By Stephen Innes
A case of turnaround Tuesday, or merely the eye of the storm?
What a wild ride 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 the US equity markets was foolishly unsustainable. And with interest rates sure to be on the move, equity markets were the first to blink. The voraciousness of the purge is what had many scratching their head, but in reality, 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 market will have lots of wood to chop to restore investors' 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 labour markets as translating directly into higher inflation."
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 rise 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 prices hit session lows late Tuesday afternoon as U.S. stocks bounced back up. But with asset rotation from equity to bonds, gold prices did not benefit from this uptick in volatility, as investors are erring on the side of the more conservative bond route given the market volatility. Equity gold hedged unwound in favour of a more traditional bond market approach as investors opt to sit out this volatility (VIX)-driven storm.
Far too much volatility in the market, and investors across all asset classes remain spooked.
Traditional correlations are finally beginning to assert themselves, so we should look for shifting risk sentiment to dominate the forthcoming sessions.
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 AUD bulls are still licking their wounds after, with the RBA's dovish twist to guidance and 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, as the currency is nowhere near down for the count.
It is 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 liberalisation 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.
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.
The Malaysian economy remains robust; oil prices remain firm. With that in mind, equity and bond markets will continue to attract investors who want exposure to 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.