Talking Points:
- In various measures of value, the markets - and particular US equities - look stretched
- There are any number of eventual sparks that can prove contagious to global sentiment due to underlying conditions
- Three of the most popular concerns now are election fallout, monetary policy changes and China
See what live coverage is scheduled to cover key event risk for the FX and capital markets on the DailyFX Webinar Calendar.
After devastating events like global financial crises, the focus - after the dust settles - to what caused the fire. In 2008 after the Great Financial Crisis (GFC), the driver was said to be the subprime housing crisis. After the dot-com bubble of 2000 and bust, it was the failure of certain tech companies who saw their share price go to zero or severely reduced. However, that focus on ignition provides less valuable information for traders and investors for the future. It is the circumstances and environment that setup the crisis that staged such events. Yet, that doesn't mean the spark is unimportant. It provides the crucial aspect of timing. But, there are more prominent detonation triggers than others in our currency situation.
Few would argue that the markets are currently stretched. Even bulls would have to admit that markets are riding quite high. A fundamental would inevitably land upon stretched value metrics whether through growth/earnings potential or risk-reward evaluations. That sets the stage for susceptibility to meaningful unwind. Complacency is not a particularly firm foundation for investors to hold exposure through troubling winds. This represents a fertile landscape for trouble wherever it should emerge. While the catalyst offers timing and the ability to tip the scales into a vicious cycle, it doesn't alter the ultimate depth of the deleveraging that would ultimately be suffered.
What ultimately is the crack that sinks this ship? There are many potential developments both known and unknown that could fell our markets. The best option we have in evaluating the probabilities is to keep track of those pressing themes we actual know about. I discuss general concerns that dominate market fears (US elections, Fed/ECB policy events, China) and what a trader poll reveals about the 'market's' expectations in today's Strategy Video.
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