Market fear rising
August 28, 2012 — Mitul Kotecha, author of the forthcoming Chronology of a Crisis (Searching Finance September 2012)
In what was fairly subdued trading conditions in the wake of a UK holiday the most interesting market move was the jump in the VIX ‘fear gauge’ which has been on a steady increase since 17 August. The rise in equity volatility suggests that the relative calm experienced over the summer may be ending.
Major events over coming days and weeks including the Jackson Hole Fed symposium on Friday, IMF/EU review of Portugal today, ECB meeting on September 6, Dutch general election on 12 September, German constitutional court decision on the ESM permanent bailout fund on the same day, as well as the Fed FOMC meeting on September 12-13, highlight the potential for more volatility and uncertainty.
Yesterday’s fourth consecutive drop in the German IFO index was all but ignored as attention turns to Jackson Hole. Nonetheless, the announcement of the formation of a working group between France and Germany suggests some improvement in coordination towards finding a solution to the Eurozone crisis, while the ECB’s Asmussen further heightened speculation that the upcoming ECB meeting would detail the ECB’s proposed bond buying program.
Meanwhile, although the Fed’s Evans (non voter) highlighted his preference for more Fed quantitative easing an improvement in consumer confidence in August expected to be revealed today, will add to data playing against imminent QE.
All of the above leaves FX markets in limbo. The USD remains restrained by expectations of Fed QE but relatively better economic data compared to the Eurozone, suggests that any USD decline will be limited. Moreover, the fact that aggregate speculative USD positioning turned negative for the first time since September 2011, suggests that there is now some scope for short covering.
Conversely, hopes of ECB bond buying offer the EUR some solace but as noted, the many events over coming weeks in Europe, highlight the risks to the currency and we suspect that EUR/USD has topped out around 1.2500.
About Mitul Kotecha
I have worked in the financial industry as a strategist/economist for over 16-years in several corporate and investment banks in London. I have covered a range of financial products including bonds, interest rates, equities and foreign exchange.
I am currently working in Hong Kong for Crédit Agricole Corporate & Investment Bank, where I am the head of global currency strategy, in charge of a team of analysts providing research and strategy for the bank’s clients and internal trading and sales teams.
I hold an honours degree in economics and a masters degree in economics and finance and have developed a comprehensive knowledge of economic and financial theory during my studies and in my employment.
I am regularly consulted by the press/media for my views on markets and economies appearing regularly on business channels such as CNBC, Bloomberg TV, Channel News Asia, and Reuters TV. I am also regularly quoted in various newspapers including the Financial Times and Wall St. Journal as well as various newswires including Reuters, Bloomberg, Associated Press, Dow Jones and many others.