Collinson FX Commentary: Feb 7

Collinson FX Commentary: Feb 7 - Electronic panic

by Collinson FX 7 Feb 2018 00:27 PST 7 February 2018

Kia Kaha, Day 2, Bay of Islands Sailing Week, January 25, 2018 © Richard Gladwell

Collinson FX Commentary: Feb 7 - Electronic panic

US equity markets went apoplectic yesterday. The DOW lost nearly 1,600 points, in the panic, at one point!

Markets were shocked by the sheer magnitude of the sell-off, but due to the electronic nature of markets and stop-loss orders etc., markets can fall much faster than the rises.

This was a major surprise to markets, hardly the 'Black Swan' event of a Brexit or the Trump election?! This is more an electronic panic event, with no back-up plan, to prevent equities falling out of bed.

Technically, equities briefly went in to correction mode (down 10%), which may have been due. Perhaps the sudden and extreme nature should be looked at? The VIX index, which measures volatility, spiked to over 50. This has been in full retreat mode, after initial volatility, in the first hour of US trade. The initial trigger for the market correction, last week, was the spike in US bond yields and a strong US employment number.

Ironically bond yields came crashing down during yesterdays Armageddon, after equities were flushed out, capital poured in to US bonds.

The Dollar jumped, with the EUR falling below 1.2400, while the GBP dropped under 1.4000.

The NZD was remarkably resilient, rising back above 0.7300, while the AUD slipped under 0.7900. The RBA flew under the radar yesterday, leaving rates unchanged, citing stronger employment and growth. A return to some form of normalcy is returning to markets but technology trading systems must radically and immediately corrected, to avoid the likes of yesterdays mayhem.

Day 2, Bay of Islands Sailing Week, January 25, 2018 - photo © Richard Gladwell

Collinson FX Commentary: Feb 6 - US share plunge continues

US share markets continued to tank, following on from the massive losses to close last week, the Dow added to the misery.

The Dow has now lost over 1,000 points in just two days trading!

The trigger for the massive sell-off was a spike in interest rates, driven by strong economic performance and rising inflation. This attracts capital flows away from the equity markets, but also threatens debt servicing abilities, adding to market fears.

Mario Draghi has been out touting the EU recovery, citing the 'robust' economic recovery. While noting the improved growth and plunging unemployment, he warned accommodative monetary policy would remain, as required.

The EUR fell back to 1.2420, while the GBP tested 1.4000, on the downside. Commodity currencies are experiencing a correction, as a result of the spike in US interest rates and the associated bump in the reserve.

The AUD looks to break below 0.7900, while the NZD fell below 0.7300, relinquishing recent gains.

Day 2, Bay of Islands Sailing Week, January 25, 2018 - photo © Richard Gladwell

Collinson FX Commentary: Feb 3- Biggest US Equity crash in 2yrs

US Equity markets crashed, to close the worst week in two years. Non Farm Payrolls beat expectations, adding 200,000 jobs, triggering a further surge in Bond Yield rates! This is how normal markets function. Growth leads to inflation, which in turn leads to rising interest rates. Rising rates attract investment, providing alternatives to equity markets and tempering inflation.

The return to the 'normal course of business' is a refreshingly strong foundation to build economic growth. The post-GFC economy had relied on monetary policy to boost the economy, which lead to weak data further expanding liquidity, triggering massive asset bubbles. Equities were major beneficiaries of this monetary stimulus. The narrative has changed as economic data and consumer confidence are driving the economic boom. This has been triggered by US tax cuts and deregulation. These solid foundations are building corporate earnings and equity markets.

The rise in interest rates are a natural progression but have encouraged capital flows away from equities. The US 10 Year Bond Yield rose to 2.85%! This supported a rebound in the Dollar, with the EUR slipping back to 1.2480, while the Yen traded above 110.

The resurgent reserve hit the buoyant commodity currencies, as the AUD plunged to 0.7950, while the NZD tests 0.7300 on the downside. The coming week, heralds an avalanche of economic data, headlined by Trade and PMI numbers. Markets will be heavily influenced by Central Bank rate decisions and associated rhetoric. Expect a huge week!