Financial market research and analysis

Stocks find some form

The calming of political nerves saw stocks gain ground as volatility crumbled by the wayside. An unwind of the profit-taking-based losses from Monday and some better economic data out of Germany helped European stocks nudge higher.

Stocks in the US opened higher on Wednesday with the S&P 500 and Nasdaq notching up fresh record highs. Shares in America’s biggest tech firms Amazon, Apple and Alphabet all hit record highs. At the same time the VIX index tracking S&P 500 volatility fell to a 24 year low.

Miners lead the FTSE

Miners were top risers in London. Confident trading updates from some of the top miners suggest basic resource shares maybe a safer place to be than the underlying commodities which are undergoing a bit of a shakeout. Companies with a stake in a higher volatility environment like banks and the London stock Exchange were underperformers. Micro Focus was bottom of the pile after merger-partner HPE revenues dropped 10%.

Volatility gets crushed

The structurally low volatility dynamic of today’s markets has plunged new depths. The prevalence of volatility ETPs in combination with very accommodative central bank policy have been a death knell to volatility. Every time volatility does jump, its sold back down by traders confident central banks will be there to save them from a prolonged market panic. Since the 2008 financial crisis each big burst of vol is lower than the last time.

Over time the basic pattern is that the markets move from periods of high volatility to periods of low volatility. The current extreme low readings in volatility suggest the next sell-off could come as early as this quarter. If the recent slide in commodity prices picks up steam it could spread to stocks as the next source of volatility.

Weak EURUSD hands tested

A definitive short-term peak has been formed at EURUSD near 1.10. The bullish Macron-induced euphoria has seen precisely zero follow-through. Better than expected economic data from Germany had a limited impact on what seems to be an extended retrenchment of euro bulls. The pound is suffering a similar fate to the euro in the face of a resurgent US dollar, but to a lesser extent. Relative strength in the pound vs the euro might just be that traders are delaying a bigger sell-off until after the Bank of England has released its quarterly inflation report on Thursday.

For havens sake

Traditional havens gold and the yen fell to fresh 1 ½ month lows on Tuesday. We have been talking about election risk acting as a floor to any declines in havens this year- well it seems that floor just caved in.

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