By Stephen Innes
The markets are fraught with peril as the focus - not too unexpectedly - remains on US equity and bond markets. And while there is not one plausible explanation for the latest equity tumult, the horrible intersection of risk aversion due to escalating US-China tensions and rising US rates has spooked out investors overnight, triggering a broad selloff which took the S&P 500 to the lowest level since February. Technology stocks took a big hit today, recording their worst today since August 2011. The "fear gauge" VIX rose above 20 for the first time since April, which triggered more than just a wave of profit-taking; investors were genuinely panicked. All of which has investors cowering trying to determine if this is a case of risk aversion or the beginning of a massive correction.
Cheap money has been the rocket fuel for equities as investors piled in the past two years, given that it was the only game in town to get a decent yield. The more aggressive Fed rate hike schedule has brought the gravy train to an end sooner than expected. But the real question facing investors is just how far is the Fed prepared to go?
Investors have become used to, and perhaps over-complacent from, FOMCs in the past that approached rate hikes cautiously. So, the markets are still going through a reality check with Jay Powell at the helm, who has unambiguously signaled a significant policy change was afoot. And it's not too much of a stretch to think he could be borrowing a page or two from Allan Greenspan when the Feds raised the Fed funds rates aggressively higher from 2004-2006 during the last cycle.
And despite the US yields correcting lower on a combination of risk aversion and foreign demand kicking in buying these very juicy yields post-auction, the equity carnage accelerated as investors continue to aggressively deleverage equity positions as high hopes give way to steeper slopes.
China concerns ahead of the US Treasury report on FX are likely aggravating sentiment, as this could trigger a worsening of global trade outlook. But let's not forget tonight's CPI report from a pure fundamental trader perspective, given the hawkish tail risk from a higher inflation print has also weighed down sentiment.
Oil prices were weighted down for most of the NY session by the sharp stock market sell-off. However, prices were primarily driven by the uncertainty concerning the real impact of US sanctions on Iranian oil supply, which continues to seesaw. While rising output concerns from the likes of Saudi Arabia and Russia continued to weigh. As well, given traders tend to" sell the landfall " scenario, and with the surprising intensity of Hurricane Michael, it will likely have negative short-term ramification for petrol demand across the US Southeast, if not further up the coast, suggesting yet more inventory builds. So, the market has swung aggressively from the supply to the demand side of the equation especially with the IMF global growth downgrades fresh in the memory banks.
But then sentiment completely buckled when the American Petroleum Institute (API) reported a significant build of 9.75 million barrels of United States crude oil inventories for the week ending October 5, which was colossally bigger than analysts expected, while builds at the Cushing, Oklahoma, delivery point for NYMEX WTI crude stocks increased 2.2 million barrels per day.
According to Reuters sources, Saudi Arabia is set to deliver an extra 4 million barrels of its oil to India in November in what looks to be an aggressive move by Saudi to replace the loss of Iranian barrels due to the U.S. sanctions and ease the suffering of one of the world's biggest oil consumers.
Gold prices ignored the .2% rise in US PPI, but hedgers were stepping back into the fray as US equity markets were tanking. But the moves were tempered by high US yields.
While the tech-heavy Nasdaq bore the brunt of the selling, the S&P 500, which is more correlated to currency markets, broke through some substantial support level, suggesting the move could run much more profound.
USDJPY came off sharply, with the risk-aversion sentiment permeating throughout the London afternoon/NY morning amid massive USD selling for the second day in a row. There was plenty of USD selling following the double whammy of Nikki Haley's surprise resignation and President Trump weighing in on Fed policy, and with the markets leaning lower on USDJPY due to focus on a possible BoJ shift, the trap door sprung on an aggressive break of 113.
Traders continue to test the 6.93 USDCNH level as chatter about the 7 level intensifies. But it would be folly to move in front of the US Treasury's Currency Report due by Monday, October 15, when there's a consensus building that the US Treasury will classify China as a currency manipulator.
There's enough risk weighing down the euro to sink a battleship, but the single unit has caught a reprieve from broad-based USD selling rather than any significant shift in EU sentiment. Which makes it a prime target for a beat on tonight's CPI.
The ringgit could face additional pressure from negative risk sentiment and lower oil prices. The upcoming budget has triggered another unwanted wave of uncertainty, especially around new taxes. Markets hate tax increases, even if they are necessary to balance the budget.