S&P 500's Worst Day in Two Years Notwithstanding, VIX doesn't Indicate Capitulation

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EnclaveFX
Sep 14, 2022
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TALKING POINTS FOR S&P 500, VIX, INFLATION, DOLLARS, EURUSD, AND USDJPY:


The market viewpoint: 

lGold is bearish below 1,680, and USDJPY is bearish below 141.50.

lThe S&P 500 lost the most money in a single day in more than two years, but the rise in the VIX indicates that we have not yet reached the long-awaited "capitulation."

lThe harsh reaction affected the market conditions more than the novel essential implications of the August inflation report, even though CPI printed higher than anticipated.


 A QUICKLY HARSH MARKET DROP, BUT NOT YET THE LONG-TERM CAPITALIZATION:

The market found justification for a substantial decrease in riskier assets like the S&P 500 with a surprise, higher-than-expected consumer inflation reading from the US this past session. However, would argue that the market circumstances caused the sudden market collapse more than the data itself. Consider the headline inflation figure, which showed a decrease in annual inflation to 8.3 percent from the predicted 8.1 percent and 8.5 percent. That is undoubtedly a "beat," but it hardly moves the series in a new radical direction. Instead, the market was strongly leaning away from a negative conclusion.

Markets were significantly skewed toward a more pronounced deflation, as shown by breakeven rates, which appeared to increase after the NY Fed's consumer inflation report from Monday. Additionally, volatility and liquidity have not yet adjusted to the seasonal norms we have grown accustomed to.

There is no denying the severity of the recent session's decline in risk assets. The S&P 500 fell by -4.3 percent, the most since June 11, 2020, and there had been no other comparable drops before the pandemic's turbulence (February to March 2020) since August 2011. The more narrowly focused Nasdaq 100 experienced a more severe -5.5 percent decline, which caused the Nasdaq-to-Dow ratio (growth-to-value) to fall substantially. This is to be expected from a shift in risk appetite. Not just US indices experienced it. There was a sympathy decline in everything from European shares to emerging markets to trash bonds. However, correlation and intensity do not indicate either conviction or submission, although both bears and bulls who firmly believe in their side will make the case. In truth, recent years could be used to infer a turn, but I urge against such rapid contrarianism. Historically, such aggressive approaches have not produced an excellent record of immediate follow-through. The opportunists continually looking for "capitulation" to "select a bottom" on the market are incredibly guilty of this.

IMPACT OF INFLATION ON FORECASTS OF RATES AND RECESSION TEMPS:

There is no denying the economic implications of the data, even though I would argue that market conditions were the most significant catalyst for this session's reaction to the inflation report. The market was left to analyze the data independently without guidance from the central bank, given that we were in the Fed's self-imposed media blackout before the FOMC rate decision (September 21). However, as it turned out, the higher-than-expected number complied with the cautions we received before officials were prohibited from speaking to the media. A determined effort was made to warn that inflation was the primary concern, taking precedence over the anticipated economic recession and possibly even a financial meltdown.