- Volatility levels are extremely low and complacent globally. In the US, the VIX was recently at 5 year lows. In Asia, implied volatility (IV) on all major stock indices has approached multi year lows as well. Finally, in Europe volatility is also very calm, but more importantly credit default swaps remain elevated, signalling the crisis is not finished by any stretch of the imagination.
- The Junk Bond market is encountering a major technical supply zone (resistance) on the HYG ETF. Price levels from 91 to 93 have been major selling points during the last several years. Furthermore, despite US equities marching towards new highs in March and August 2012, the Junk Bonds have been sending us a warning non-confirmation signal.
- Despite low volatility, behind the scenes, commodity currencies are starting to weaken. In particular, the Aussie Dollar is losing its bid as investors watch prices of Iron Ore free fall (60% of Australian mining export). From a contrarian perspective, investors are extremely bullish on commodity currencies right now. Disclosure: I have shorted Loonie with OTM March '13 Puts.
- All eyes should be on the price of Copper in coming days and weeks, as it gets ready for a make or break technical decision. Its decision will be one of the critical leading indicators for the future state of the global economy, as already discussed in the previous article. Other industrial metals, including Iron Ore and Steel, have not performed well as Chinese demand slows meaningfully.
Industrial economic barometers like Copper and Crude Oil are failing to rise above their 200 day MA and more importantly are not confirming the S&P 500's new highs in 2012. The Emerging Markets, saviour of global growth in the post Lehman recovery, also continue to lag other equity indices indicating that not all is well with the BRICs. Furthermore, the short term rise in the DAX 30, Commodity Currencies and Brent Crude Oil (not shown here) has been almost vertical, so caution is advised. Finally, Gold, Silver and Platinum have technically broken out to the upside, but the real test will come as volatility of global risk assets rise and if the US Dollar starts to rally again.
We continue to see the Citigroup Economic Surprise Indices in mean reversion mode, which means the incoming global economic data continues to surprise economist's expectations. This has been a positive environment for risk assets. While the data has been positive relative to what economist's expect, the overall economic activity in the global economy is nothing to write home about. Let us focus on the main three economies, as we always do: US, Germany and China.
Besides ECRI's leading economic indicator, there are other indicators confirming significant divergence between Main Street and Wall Street. The chart above, thanks to Ed Yardeni's blog, shows that his own personal Fundamental Stock Indicator is in complete disagreement with the stock market over the recent multi-month rally out of the June lows. We've seen this many times before and should know by now how it ends: stocks usually play catchup to the downside.
usually have very high correlation, but just like with US equities, the disconnect can clearly be seen here as well. That is because Super Mario has promised just as much easing on the right side of the Atlantic, as Helicopter Ben has on the left.