By way of news flow, it's generally all been negative and this has kept the buyers away from building on yesterday’s fairly upbeat tape in risk. As it is we’ve seen all out-risk aversion manifest through markets – something snapped - and while poor market liquidity and deleveraging have compounded the movement, the market is feeling the force of both macro concerns (growth worries and central bank tightening) and guidance from global corporates (Maersk, GE) – the notion of looking for a return of equity as opposed to on their equity is there.
The VIX has gained a massive 6.5 vols to 33.5% and equity investors are piling into portfolio protection and paying up for the vol. FX volatility is now the highest since early 2020, and much of this can be explained by higher USDCNH volatility, but EURUSD volatility is pushing higher as we see price testing the March 2020 spike low of 1.0636 – clients are skewed long on EURUSD, but a break here will get a lot of attention I am sure.
US Treasuries have seen shorts cover and yields have fallen hard, with bonds resuming the historical role in the portfolio - playing defence - with equity lower this feels like a risk parity play. The JPY is also clearly outperforming, so while central bank divergence has seen the masses accumulate a sizeable short JPY exposure when the market goes into fully dark these shorts are quick to buy back and many are reversing into opening longs.
Tech has been taken to the cleaners, with our NAS100 price -5.3% and the most since 23 March 2020 – we’ll see if there is any relief through the session ahead as Microsoft has come out with impressive earnings and the stock is 4% higher after-hours. On the other hand, Alphabet fell 6.7% after reporting but has clawed back some of the losses and sits down 2.5%. Either way, tech and high beta areas of the equity market need to find some inspiration, or a further liquidation can’t be ruled out – at the moment it feels like catching a falling knife.
Again, we ask what will is the circuit breaker to promote a lasting trend higher? My own view is it either comes from a belief that China has covid under control or we hear a Fed member saying “inflation is a concern but we’re watching for signs that growth concerns or financial conditions over tighten”. Subsequently, the pivot is planted into markets– as it stands, we can’t hear that until after the next Fed meeting (5 May) and if anything the Fed is welcoming moves in markets – markets feel vulnerable and the answers they seek are not readily available.