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Volatility Hits as Correlations Unwind

Ahead of the Federal Reserve’s first POMO auction on Friday the global markets were spooked by sound-bites that a bail-out package for Ireland may by revealed on Tuesday of next week, and be something similar to the Greek rescue package earlier in the year.

On the day of G20 meeting the market was obviously primed to react quickly to whatever came at it, and followed through by initially dropping global equity, commodity, and currency values against the Usd.

S/P 500 futures trade, the litmus test for those looking for global market momentum on any given day, dropped 1.5%, the dollar index stayed flat (Eh?), crude oil dropped 2.0%, as did gold, in reaction to the headline breaking in the Asian session. However, once European trade absorbed the initial drop lower the equity and currency markets regained all Usd losses, leaving commodities at the low of their overnight session.

The moves reveal the high level of speculative interest across all markets, which creates a reactionary trading environment that is not prepared to weather a storm, but instead is more than willing to close out, and buy again in the opposite direction when the next momentum bout hits.

Weekly chart closes will be important, especially as the Federal Reserve are at play in the open market today buying back Treasury notes in an effort to stimulate stocks. If S/P 500 trade closes below the 1210 overnight high it will signal weakness going into next week.

The consequence of that could be further commodity price reversals as recent parabolic moves are liquidated, and it could start a round of correlation break-downs in the inter-connected global markets, as seen overnight.

Currencies are starting to factor in potential Euro-zone economic and debt re-valuations which will weigh on the euro, and by default impact the dollar index movement, but each currency will now have to stand-alone against the dollar, rather than moving en-block as they have done over the last 12 months.

Withthe implementation of $6-8b of Quantitative Easing via the POMO auction today, added to the G20 meeting, and a volatile overnight session, the Friday trading day should be eventful. Volatile, but eventful.

Federal Reserve POMO dates

The next POMO is Friday 12th November, when $6-8 billion is intended to be monetized, as part of the $600 billion that will hit the market over the next 6-8 months.

Once again, the most important component in the way this plays out could be Eur/Usd, with continued doubts or question marks on Euro-zone economic and fiscal outlooks creating a perfect storm that could see risk, commodity, and Usd markets all appreciating at the same time.

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Disclosure: TheLFB runs an automated trading program that is constantly one side of the dollar or the other, in-line with the detail posted in the article.