VIX Trends and Critical Fundamental Threats Make Markets Wary of Financial Threats

S&P 500, VIX Index, Financial Conditions, ISM, Employment, AUDNZD Issues:

• Market outlook: USDJPY bearish below 141.50; Gold bearish below 1,680
• The S&P 500 posted its biggest one-day rally, up 2.6% from a 22-month low, but that seems more to do with temporary seasonality than confidence.
• Historically, the VIX and market volumes are expected to peak in October, a thorny proposition given fears of a recession and financial instability.

S&P 500 and VIX: Seasonal and Structural Sentiment

Monday’s session opened more than just a new trading week. October is also the start of the fourth quarter. There are a number of seasonal capital flows associated with this transition, and these trends are related to the increased risk appetite of this past session, rather than the more traditional means of fundamentals or technological progress. There is a possibility that This is important because seasonal effects are inherently limited in duration. This does not mean that the public cannot move to stronger motivations for constructing views. But without additional transport, the run could end quickly. The 2.6% gain from the S&P 500 appeared to lead the way, especially when it came to ‘Risk’ performance on Monday. This was his biggest one-day rise in over two months. Specifically, his July 27th when the Fed raised its benchmark rate by 50 basis points.

S&P 500 Volume, 20-Day SMA, 1-Day ROC Chart (Daily)

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My skepticism about initiating a persistent bullish reversal is certainly based on technical and fundamental background. In addition to a larger bearish trend in 2022, the thematic outlook says financial conditions could be destabilizing in the battle against rampant inflation, along with serious concerns about a possible global recession. Minor concerns are seen. Both conceptually and thematically, given that the world’s major central banks have built massive stimulus packages over the past decade, speculators have changed their personal sense of exposure to risk. Excessive leverage exists in the sense that Expected (implied) volatility is high across the financial system, especially in yields and FX, making financial markets uneasy. It was Franklin D. Roosevelt who said in his 1933 speech, “There is nothing to fear, fear itself.” In that context, it could have been reassuring. But for a market driven by herd mentality, it can be devastating. And given that the historic bar for volatility peaked in his October, we should be concerned.

Relative Equity, FX, Gold, Government Bonds, and Emerging Markets Volatility Charts (Daily)

chart by John Kicklighter

Recession Concerns in Focus on ISM Data and Job Figures Before NFP

Seasonality and sentiment are abstract but important threats to monitor future trends. It is difficult to predict how crowd perceptions will change over time, but we can be informed by more mundane basic themes. One view is that a recession is likely, if not inevitable. Perceptions of a “soft landing” have returned to the general view of the United States and the world in recent weeks, but that optimism was pegged at this past session with the release of his ISM manufacturing report in September. was made Expected to slow down over the past month, the 50.9 reading was much more constrained than expected. Moreover, the forecast is grim, as both the employment (48.7) and new orders (47.1) factors fell sharply from last month and are in ‘contraction’ territory. At the very least, attention to service sector reports later this week will increase significantly.

S&P 500 overlaid with ISM surveys for manufacturing and services (monthly)

Chart created by John Kicklighter using data from ISM

If we’re really paying attention to the health of the world’s biggest economy, the set of jobs data we’re headed for could get some serious market-based traction. Concern (and perhaps fear) could escalate significantly around the September non-farm payroll figures due to be released on Friday, with the ISM factory employment reading declining. In the meantime, we’re working through a series of meaningful employment data leading up to the eventual release. Tuesday’s session will be particularly informative with JOLT job openings and turnover figures. We have witnessed an extraordinary post-pandemic labor market in which Americans seem to dominate the fate of their jobs, but those heydays may be behind us.

Graph of total US job openings and JOLT turnover by month

Chart created with the St. Louis Federal Reserve Economic Database using US BLS data

Key events and interest rate speculation

When it comes to market potential, I believe market conditions such as liquidity and possible recession threat analysis are the biggest concerns. That said, they aren’t particularly reliable in providing progress on a regular cadence. And looking at the macro calendar, much of the event risk is concentrated in monetary policy speculation. In this past session, many Fed officials spoke on a variety of topics, but John Williams and Tom Birkin stood out. The former suggested that inflation would fall sharply in 2023, a dovish indicator for markets, while the latter touched on a possible increase in the volatility benchmark in monetary policy, giving rise to dollar contagion risks. acknowledge the possibility of We’ll be watching to see what Lorie Logan, Loretta Mester, Philip Jefferson, and Mary Daly have to say in the next session. Add her ECB President Christine Lagarde to that watch list.

The risk of significant macro events in the next 24-hour global economic calendar

Calendar created by John Kicklighter

If you are watching monetary policy, I would have to say that it is a much closer relationship than simply consolidating the views of central bankers on their collective course. Tuesday morning is the Reserve Bank of Australia (RBA) rate decision and Wednesday morning is the Reserve Bank of New Zealand (RBNZ) presentation. Both are expected to raise their respective benchmark rates by 50 basis points. That said, both of these historic carry currencies flag the pace of tightening in the world’s largest currency and policy group, giving way to the likes of the US dollar in a big way. That makes it harder to focus on the AUDUSD vs NZDUSD fundamentals, but the AUDNZD comparison is more interesting to me. Notably, the correlation between exchange rates and his two-year yield spreads in Australia and New Zealand has collapsed significantly in his two months.

AUDNZD and 100-day SMA charts overlaid with AU-NZ 2-year yield spread (daily)

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