How Serious Is This Sell-Off?

by: Cam Hui, CFA

Yesterday, global stock markets sold off mainly on the Hollande and Holland news. European stocks are in a well-defined one-month downtrend.

Click to enlarge charts

US equities descended to test an important technical support level.

However, when I look at the FX and bond markets, I can't see the same level of investor angst that seems to exist in the equity markets. For example, if Europe is such a mess, why is the EURUSD exchange rate holding up so well?

Also consider the CADUSD exchange rate, which is sensitive to commodity prices and a measure of risk appetite. The loonie remains in a trading range relative to the greenback.

There are no signs of panic in the bond market either. High yield, or junk, bonds continue to perform reasonably well in light of the difficulties experienced by the stock market. Why isn't risk aversion showing up in this market?

In conclusion, until we get signs of a significant decline in risk appetite from the foreign exchange and bond markets, this bout of stock market weakness is just another phase in a sideways and choppy market.

Disclaimer: Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest.

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.