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Quarterly Witching: Dark spell ahead?

18 September 2020

Asian stocks are edging higher, with the MSCI Asia Pacific index set to register its first weekly gain this month. However, the selloff in US stocks is set to stretch on, with futures contracts for the S&P 500 and the Dow Jones indices falling into the red at the time of writing. Nasdaq 100 futures are fluctuating between gains and losses, suggesting that the index could yet deepen its ongoing technical correction. The sense of trepidation in the markets is also evident with the slight gains in safe haven assets, with Gold prices set to register a second consecutive week of gains.

Market participants are bracing for potentially heightened volatility, with US markets set to undergo its ’quarterly witching’, as futures and options contracts on stocks and indices expire today.

And it may not end there.

The seasonal end-of-the-quarter portfolio rebalancing by large institutions, such as pension and sovereign wealth funds, could also contribute to choppy market conditions involving over the rest of September. And then there’s the looming US elections, and the political uncertainty could paralyze some segments of the markets in the leadup to November 3rd.

Set against such a backdrop, no wonder that the VIX index, also known as the market’s ”fear gauge”, is retracing towards the 30 mark and testing the resistance levels at its 100- and 200-day moving averages. Since the dramatic drop earlier this month, investors are awaiting fresh catalysts that could jolt investors either way. In the interim, the 50-day moving average for multiple assets, from the S&P 500 to Gold, is being relied on as key support levels.

Investors drew little cheer from the continued recovery in the US jobs market, despite the drop in both the initial and continuous jobless claims. The forward-looking nature of the markets demands that more US fiscal stimulus is rolled out, although such prospects look slim over the near-term, given the current impasse between the Democrats and Republicans. The drawn-out political stalemate that only delays the much-needed financial support would severely undermine the recovery in the world’s largest economy, a risk that global investors are very much aware of. After all, market participants were just reminded of such a risk by Fed chair Jerome Powell, after the latest FOMC meeting earlier this week.

Still, the declines in equities over the weeks ahead may translate into buying opportunities for long-term investors. Considering that the Federal Reserve is looking to keep US interest rates ultra-low possibly until 2023, the lower-for-longer interest rate regime should only boost the appeal of equities. Perhaps the bouts of volatility that may arrive over the days and weeks ahead could be useful in offering timely reminders about steeling one’s resolve in the face of fear.



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