<p>If there has been a common thread in the markets lately, it has been the lack of volatility and a general wait-and-see attitude among traders. The VIX, which spiked in the mid-1980s in March, is currently at 25, after setting a series of lower highs at 44 and 38 in June and September, respectively.
Crude oil has been in the $ 30- $ 40 range since the incredible price action we saw in April. Gold has been in consolidation mode since it set a new all-time high against the US dollar in August and achieved a brief break above that important psychological milestone of $ 2,000 per ounce. It recently broke out of a symmetrical triangle, retested it as support, and has been trading sideways ever since the bulls failed to gather the energy to push it back to those recent highs.
After setting new two-year lows in July, the dollar index (DXY) has been trading sideways between 90 and 93, while the euro index (EXY) appears to be doing the opposite; trading sideways at the top of the two-year highs it set in July and August.
As far as central banks are concerned, it appears that the currency bazookas that were pulled out in full force at the height of the COVID-19 crisis earlier this year appear to be depleting ammunition, or at least their effectiveness is waning. . .
Comments from Fed Chairman Jerome Powell at the September meeting have been received largely as gape with little real policy change. He copied Mario Draghi’s famous phrase of “whatever it takes” and repeatedly referred to the Federal Reserve’s monetary policy as “powerful.” In reality, all that is on the table is keeping interest rates near zero until 2023 and continuing the Fed’s current asset purchase program until further notice. Powell referred to the new normal as one of low interest rates, low inflation and slow growth, while calling for more fiscal stimulus from the government to help ease the havoc wreaked on the US economy by the coronavirus pandemic.
Meanwhile, the Bank of England appears to be preparing to join Europe and Japan in crossing the negative rate Rubicon. The bank’s monetary policy committee is reported to be working to clear certain obstacles to the implementation of negative interest rates to allow the Bank of England to further reduce its current rate of 0.1%. The negative rate policy, which has been rejected in the past by the Bank of England’s interest rate committee, seems to have finally found favor as one of the last arrows in the central bank’s proverbial quiver. The cuts are expected to take effect in 2021, and the current rate will hold for the rest of the year alongside the bank’s current £ 745bn quantitative easing program.
Furthermore, the ECB has also chosen to maintain its current course. Interest rates will remain unchanged for now, as will the central bank’s Pandemic Emergency Purchase Program (PEPP) at 1.35 trillion euros. It was recently announced that the ECB should review this bond purchase initiative, and analysts expect a possible increase by the end of the year. The only other notable measure that has been introduced has been a recent relaxation of the leverage ratios of European banks which will release another 73 billion euros into the banking system.
The calm before the storm?
Range markets like these can be incredibly difficult to trade. They move sawtooth back and forth while moving sideways for extended periods of time, putting pressure on open trades, forcing margin calls and stops on those that are positioned more aggressively. There seems to be no rhyme or reason for price action before a definitive breakout occurs in either direction and so it all makes perfect sense in hindsight.
However, taking a cursory look at the global economic climate, one has to wonder if the bias is to the downside for all but safe haven assets. Except for some completely unexpected news, such as a totally effective vaccine, there seems to be a number of unknowns on the horizon to explore before we can begin to discuss a global recovery.
Not only do we have a turbulent America in the run-up to a heavily loaded election, we are seeing new spikes in infections resurfacing in Europe, as well as the reintroduction of lockdown measures in certain countries. Powell’s comments on low rates, inflation, and slow growth are reminiscent of Japan. Similarly, the BoJ declared in 2016 that it would maintain a highly accommodative monetary policy until inflation exceeds 2%. This never happened. Similarly, the Fed is now in the process of exhausting all its tools while waiting for 2% inflation and calling for fiscal interventions.
Graphics to Watch
Even though the charts have been fairly calm lately, we’ve seen a recent turnaround in US equities that requires more attention. The question about this sell-off is whether it is the start of something bigger, or just a momentary flash before stocks rise as the giant tech companies, which have been among the few beneficiaries of this crisis, continue to push the entire market. .
What’s particularly interesting is the RSI divergence that has formed on the weekly charts of all the major US indices, including the Russell 2000, the Dow Jones Industrial Average, the Nasdaq, and the S&P 500. As is the In the case of technical indicators, the longer the time period in which the signal appears, the more you should pay attention to it.
Above you can see the RSI divergence on the S&P 500, along with the previous two divergences that we have witnessed. The first of which, in September 2018, led to a reduction of 20%. The second, during the first wave of the coronavirus, led to a reduction of 35%. Whether the latter will follow suit remains to be seen, but it’s definitely something to watch out for. Particularly because we are seeing the same divergence in the US indices and over a longer period of time. Could this be the next catalyst for more market volatility? He is certainly an intriguing candidate.
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