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S&P 500, Crude Oil, Yield Curve Tumble as Risk Aversion Aligns to Flu Fears

S&P 500, Crude Oil, Yield Curve Tumble as Risk Aversion Aligns to Flu Fears

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S&P 500, Oil, Yield Curve Talking Points:

  • Headlines around the coronavirus multiplied over the weekend and market-based risk trends didn’t miss the fear
  • The S&P 500 posted its first 1 percent change day (a drop) to break a 72-session streak that raises concerning precedence and risky patterns
  • Whether a global health risk, military engagement, election risk, growth concern or some other catalyst; a sentiment move can be dangerous

Virus Fears Tap Into Global Risk Fears

We registered a jolt to risk trends through the end of this past week when benchmark US indices took a nasty dive through Friday. There have been similar developments in the recent past which have benefit the weekend liquidity drain to realign to whatever fundamental justification was necessary or available to maintain the convenient complacency that seems to show back up before more systemic developments take hold. Yet, the loss of market depth didn’t do the financial system any favors this time around as was evidenced by the accelerated retreat through Monday. The prevalence of bearish gaps was unmistakable. It is familiar human behavior that when something troubling occurs, a reason ‘why’ is sought out to help curb fears that it can happen again or that it is due to progressively worsen. That is the risk inherent in the virus fears.

Chart of Google Trends Search for ‘Virus’ and ‘Flu’ for Past Five Years

Graph from Google Trends Console

Updating a measure I have referenced a few times recently, Google search interest in the most generic terms related to the coronavirus (‘virus’ and ‘flu’) have climbed significantly. Even when the filter is adjusted to include global and financial interest, the concern is explicit and severe. This is not the only fundamental concern to challenge the market’s default ‘risk on’ bearing. Concerns over economic health, the declining efficacy of monetary policy, dithering rates of return and artificial threats to stability (like trade wars) have all had their turn at the wheel – and some have had multiple turns. Attaching sentiment to this outbreak is different in that it is more difficult to track with less direct data and it is not something that can reasonably be quelled with a policy decision or data update. Placing the burden of relief on such a nebulous scenario can certainly raise the perspective of uncertainty. Volatility measures naturally responded in kind.

Chart of Volatility Indices for Different Assets on a 12-Month Rolling Change Basis (Daily)

Chart made by John Kicklighter with data from Bloomberg Platform

The Breadth and Environment for Risk Trends

While much analysis is directed towards evaluating the major fundamental events and themes in the open market with assessments of their potential under different scenarios, the vast majority of the drivers we see discussed are ultimately means to an end. They are catalysts stirring sentiment for better or worse in a particular region or asset, and in some rare cases it spans the entire market. Yet, the scale of impact is generally measured on in the data’s outcome or its textbook interpretation of a GDP impact but rather how thoroughly it can impact systemic risk trends. Monday’s slump in risk-oriented markets was both severe and broad which suggests it has greater capacity to drag the markets down more comprehensively and for longer. Of course, as wide and intense as the move was, it is still very early in the transition from extended complacency; so caution is warranted regardless of which side of the risk spectrum your views fall.

Chart of the Scale of Risk Sentiment

Chart made by John Kicklighter with data from Bloomberg Platform

Being a data person myself, I do like to find statistical references in history to garner a sense of the market’s potential. One such measure comes with the inordinate stretch of quiet in the S&P 500 that we had registered up until Monday’s performance. There are many ways to read market activity – the most popular of which may be the VIX nowadays – but I have been particularly interested in the limited realized volatility from day to day of the most heavily traded benchmark through derivates: the S&P 500. With a -1.6 percent drop through Monday’s close, this benchmark ended a streak of 71 consecutive trading days without a 1 percent move (bullish or bearish). Over the past quarter of a century, there are only two particular other instances of quiet to surpass this extreme: October 9th, 2018 and January 25th, 2018. The market following the end of these periods were the extreme tumbles of recent memory. That doesn’t ensure the same will happen this go around, but starting from ever greater extreme highs represents even more to lose.

US 500 Mixed
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 3% 0% 1%
Weekly -7% 0% -3%
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Chart of S&P 500 and Consecutive Days without a 1 Percent Move (Daily)

Chart made by John Kicklighter with data from Bloomberg Platform

Further Catalysts to Stoke, Curb or Distract a Sentiment Run

Risk trends are the ultimate destination when it comes to the markets, but that doesn’t mean event risk that acts as rudder for these systemic moves is without analytical and trading merit. When markets are already moving, key event risk can act to accelerate the market, decelerate the market or event distract long enough to sideline an otherwise productive move to allow the pull of complacency come back into play. Through the upcoming session, there is range of scheduled event risk that is more significant to traders than the tame listing we were met with Monday. In particular, the US is facing a range of direct event risk. Top of my list is the Conference Board consumer sentiment survey which will be used to reflect on market performance, economic activity, election insights and even the coronavirus. However, the US durable goods orders and earnings figures (particularly Apple) will offer important economic insight on the world’s largest economy. Looking at the 10-year to 2-year and 10-year to 3-month yield curves, serious concern is starting to formulate again.

Chart of the US 10-Year to 3-Month Treasury Yield Curve with 20 and 200-Day Moving Average

Chart Created with TradingView

Looking further ahead, there are far more weighty indicators on deck that can act as amplifier or anchor depending on the outcome. On the US side, Wednesday’s FOMC rate decision carries an even greater impact than what we were expecting before the week even began. Before Monday’s volatility, the ECB rate decision this previous week left us with an impression of a major central bank that was starting to alter its monetary policy course such that the question of scope for further troubles was a serious concern. With risk aversion kicking in, a not-so-subtle question of ‘what will the Fed do’ and ‘what can the Fed do’ starts to arise. Further beyond that, 4Q GDP figures will add more tangible numbers to what are now speculative fears. If the market is already on a bearish bias, additional event risk is likely to take on the role of justifying building concerns. Be cautious.

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Chart of S&P 500 with Aggregate of Largest Central Banks’ Balance Sheet (Daily)

Chart made by John Kicklighter with data from Bloomberg Platform

If you want to download my Manic-Crisis calendar, you can find the updated file here.


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