Beware, Confidence and Risk Appetite Have Recovered Too Quickly
- A broad rebound in risk-oriented assets and tumble for havens denotes a market oriented towards risk appetite
- Yet, as comprehensive as the rebound in speculative appetite is, it also shows signs of being extreme
- Relative to their respective 50-day moving averages; S&P 500, VIX, EM ETF and AUDUSD signal a stretched risk position
Having trouble trading in the FX markets? This may be why.
There is little doubt that risk appetite has recovered these past weeks. Not only have we seen consistent rebounds across sentiment-oriented asset classes like equities, commodities and certain carry trades amongst others; but the moves have seen remarkable momentum. Yet, the concern comes through the intensity of the appetite itself. Fundamentally, the backdrop for absorbing risk has improved little between lackluster growth, fading returns and diminishing liquidity conditions. That makes the intensity of this prevailing drive that much more dubious. Measuring how stretched the market's confidence may be, comparing the various markets' current spot levels to their respective 50-day moving average illustrates how extreme the build up has been. The S&P 500 has surged beyond its medium-term average to a gap that is the largest in years. For the VIX (a fear gauge) the drop has put a divergence that is the largest in over a decade. These are exceptional moves without exceptional conviction; and the drive to maintain the move is something we should question. We discuss the current questionable and precarious state of risk in today's Strategy Video.
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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.