Financial market research and analysis

Risk lovers lost ground, as the US markets finally instigated the post-Trump victory correction.

The Dow Jones futures retreated to $19066, while the S&P500 futures tested the $2200 support in Asia. The volatility index on the S&P futures, known as the VIX, rose by 6.56%, hinting at the rising need for a correction in the US equity markets after they climbed to all-time highs on the back of a surprise Trump-win rally. According to the latest CFTC data, fund managers already trimmed their net long positions in US stocks last week, in an effort to sell the top of the rally.

It may not be too late to join the downside rectification in the US stocks. In the short-run, a deeper slide in Dow Jones and S&P500 indices could be anticipated towards their respective 200-hour moving averages. The Dow Jones index is expected to ease to $18995, while the S&P500 could test $2195 before $2190/2188 support.

In the mid-run, the bearish reversal in the US stock markets is not ruled out, given that the Federal Reserve (Fed) rate hike could dent appetite for risky assets and lead investors to move their capital from equities back towards bonds and gold. 

Rising political risk in Italy weighs on euro

Italian stocks are underperforming their European peers. The negative divergence is expected to widen heading into the Italian constitutional referendum due on Sunday 4th December.

Italian bank stocks are especially vulnerable as a proxy of the overall sentiment. The yield spreads between the Italian versus the French and German bonds surge, as the  capital moves towards safer Eurozone holdings. Higher credit default swap (CDS) spreads on Italian banks point at rising tension before the referendum. Plunging energy stocks on cheapening oil certainly doesn’t help improving the mood in Italy today.

The Prime Minister Renzi is craving for a ‘yes’ vote in order to give additional seats to the party that has won the majority of votes in elections for Chamber of Deputies, hence to strengthen his own power at the heart of the government. Despite earlier talks that Mr. Renzi would resign in case of a ‘no’ vote, we believe that the outcome of the referendum will not have a significant impact on Italian politics. Mr. Renzi is unlikely to give up on his role either way.

Nonetheless, political uncertainties will likely keep investors away from Italian assets and partly from the euro. Italian referendum risks should counterweight the French-backed optimism earlier this week and push the euro buyers on the sidelines. The overall risk-aversion could lead the euro lower into the weekend.

A large 1.06-put is spotted at Thursday’s expiry.