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Despite S&P 500’s Worst Day in 2 Years, VIX Doesn’t Signify Capitulation


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S&P 500, VIX, Inflation, Dollar, EURUSD and USDJPY Talking Points:

  • market perspective, USDJPY bearish below 141.50; Gold bearish 1,680 . below from
  • The S&P 500 suffered its worst one-day loss in two years, but the rise in the VIX suggests we haven’t reached the long-awaited ‘capitulation’.
  • While the CPI printed higher than expected, market conditions had more to do with the severe backlash than the novel fundamental effects of the August inflation data

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A short-term severe market decline but not yet a long-term surrender

With a surprising, higher-than-expected consumer inflation print from the US this past session, the market found justification for a sharp decline for risk-leaning assets like the S&P 500. Still, I would argue that the sudden market drop had more to do with market conditions than actual data. Consider the headline inflation report which slowed to 8.1 percent compared to the annual pace of 8.3 percent expected and the previous pace of 8.5 percent. It’s definitely a ‘beat,’ but it hardly takes the series to any new extremes. Instead, the market found itself leaning heavily against an unfavorable outcome. Markets had significant skew in view of more rapid deflation in price gauges reflected in breakeven rates to be produced on the NY Fed’s consumer inflation report from Monday. Adding to that liquidity and volatility is not fully adapting to the seasonality norms that we have come to expect.

Chart of S&P 500 Emini Futures with Volume50 and 200-day- SMA as well as 1-day ROC (Daily)

chart created tradingview platform

There is no objectionable word on how fast there was a jump in risky assets this past session. The S&P 500’s -4.3 percent drop was the biggest since June 11, 2020 – there was no other comparable drop since August 2011 before the storm of the pandemic (February to March 2020). The targeted Nasdaq 100 suffered a more sharp -5.5 percent decline that sharply lowered the Nasdaq-to-Dow ratio (growth-to-value). This was not just a US index event. From European equities to emerging markets to junk bonds, there was a sympathetic decline. And yet, correlation and intensity indicate neither conviction or dedication – although you’ll find true believers argue with bears and bulls. Historically such rapid moves have not produced a strong record of immediate follow-up – in fact recent years can be used to anticipate a turning point, but I would argue against such an immediate paradox . This is especially true for opportunists who are constantly on the lookout for ‘capitulation’ in the market to ‘pick from the bottom’. While the market turnaround was swift and severe, we are far from the panic measures that could historically reflect a market that has defied its expectations. I’d consider that the peak on the VIX would be somewhere in the order of 50.0 handles, but we’re barely above halfway on that stretch.

Chart of the VIX Volatility Index (Weekly)

chart created tradingview platform

Inflation’s impact on rate forecasts and recession fears

While I would argue that market conditions were the biggest driver of the reaction to this past session of the inflation report, there is no mistaking the economic impact of the data. Given that we are in the Fed’s self-imposed media blackout leading up to the FOMC rate decision (September 21), the market was left without a steer from the central bank to digest the data. Although it does happen, the higher-than-expected numbers meet warnings we were given before the authorities blocked them from media engagements. A concrete warning was given that inflation was the priority – a focus that would take precedence over a potential economic contraction and perhaps even a market tantrum. Amid doubts that the Fed can move forward with its front-end effort to catch inflation, fed funds futures took a serious hit to expectations of a 75 basis point increase last week at 73 percent prospects and a day before the transition. 91 percent expected. Next Wednesday there is a 33 percent chance of a move of 100 basis points.

75bp vs 100bp rate hike likely by Fed on Sept 21scheduled tribe Meeting via Fed Fund Futures

Bar charts and tables from CME Fedwatch

While I believe that market expectations of a quick slowdown of policy momentum from the central bank – and particular forecasts of a 2023 cut – were impossible, a full percentage point increase doesn’t seem realistic anymore. Consider the warnings from last weeks, a ‘significant’ move for the 75bp clip of the last two meetings and the data was only marginally higher than forecast, while consumer expectations are for a return to target in the near future. Even so, basic pressure is not isolated from the effect of rate alone. The potential for an economic fallout is another existential threat that could have ramifications across markets. Two months ago, I asked participants what they were, although the likelihood of a US recession – which now looks like extreme – was shortly after the inflation figures were released, and some 82 percent said an economic downturn was likely. . I posed the same question around this week’s August inflation report and the split was far more balanced than the 54 to 46 percent split. This fear could have been worse if it were not for the assumptions governing NBER’s definition of ‘bearish’.

Twitter poll asks likely US recession in 2022 from July 13 to September 13

Voting from Twitter.com, @JohnKicklighter

While the polls I polled and recorded sentiment surveys last session push against the notion that the world’s largest economy is doomed to slide, a variety of market measures indicate that enthusiasm is a There is no universal state. Beyond the rationale being carried through ‘risky’ assets or economic-adjacent markets such as crude oil, investors’ preferred ‘wonkish’ measure of recession risks (the US 10-year to 2-year yield spread) should be attributed to a sudden decline. faced. In reverse. It is possible to make a bullish case for speculative markets, but it is important to be honest about the fundamental background that will at best be ignored to favor the direction of the market or at worst go against the outlook.

Chart of US 10-Year to 2-Year Yield Spreads with 100-Day SMA (Daily)

chart created tradingview platform

Next: Incident Risk and Intervention Risk

With the US CPI reading behind us, we may be in on ‘peak event risk’ for the week. Nevertheless, we have a volatile market and a lot of additional event risk ahead. Economically, the US will still be in the crosshairs as the Upstream Producer Inflation Report (PPI) is due at 12:30 GMT. Should this indicator defies even moderation expectations, sentiments for September price readings will face a sharp readjustment. I will keep the import/export inflation report due on Thursday in a similar regard. On an event risk perspective the US is not the only market target. UK inflation figures and the European Commission’s President’s Union of States will play down their respective recession fears.

Calendar of Major Macroeconomics Schedule for the next 48 hours

Calendar created by John Kicklighter

Whether the discussion is about move potential, risk trends or any other fundamental driver; I believe USDJPY is a market that should be watched by macro watchers. After the CPI outperformed this previous session, the pair – like most dollar-based crosses – experienced a strong rally. The fee pulled the EURUSD back from parity, GBPUSD and USDCNH to its extremes; But it was USDJPY that was most influential. The risk aversion we took in the markets seemed to be staggering from a yield differential standpoint. To be fair, the dollar is a more safe haven than the yen, but hasn’t given Japanese investors any respite from their investments abroad. Considering once again the high levels of August 1998, it is imperative to look very closely at the dangers of intervention by the Finance Ministry. This is not to say that they will be successful in turning the markets around, but their efforts have caused serious volatility in the past.

Recommended by John Kicklighter

How to trade USD/JPY

Chart of USDJPY with 20-day SMA and 1-day ROC (Daily)

chart created tradingview platform



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