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Stock rebound on a knife edge amid high volatility

Vantage Published Updated Tue, January 25 12:14
Stock rebound on a knife edge amid high volatility


Overnight Headlines

*Australian CPI jumps to 7 ½ year peak fuelling earlier rate hike bets

*Dollar nears two-week high amid jitters over Fed, Ukraine tensions

*Oil rises on supply disruption concerns as geopolitical worries grow

*Asian shares, US futures slide as volatility remains high

US equities staged a dramatic reversal with indices closing in the green after dropping sharply earlier in the day. The Dow gained for the first day in seven while the Nasdaq 100 ended +0.49% higher and closed above 14k. The VIX surged to 38.94, its highest level since October 2020, before dropping back below 30. The rebound is not being seen in Asia, with markets 1-2% lower and US futures firmly back in the red.

USD hit a two-week high at 96.12 before closing around 95.91. EUR and JPY were only very slightly lower in relatively narrow ranges compared to the drama in stocks. GBP fell for a third day, bottoming at 1.3440 before closing at 1.3485. AUD found support below 0.71 though NZD dropped to levels last seen in November 2020. USD/CAD jumped to 1.27 before pulling back close to 1.26.

Market Thoughts – Strong cocktail of volatility

What a day. In a change to the prior two trading sessions, we saw a bullish reversal in US markets taking place at the end of the day with stocks closing in the green. A columnist on Bloomberg cited research saying that there have been only five previous examples when the Nasdaq Composite has fallen as much as 4% intraday and finished in positive territory.

The fact that the other instances have been at times of severe market dislocation (eg. ’97 Asian crisis, Dot.com bubble in 2000, post-Lehman in 2008) is worrying. Rebounds of this nature are a rare event and as the columnist says, “history suggests that such things tend only to happen when something is amiss”.

Trading took the Nasdaq within a whisker of a bear market – losses of 20% from the all-time high. Already 69% of the stocks in the Composite are down by that much or more. The key question is whether the Fed will confirm policy tightening four (or more) times this year at its meeting tomorrow. We also get Microsoft earnings after the US close tonight, ahead of Tesla and Apple reporting later in the week.

Chart of the Day – Vix spikes higher   

Risk sentiment took a turn for the worst with Wall Street’s so-called fear gauge, the CBOE VIX, hitting its highest level since October 2020. The VIX is a real-time index which measures the market’s expectations for volatility over the coming 30 days and is derived from the prices of S&P500 index options.

This index, and also the VIX forward curve are not displaying full capitulation, so the chance of a further selloff is real. We can see the 2020 pandemic highs above 85 which got close the 2008 peak above 89 during the GFC. The index rarely touches the upper Keltner band.

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