Whipsaw markets continue on US strength

There was a solid bounce in the US markets Friday night, as Q2 GDP was revised to 4.6% on an annualised basis from 4.2% previously.

Source: Bloomberg

The recovery rally was expected, despite the GDP print having seen the worst one-day trade since July as ‘risk off’ ramped up on Thursday. However, Friday’s rally wasn’t enough to really see a recovery in Asian futures on Saturday – this is interesting for the trends we have seen on this side of the world.

The US data has also meant a sharper tone from the hawks. FOMC Dallas Fed President, Richard Fisher, sited the ‘uber-strong’ GDP figures as a wake-up call to the board and reiterated his concerns that the Fed ‘mustn’t fall behind the curve’ as it debates when to raise the Fed funds rate.

He cited the strength in US growth as a pressure sign for future wage growth, saying that the US will likely experience a very sudden and sharp acceleration in growth – this will drive wage growth even higher, possibly leading to inflation bubbling past comfort levels. He has dissented in the last two FOMC meetings and continues the southern states’ resistance (having seen Ester George rotated out of the voting bloc this year) to the highly accommodative monetary policy. 

This talk is only going to increase over the next 30 days. The US is motoring towards the end of its asset purchase programme and the market is gunning for any sign as to when the Fed funds rate will move. The price action in the USD is a clear sign that the market is trying to get ahead of the move. It is overbought and over-loved – and will see a some selling as it’s hard to see who will continue to bid it up. Most will have taken positions, but any weakness here will provide a further opportunity to leverage investment funds towards the US markets.

This is why I see whipsaw markets starting to develop. The sustained low-volatility, high-growth market of the past three years (thanks primarily to the asset purchase programme) is facing some major headwinds in the final quarter of the year. I remain strong in my call that being long the VIX is a way to offset likely slides in the equity markets.

Ahead of the Asian open

Geopolitical risk has come to a nation not normally associated with these issues. The Occupy Hong Kong event erupted into police firing tear gas and water cannons to disperse crowds on Saturday night as protesters talked of democracy. The open of the Asian futures this morning has seen some solid selling of the Hang Seng on the risk event and will see the island nation in the red on the open. If this talk ramps up, it is only going to pull down Asian trade – the second-largest index in the region.

Based on Saturday’s close of the futures, we’re currently calling the ASX 200 up four points to 5317 – a sign that the ASX is now marching to its own drum rather than overseas leads. The breakdown in the trend across the banks is a worrying sign that this pullback (almost a correction) is a structural trading change. I see further downside in the yield trade as Australian bond yields increase and the US bond market pulls yield hunters out of the elevated risk trade. I see further uncertainty here and I also remain long the Australian VIX.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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