Best of the Week
Most Popular
1.UK House Prices Momentum Crash Threatens Mini Bear Market 2017 - Nadeem_Walayat
2.Perfect Storm - This Fourth Turning has Over a Decade of Continuous Storms to Come - James_Quinn
3.UK House Prices Momentum Crash Warns of 2017 Bear Market - Video - Nadeem_Walayat
4.Billionaire Investors Backing A Marijuana Boom In 2017 - OilPrice_Com
5.Emerging Markets & Basic Materials Stocks Breaking Out Together - Rambus_Chartology
6.Global Currency Reserve At Risk - Jim_Willie_CB
7.Gold and Silver: Your Stomach Is Probably Wrenching Right Now - The_Gold_Report
8.Warning: The Fed Is Preparing to Crash the Financial System Again - Graham_Summers
9.Basic Materials and Commodities Analysis and Trend Forecasts - Rambus_Chartology
10.Discover Why A Major American Revolution Is Brewing - Harry_Dent
Last 7 days
4 Insights for Adjusting Your Portfolio in a Rate-hike Environment - 19th Aug 17
Gold Direction Indicator - 19th Aug 17
Historical Inevitability and Gold and Silver Ownership - 19th Aug 17
You Are Being Lied To About “Low” Gold Demand - 19th Aug 17
This is Why Cocoa's Crash Was a Perfect Setup - 19th Aug 17
Gold, Silver Consolidate On Last Weeks Gains, Palladium Surges 36% YTD To 16 Year High - 19th Aug 17
North Korea Is Far From Being Irrational… It Has A Plan - 18th Aug 17
US Civil War - FUNCTIONAL ILLITERATES TRYING TO ERASE HISTORY - 18th Aug 17
Bitcoin Hits New All-Time High Over $4,400 As It Catches Paypal In Total Market Cap - 17th Aug 17
3 Psychological Ingredients behind Great Web Content - 17th Aug 17
The War on Cash - Rogoff, Orwell and Kafka - 17th Aug 17
The Stock Market Guns of August, Trade Set-Up & Removing your Rose Tinted Glasses - 16th Aug 17
Stocks, Bonds, Interest Rates, and Serbia, Camp Kotok 2017 - 16th Aug 17
U.S. Stock Market: Sunrise ... Sunset - 16th Aug 17
The Next Tech Crash Could Delay Your Retirement by a Decade - 15th Aug 17
Gold and Silver Precious Metals Nearing Breakout - 15th Aug 17
North Korea Showdown: Pivotal Market Turning Point - 15th Aug 17
Tech Stocks DOT COM Bubble Do-Over? - 14th Aug 17
Deep State Conspiracy or Chaos - 14th Aug 17
From the Trans-Atlantic Axis and the Trans-Asian Axis - 14th Aug 17
Stock Market Intermediate Correction Underway - 14th Aug 17
The Islamic State Jihadi Pivot to Asia - 13th Aug 17
Potential Pivots Upcoming for Stocks and Gold - 13th Aug 17
North Korean Chinese Proxy vs US Military Empire Trending Towards Nuclear War! - 12th Aug 17
Gold Stocks Coiled Spring - 12th Aug 17
Neil Howe: The Amazon-Walmart Rivalry Will Determine the Future of Retail - 12th Aug 17
How to Alton Towers Half Price Discount Entry 2017 and 2018, Any Time, No Pre-Booking! - 12th Aug 17
Top 3 Technical Trading Tools Part 2: Relative Strength Index (RSI) - 11th Aug 17
What Makes Women Better Investors - 11th Aug 17
Crude Oil Price Precious Metals Link in August - 11th Aug 17
Influencer Marketing Predictions All Businesses Should Take Into Account - 11th Aug 17
Really Bad Ideas - Government Debt Isn’t Actually Debt - 10th Aug 17

Market Oracle FREE Newsletter

3 Videos + 8 Charts = Opportunities You Need to See - Free

VIX Asleep as Stock Market Weakness Escalates

Stock-Markets / Stock Markets 2016 Jan 15, 2016 - 04:04 PM GMT

By: Ashraf_Laidi

Stock-Markets

One notable reason the VIX is trading at only half the level seen in August (53.0), a time when equity indices plunged near today's levels is related to market's absorption of risk versus macro negatives.

The China devaluation of August 24 came as a complete surprise to financial markets, which were neither ready for the PBOC's FX manoeuvres, nor prepared for the dangers of rapid decline in the currency of the world's biggest buyer of commodities as they are today.


Indeed, the 98% jump in the VIX of August 24 was also propagated by soaring volumes of VIX and VIX-related products (VIX ETFs and leveraged ETFs), as well as high-frequency trading of these products by banks and algo firms.

Known unknowns

Setting the technical intricacies aside, markets in August were not positioned for a surprise from China and certainly not aware of the intricacies of the yuan's daily fixings and the implications of the onshore vs offshore pricing. At the time, the primary concern was whether the Fed would raise in September or December, as well as the more familiar emerging market concerns.

Today, the sources of market selloff and macro deterioration are not necessarily new or unexpected (tumbling CNY, falling CNY, disappointing macro data) but their implications for eroding capex, widening credit spreads, quantitative FX tightening by emerging markets and forced liquidations by Gulf sovereign wealth funds are more ominous and immediate for the market.

Metrics of Weakness, not Risk

Although the VIX remains inside the 20-40, a level considered as neutral, there are more relevant metrics of macro risk/weakness, namely more elevated high yield spreads (713 bps vs 560 bps in August 24 at 29% higher), flatter yield curve (10-2 spread at 1.19% vs 1.44% in August 24 at 17% higher), oil prices 23% lower and finally a substantially weaker readings in manufacturing and retail sales (see chart).

Complacency

Downside risks may more anticipated today but market participants, but their confluence and intensity has far reaching implications than five months ago. We expect oil prices to reach $17 (unchanged supply from Saudi to accommodate Iran's production, falling demand from the Gulf and China, halted exploration projects and policy easing from Canada) to accelerate the deflationary pressures and push the Fed back into negative interest rates in Q3 of this year.

US Retail Sales Y/Y %

By Ashraf Laidi
AshrafLaidi.com

Ashraf Laidi CEO of Intermarket Strategy and is the author of "Currency Trading and Intermarket Analysis: How to Profit from the Shifting Currents in Global Markets" Wiley Trading.

This publication is intended to be used for information purposes only and does not constitute investment advice.

Copyright © 2016 Ashraf Laidi

Ashraf Laidi Archive

© 2005-2017 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife