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Market participants remained gripped by fear. The VIX index shot up beyond 40, the highest in almost four years. The New York Stock Exchange invoked Rule 48, a type of special circuit breaker, to maintain orderly trading, as it pre-empt panic selling at the market open on Monday.
One may wonder whether the 3-4% fall in US stocks could be much worse without the rule. However, it may done little to stop the merry-go-around of panic selling seen globally.
Now that the pain is quite real, people are asking what can be done to stop the pain.
What was interesting is that there was no clear catalyst for the global stock meltdown. The lack of clarity makes it difficult to assess what is needed to stem the rout. What we know is that a combination of factors may have contributed, but not the trigger, to the risk selling.
Slowing global growth, commodity slump, deflation risks, Chinese slowdown, timing of the Fed hike are all possible drivers of fear.
Working on this assessment, we may need a couple of scenarios to inject calm back into the market. Firstly, a coordinated policy response is critical, and much of this needs to come from Asian economies.
The PBOC is the clear choice to lead the efforts. We have noted that the absence of a reserve requirement ratio (RRR) cut over the weekend might have disappointed the market participants, leading to greater selling impetus.
At the moment, an RRR reduction is not enough to cut it. The intensity of the global stock rout demands something more substantial from both the monetary and fiscal side. There are doubts whether China can cope with the persistent capital outflows, and domestic equity meltdown, given that it has already put in some heavy-hitting measures, and funded over $400 billion to a state agency to buy stocks. This suggests that more needs to be done in terms of easing measures and efforts to boost government spending.
Secondly, a spate of better economic news may help to allay concerns that global growth is not deteriorating. Certainly, improvements in the Chinese economy will be welcomed.
The timing of the Fed’s tightening is getting further and further. The market is pricing in only a 22% probability of a September rate move, down from 34% last Friday and 48% in the week before.
The comments made by Atlanta Fed President Dennis Lockhart also reinforced the market outlook. While he continued to expect a rate hike this year, he did not repeat his September call. President Lockhart added that a stronger dollar, weaker yuan and weak oil prices will complicate the Fed’s growth forecast.
This shifting expectation of the next Fed policy move has a huge impact on dollar bulls. They are paring bets on further strengthening in the greenback aggressively, somehow aligning with the global risk aversion.
As a result, JPY, EUR and CHF extended its appreciation path. USD/JPY punched through 120, dropping to near seven-month lows. EUR/USD spiked above 1.16 but was held back by profit takers. Unsurprisingly, commodity currencies slid further on the back of soggy commodity prices. Asian currencies should stay on the back foot but the weaker dollar might offer some reprieve.
If you are more technically-inclined, then this may interest you. Market internals are suggesting that there could be buying interests filtering through. S&P 500 has a low 8% of constituent companies trading above their 50-day moving average.
Historically, there would be a bounce in the market when this percentage falls below 10%. We are seeing the same development across the globe.
However, the momentum remains firmly on the downside, and a very aggressive one. It’s preferable to stay with the trend, and trade accordingly until there is a clear technical signal.