The Christmas period this year has seen almost unprecedented seasonal volatility in equity markets throw up some truly wild moves in the likes of the Dow Jones, the S+P 500 and the Nikkei. In fact, the Nikkei fell into ‘bear market’ territory earlier this week, dropping to a low of 18,948- a more than 20% fall from the year’s high of 24,448. The S+P 500 technically did the same too when it fell to a low on Boxing Day of 2,346.
Understandably, the sharp rise in volatility over the past fortnight has seen the VIX (volatility index) rise to as high as 36 this week, from levels below 20 only a week or two back. Now as far as I can see, there’s not necessarily one single root cause for all of this, but certainly the fall in oil prices most recently has been at the core of it. As to which one is actually wagging the others tail isn’t clear, but it does rather look like WTI might have set the ball rolling.
The more than 40% drop in the price of oil has eventually weighed on the CAD too with the USDCAD rising above 1.36 as WTI traded to a low this week of $42.33 a barrel. At the same time the sell off in equities has seen risk aversion favour the JPY and Gold. The JPY has been the best performer within the G10 currency space and consequently the CADJPY has suffered a significant move lower.
At the same time, the falling equity markets have forced US yields lower again, which when added to increased levels of risk aversion has worked out very nicely for Gold with the price rising back above $1280 for the first time since the middle of Q2.
To better see how the corresponding moves in WTI and Gold have played out, please take a look at a simple price comparison chart of those two below.
The left hand scale shows the price of WTI (yellow line) falling back from above $75 a barrel at the same time as the price of gold (white line) has lifted from below $1200, back above $1280 an ounce, as defined by the right hand scale. As you can see, this has resulted in quite a seismic shift in the inverse price correlation of the two commodities
Meantime, turning back to the JPY, which as I said, has been the main currency winner from all of these latest equity market moves. Looking at the chart below you can see how that has played out against the dollar with the USDJPY dropping below its 200 dma (daily moving average) this week.
So, all the time the price remains below that 200 dma (defined by the yellow line - currently at 111.04) on daily closing basis, then the prospect of further immediate downside is live. Naturally, much will depend on how those equity markets fare in the final two trading days of 2018 as to whether or not the JPY rises further.
As I write this morning, those equity markets are continuing to try and rebound, but given the volatility seen already this week, it’s a brave man (or woman) who would say for sure; that the worst is now behind us.
Next Monday is of course the final trading day of 2018 and reports so far suggest that there will be strong demand for the dollar for the final month end fix of the year- at the same time, worth nothing that such demand may not be one-dimensional though.
I will be back in touch again on Monday morning with my final article for the year, where I will add more detail on this (if I have it) and perhaps some narrative regarding the prospects for the pound in 2019.