The Month Of August
Historically speaking, the month of August stands tall among other months in terms of volatility, but this year it was in a different league. We saw some intense moves in the markets: the VIX saw the biggest move during this month in nearly two decades and volatility in the equity markets and in forex markets exploded. The fixed-income assets- the bond yields experienced massive whipsaws.
To put things in perspective, it is important to compare this month’s performance from previous years’ August. The US 30-year Treasury yield tumbled to record low touch the level not seen since 1982, implied volatility rate blasted and it reminded traders the year 1998, the biggest August move in over two decades. The volatility for the FX market also horrible, again its biggest August move since 2007. So, for day traders, it has been a very interesting month, and for passive investors, it was all about hedging and rebalancing their portfolios.
Trade War Algorithms Need Fine Tuning
Speculators need to make sure that they fine-tune their trade war algorithms because this war has become a lot more sensitive from a perspective of trading. Tariff announcement and implementation of them are two different things altogether. So far the markets have considered them as one factor, and the moment the word tariff hit the wire, traders considered that as a done deal. But, in the light of recent events where China has adopted the US strategy: announce tariffs first and then say they will be delayed, the game has changed altogether for traders.
Yesterday’s bounce in the equity markets was purely on the back of this optimism. This positive momentum is still driving the trading action over in Europe today. After the recent tweets from President Trump and his interview on Fox News, traders have once again started to pile their bets in the equity markets. Perhaps not a bad decision because equity markets are cheap in a relative perspective.
Why is Nasdaq Leading the Pack?
Out of the three major benchmark indices, the Dow Jones, the S&P500 and the Nasdaq index, it is the tech-savvy index, the Nasdaq which is leading the gains. We have seen more momentum for this index as compared to others. It moved above its 100-day moving average well before the other two indices- the S&P500 and the Dow Jones. Nonetheless, all the three majors indices are above their 100-day moving averages on their daily time frames and this means more strength for the bulls.
Treasury Yields To Continue Their Higher Move
The fixed income space, a market which has become a lot more sensitive lately, has also shown evidence of risk-on trade. Bond yields have edged higher, but the inverted yields haven’t gone out of the picture yet. Speculators may jump back and start pushing them lower again as there is still nothing material on the trade war front.
Sell-Off In Gold
Having said this, the gold price is still trading above the critical of 1500 and this means business. The recent upward momentum in the gold price has been astonishing and by looking at the yesterday US GDP prelim q/q reading, one can say that the upcoming quarters aren’t going to be strong either especially if the fears of trade war do not dissipate.
I believe that the next big important economic number for the markets is the upcoming US NFP number next week and even a strong reading may not be able to shift the Fed’s monetary policy stance. Another interest rate cut in September is almost a done deal however if things do change then there could be a serious sell-off for the gold price.
