Was yesterday actually a case of turnaround Tuesday or merely the eye of the storm?
What a wild ride we've had over the past 48 hours!! And of course the downward correction in equity market was always on the cards as a combination of multi-year high bond yields, and record highs in US equity markets were foolishly unsustainable. And with interest rates sure to be on the move, equity markets were first to blink. But the voraciousness of the purge is what had many scratching their heads. In reality though, in this day of computer-driven algorithmic trading, this is not the first nor will it be the last mini flash crash to come.
There was nothing that particularly stood out other than an abundance of inflationary wood chips that formed into combustible markets resulting in the sudden repricing of risk.
But at the end of the day, bargain hunters reemerged as the S&P closed +1.74% with levels marking the area from which Monday’s late NY session sell-off began.But with so much volatility lingering, equity markets will have lots of wood to chop to restore investor confidence.
Adding some calm to the proceedings, St. Louis Fed President James Bullard, a non-voting member of the Federal Open Market Committee, attempted to dampen US rate hike euphoria stemming from Friday’s spike in average hourly earnings. He said, “I caution against interpreting good news from labor markets as translating directly into higher inflation.”
Oil
WTI oil prices recovered most of the afternoon losses, rising from $63.45/barrel at the close just shy of $64.0/ barrel in after-hours trading. API weekly crude inventories did not raise as much as forecast. But near-term sentiment remains tethered to yo-yo strings with equities and the dollar providing the counterweights. Risk aversion does not bode well for oil prices and with all the chatter (including the November EIA report) about US production ramping up there could be a growing propensity to move lower near-term.
Gold
Gold prices hit session lows late Tuesday afternoon as U.S. stocks bounced back up. But with asset rotation from equities to bonds, gold prices did not benefit from this uptick in volatility as investors are erring on the more conservative bond route given the market volatility. Equity gold hedges unwound in favor of a more traditional bond market approach as investors opt to sit out this VIX driven storm.
There's far too much volatility in the market and investors across all asset classes remain spooked
Currency Markets
The Japanese Yen
Traditional yen correlations are finally beginning to assert, so we should look for shifting risk sentiment to dominate the forthcoming sessions.
The Euro
EURUSD is entering a period of consolidation in the short term and yesterday certainly matched that argument. But Reuters reports that a final coalition deal is expected at some point late Tuesday in Europe.
The Australian Dollar
The AUD bulls are still licking their wounds, with the RBA’s dovish twist to guidance feeble retail sales and trade data. However, if you adhere to the yuan/AUD correlations proxy, one should not exclude the Aussie dollar just yet. The currency is nowhere near down for the count.
The Chinese Yuan
Acting as a haven and rightly so as the CNH remains very resilient to broader US moves. The PBoC 2018 working conference statement has cemented the view that the mainland is putting more emphasis on opening up bond markets while promoting the liberalization of the yuan. A real win for foreign investors who are finally seeing the barrier to enter China capital markets gradually fall by the wayside.
The Malaysian Ringgit
We should not lose sight of the great strides that the ringgit has made over the past 12 months and while investors confidence will be tested during this sudden uptick in volatility the ringgit will be more than up for the task.
Malaysia's economy remains robust; oil prices remain firm. With that in mind, equity and bond markets will continue to attract investors who want exposure in the ringgit. As we still hold the view that the ringgit will be less susceptible to other regional currencies as the BNM could increase interest rates again, Malaysia is the most significant oil exporter, and the central bank welcomes a stronger MYR.