The turnaround in stock markets Tuesday was a demonstration of how a clear narrative can help market participants take risk. The New Zealand dollar was the top performer while the Swiss franc lagged. Japanese earnings data is due up next. A new Premium trade has been posted to subscribers on a pair not approached since October.
We highlighted the implosion of the short-volatility ETF/ETNs yesterday as the event was unfolding. The worries continued into the start of European trading and the US equity open but the fears faded late and the S&P 500 added 46 points to 2695.
A big reason for the bounce back is that the VIX narrative helped market participants understand what happened. The only thing scarier than a market selloff on news is a selloff on a mystery. The unknown could be anything.
Short of nuclear war, the market is more comfortable once it has a sense of what happened. That immediately helps to limit contagion and highlight which areas of the market are safe. That’s what slowly continues to unfold and it’s good news for a continued to rebound in risk trades.
At the same time, the rout was also an opportunity to test virtually every market. One trend that stands out is how quickly Treasury yields rebounded. US 10s finished up 9.6 bps to 2.80% Tuesday and is now just 8 bps from the cycle high. That highlights a high risk of climbing to 3% in short order.
In FX, EUR/USD held up well through the storm in a signal of continuing strong demand.Looking ahead, the main data point in Asia is December Japanese labor cash earnings at 0000 GMT. The consensus is for a 0.5% y/y rise and it will take a big miss to generate any market moves.
