Overnight Headlines

*Dollar breaks out to fresh 20-year highs as risk mood improves

*Fed’s Powell can’t guarantee “soft landing” as Fed looks to control inflation

*Rate hike bets build in Japan despite BoJ easy money insistence

*Gold falls below key support and 200-day SMA at $1836

USD pushed up to a new high at 104.92 even as government bond yields dipped. 10-year US Treasury yields fell below 3% and have moved lower for four straight days since topping out at 3.20%. EUR/USD fell 1.3% to 1.0353, the weakest since January 2017. GBP slipped for a sixth day to a new cycle low at 1.2164. Returning safe haven demand for JPY sent USD/JPY tumbling 1.3% to 128.34. AUD fell over 1% to close at 0.6856. That’s the lowest in nearly two years.

US equities pared most of their losses in the final hour of trade. The S&P500 recovered from a 1.8% fall to finish 0.1% lower. That drop had pushed it to the brink of a bear market. The Nasdaq eked out a marginal gain. Asian stocks are firmer as risk momentum improves slightly. Softbank has surged in Japan amid buyback hopes, despite a record loss. European futures are showing a higher open, reversing yesterday’s losses.

Market Thoughts – Fear gauge elevated but not in panic mode

The VIX, Wall Street’s so-called “fear gauge”, continues to hover above 30 with many investors waiting for it to rise sharply so we see some sort of selling capitulation. The VIX measures the expectation of stock market volatility in the S&P500 as expressed by 30-day options prices.

It averages below 20 on a long-term basis. But it hit a high close of 82.69 during the March 2020 pandemic market sell-off. Investors’ aggregate equity positioning has fallen to the lowest levels since that crisis. This may be a reason why we don’t get a sharp spike higher in the near term. Or will we have a moment of high-profile pain as various other asset classes, like digital assets, suffer?

Chart of the Day – FTSE 100 bounces off support

Global equities have begun to price in stagflation themes. These include higher inflation, rising rates and slowing growth. The latter is under pressure from supply chain bottlenecks, and a slowdown in China driven by severe Covid-19 lockdowns. That said, the FTSE 100 has held up relatively well compared to the more tech-heavy US indices. The UK benchmark has only a small weighting of high-valuation growth names.

The market has hit strong resistance at the January 2020 high at 7689 on a few occasions this year. A long-term double top could be in the making. Prices have recently been trading around the 200-day SMA at 7305. The drop yesterday then dipped below previous support at 7217 and the midway point of this year’s high/low. The weekly close will be key for near-term direction. Initial support is at 7158 and 7101.