VIX remains the key pick

We have been saying since mid-May to be wary of the events that will occur in October (the end of the asset-purchase program). October remains the turning point of the year and we retain our key pick of being long the VIX.

Source: Bloomberg

Global markets have just logged their worst trading week of the year. The Dow wiped off all the year-to-date gains. The S&P clearly broke the 2012 uptrend channel and S&P futures finally fell through the 5% pullback mark, having now lost 5.95% since the September high – the trigger point I have been looking for. This is the first time since November last year, suggesting a strong US pullback is on the cards (remember - US earnings season begins this week, giving possible support).

The sell-off on Friday was brutal. Maybe even overly so. The futures markets closed sharply lower on Saturday so a bounce is unlikely today. However, in volatile markets, movements in either direction are part and parcel of the norm.

On Thursday, I stated that we may see a 1-to-2% retracement in the yield stocks, considering the fact NAB, WBC and ANZ are two weeks from reporting full-year numbers. Friday’s sell-off will make that harder to call, but history suggests there will be some form of support leading into the number – a textbook case of ‘buy the rumour, sell the fact’.

I am now watching for whether the yield adds support, considering the comment from the Fed over the weekend. Currently, NAB is on course to pay a full-year dividend of $1.98, meaning its dividend yield is currently 6.2% net. Considering NAB has disappointed on the yield side, it’s the one likely to underperform. It will, however, be interesting to see ANZ and WBC’s yields and the trade response.

Another yield-supportive development came over the weekend as Fed vice chairman Stanley Fischer very clearly stated at the IMF annual meeting that. ‘If foreign growth is weaker than anticipated, the consequences for the US economy could lead the Fed to remove accommodation more slowly than otherwise estimated.’ This is becoming a constant theme across the presidents, making a July rise the most likely start point in the cycle.

I strongly believe that the yield trade is in investors’ crosshairs. The sell-off began well before the current market rout, and I remain bearish on the banks for this reason as investors are looking to cash out of ‘high risk’ equities in favour of bond yields and other ‘safer’ instruments. However, with US bond yields back to yearly lows, that will provide some sort of support (just not today).

With global growth being slashed and the outlook for emerging markets looking very shaky, Australia will suffer more than most developed nations.

Ahead of the Australian open

Chinese trade balance figures may give us some signs of where we are in the cycle. The concerns over a Chinese slowdown have been part of the issue behind the sharp and sustained sell-off. Imports into the country remain soft – a concern for the south-east and Pacific, considering the amount these nations export to China. The country may provide some support today, however small.

Based on the close of the futures market on Saturday, we’re calling the ASX 200 down 61 points or 1.1% to 5127. With no lead from the US to add any form of support, the ASX is going to see low levels of support. Interestingly, you could make a case that fundamentally we are in for a bounce. Although technicals suggest the slide is going to continue, a momentum perspective suggests the market is well and truly oversold. The issue is that, when the VIX is on the march, fundamentals are normally the last to add weight to a markets’ thinking.

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