines to register plunges tallying 4.1 percent and 4.6 percent for the S&P 500 and Dow 30 respectively. Both earn the designation of the worst single day's decline since August 2011. And just because the bell rang at the NYSE, doesn't mean the pain stopped. After hours trade in futures markets saw an extension of the slide.
Isolated Fear to Full Contagion
The afterhours bearish sentiment through Monday's close and the fact that the Asian and European markets were closed for much of the fireworks suggests that the global markets are preparing to 'catch up'. The real risk comes should the circulation of fear maintain intensity through the circumnavigation of the world's markets. For that, we are not just shedding loosely held short-term speculative exposure. That would insinuate a more motivated and full deleveraging from nearly nine years of build up based on questionable motivations like excessive monetary policy and unnaturally low levels of hedging and implied volatility.
As the Risk Sentiment Spreads
Speaking of volatility, the VIX surged over 100 percent on the day the past session for one of its most remarkable charges on record. Thankfully, the heavy net short futures exposure had been cut back in the past months, but not far enough. The popularity of volatility-based ETNs will no doubt bring forward some serious flaws in pricing and liquidity for popular assets like the inverse VIX products. Many closed without fully reflecting the severity of the underlying VIX, and stability will certainly be called into question. Meanwhile, the likes of gold didn't seem to show its natural proclivities as a safe haven. The precious metal actually dropped on the day, much as is expected if we were just pricing against the US Dollar.
Next Opportunities for Risk and Other Themes
Should risk aversion continue and/or intensify, we should keep tabs on the correlation of assets across the spectrum. In FX, the Yen crosses are of particular interest as they have been a staple that has stubbornly refused the yoke of traditional risk on - risk off over the past years. Yet, an equally-weighted Yen index is lining up to a possible technical breakdown. Pairs like EUR/JPY, GBP/JPY and AUD/JPY are all in the aim of sentiment. USD/JPY on the other hand becomes an important point of debate over the intensity and intent of risk aversion as Yen crosses are carry unwind in risk off while the Greenback is a true haven for liquidity. Speaking of the Dollar, few pairs are more founded on speculation over the past year and years than EUR/USD. I will be watching that pair particularly intensely. We discuss the landscape as risk aversion intensifies in today's Trading Video.
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