Risk sentiment has tailed off in recent days with the S&P 500 declining over 2% from the recent record high. At the same time the dollar’s advance has been stalled since the end of last week, this can be seen both in the currency crosses and also with gold’s recent bounce from the lows. It would be, perhaps, inaccurate to lay the blame at the door of US equities though, as the declines in European equity markets have been more aggressive, with the Eurostoxx 50 posting a 3.5% decline from the recent peak, possibly on the back of increasing pessimism about recovery prospects in the Eurozone. However it’s worth noting that after the witching (futures and options expiry on the US exchanges on the 3rd Friday of the quarter ending months) that occurred last Friday, the performance for equities has been historically poor the week after. Sometimes we search too far, trying to attach meaning to market behaviour, it could all be as simple as a post-witching malaise.


There are any number of reasons to be concerned about where we go from here, not least valuations are already challenging historic highs, policy in some of the major central banks stands at an inflection point, US companies would rather return money to shareholders via buybacks than seek out new investment ideas, US legislators clamping down on “inversions” the latest wheez to escape higher US corporate taxes, we have geopolitical instability in the Middle East, Russia/Ukraine, pick one, pick another, pick all of those justifications. But really… where else can you park your cash right now? The same point I made in the summer. The bottom line is, you can’t earn any interest on your cash, so.. equities it is.. for now. I mean.. what else can you do right?


On the data front, we’ve had IFO in Germany which was a bit worse than expectations with a slight decline, along with consumer confidence in Italy which interestingly was a bit better than expected. There’s nothing particularly exciting coming out for the rest of the day. So we can turn our attention to the markets and wonder if the bearish tone will persist today. I’ll be keeping an eye on the September lows on the S&P 500. We were just 4 points away from it yesterday, if that should break then we could be set for deeper declines, but I still harbour some hopes that we hold from here. Still I can’t shake off the feeling that the end of the Federal Reserve’s bond buying programme, and the consequential end of balance sheet expansion could be a seminal moment for markets. We’ll have to wait and see..


As I said early last week it is entirely realistic in a trend that you have periods where markets pullback, this is a necessary requirement for trends to remain healthy. I believe we’re in a dollar up-trend, however it is entirely realistic for the trend to stall for a while as it takes a breather. We may well be seeing that right now, but I have no idea how long this paradigm might last. The currency pairs that could be especially vulnerable to corrections in my view are USD/JPY, EUR/USD, GBP/USD.. there are others but these are the big boys so it’s worth mentioning. It would not surprise me if the speculative community in positioning for dollar strength has pushed the trend further along than is justified, so if we get corrections there may be a short period of financial pain for that sector before we get off to the races again.. I’m just saying!


I am less convinced about recoveries in Emerging Market currencies generally, but a rising water level will carry all boats. They are certainly stronger as a group versus the dollar today. I continue to take a particular interest in the Indian rupee, my suspicion is that it is poised to appreciate, but it’s not yet confirming technically. I’ll let you know if my confidence level increases.

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