Overnight Headlines

*USD pulled back form the March high at 93.43, lower this morning

*US stocks dropped below key SMAs before pulling back

*Vix spiked close to 30, currently trading above 25

*Hang Seng recovers early losses to trade flat

USD pushed up to one-month highs before printing a bearish shooting star candlestick. The yuan recovered most of its Monday drop with China mainland markets still closed. EUR touched near four-week lows at 1.17 before bouncing while GBP crashed through 1.37. NZD is softer overnight after the RBNZ’s Assistant Governor all but removed a 50bp hike at next month’s meeting. CAD is the strongest major today after pulling back from 1.29 in USD/CAD on Trudeau’s election victory.

US equities fell with the S&P500 sliding 1.7%, having been down -2.9% intraday. Small caps suffered the most, dropping -2.4% with the tech-laden Nasdaq down -2.2%. Implied volatility spiked with the Vix just shy of 30 intraday. Big tech did not prove to be much safety and safe havens like utilities and healthcare fared best. Chinese markets are still closed, Japan is catching up and down -1.7%. US futures point to a rebound with futures up 0.6%.

Market Thoughts – Flight to quality

It was a classic full-on day of risk off yesterday with sentiment hit hard. Many investors had been talking about a correction in the last few weeks. So it was an opportunity to derisk with stocks moving lower, core bond yields declining, credit spreads widening and long-end inflation expectations stalling. Metals and energy dropped though oil held above $74.

Global growth prospects had been questioned by many (“peak growth” etc) with concerns about stagflation being raised. The Chinese real estate sector was the catalyst with all eyes on any more serious contagion and Beijing’s solution. JPY and CHF have been the biggest beneficiaries in FX which is to be expected with yen crosses sitting on some major support levels. Uncertainty may persist until tomorrow’s Fed policy decision with next support on the S&P500 at 4235 worth watching.

Chart of the Day – Trudeau minority win

With so many risk events going on, it seems incidental that current incumbent Trudeau has claimed victory in Canada’s national election overnight. It’s a “status quo” result as there is no majority victory. The far right looks to have emerged form fringe status taking around 6% of the vote, mostly from the Conservatives. The prospect of extended stimulus will be welcomed by markets. But there will be concerns around the energy/pipeline policy impact.

USD/CAD hit a high yesterday of 1.2896 touching the upper Keltner band before retracing today back below 1.28. The mid-1.29s is clearly strong resistance given the strength of the reversals on both daily and weekly charts. Much now depends on the FOMC meeting with support around 1.2750 and then 1.27.