We are starting to see slight jolts lower in the US markets and the tension is mounting for something to happen. Yet so far we are yet to see a true breakdown of the grind higher despite a drop overnight. However, the VIX, having hit a February 2007 low last week at 10.3, is starting to shift up. With Iraq at a breaking point and oil and gold also elevated, any slips in the market will see put protection up and therefore the VIX a long call.
The longer term trade in GBP/USD has been in a clear uptrend for a long time now as the BOE and Fed divergences play out in the pair. However there are a few signs that suggest momentum is fading. Firstly, the pair is struggling to make a clear break through the psychological 1.70 barrier. The daily oscillations are showing that the pair is finishing below this level more often than not. There is a sign of a sharp reversal, however it does suggest it may be entering a consolidation period.
Abe announced the third part of his arrow program overnight which was met with low excitement as the expectations are the fiscal policy changes will take up to two years to implement. The Japan 225 has had a very solid run of late as bottom expectations grow, however Friday sees the much anticipated inflation read which will determine if consumers have returned after the tax increase. Any signs the programs are not working is likely to see the uptrend of the past week evaporate.
Consumer Discretionary Sector
Confession season has finally kicked off and the consumer discretionary sector will be the place to watch for downgrades. So far we had seen downgrades from Super Retail and The Reject Shop; now Kathmandu is suffering the same fate on a warmer-than-expected winter. We have also seen JB-Hifi calling numbers at the bottom end of their expectations, meaning Harvey Norman is likely to be experiencing similar declines. With David Jones out of the race with a takeover bid, Myer is the last major to watch, and considering the slowness in apparel, it would not be surprising to see it issuing a similar warning.