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10/10/2014: Equity sell-off accelerating as safe haven plays act as a port in the storm


Fear and uncertainty are powerful emotions for traders and investors. Right now, market participants are fearful of the falling or lack of growth in the major economies of Asia and Europe. They are fearful of the economic impact of the sanctions and counter sanctions on Russia, the Ebola virus, and the spread of ISIL. Additionally there is also uncertainty over the ECB’s commitment to monetary easing, with a lack of clarity in the recent meeting over Asset backed securities purchases and the dampening of speculation over full blown quantitative easing.

These factors are resulting in a significant retrenchment in risk appetite in financial markets, with the selling pressure in European indices today reaching elevated levels. Wall Street, the Asia and now European trading sessions have all seen successive precipitous selling, with volatility spiking higher. The VIX volatility index increased by 24% yesterday and with S&P futures pointing to a further 13 points lower at the open (around 0.7% down) the VIX is likely to continue to pull higher. The market’s “fear gauge” suggests that portfolio managers are crying out for hedging protection as the markets slide.

VIX   10102014

Traders are fleeing out of equities and into safe haven sovereign yields as Treasuries, Gilts and Bunds have all been bid up.  The US 10 year Treasury yield has fallen to 2.30% which is its lowest level since June 2013. In forex trading, the dollar is stronger against all major currencies apart from the yen. This also suggests a significant safe haven preference in forex too. The strength of the dollar has also stopped the advance of the gold price.

In times like these with such high volatility it is easy to get your fingers burnt on indices. The FTSE 100, DAX Xetra and CAC 40 are all oversold on the RSI momentum which increases the potential for technical rallies. However, looking at the Bollinger Bands (a technical analysis measure of volatility) suggests that the indices are on the cusp of being overstretched.

However, for now, the markets have entered a significantly bearish phase and the likelihood is that further selling pressure will be seen. The raft of hawkish FOMC members that are speaking later today including two voting members (Richard Fisher and Charles Plosser) means that equity markets are unlikely to get much good news on Fed monetary policy, whilst there may also be further fuel to the fire of the dollar rebound.

I will leave you with one scary technical development.  On the break below 8903, the DAX has completed a huge 12 month head and shoulders top pattern. The size and magnitude of this pattern suggests the need for confirmation before we start making majorly bearish calls. Therefore we are now looking for a two day close below 8903 to confirm the pattern break. I have marked on the chart the maximum potential implied downside target.

DAX   10102014


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