I am a devotee of both Minsky and Mandlebrot. I strongly believe that a study of their theories of what drives markets and how the players interact is an important part of any traders necessary understanding of their craft – even if they only trade on technicals.
But if I can distill the teachings of these two into one sentence it would be the following:
Volatility transition from low to high and then it clusters
It is the warning I have been making for months now and it is a warning that appears to be bearing fruit after the IMF downgraded the outlook for global growth ahead simply catalysed notions that were already forming in traders and investors heads as they seek to justify current pricing, to themselves as much as anyone.
Importantly though the IMF mentioning that some sharemarkets wrre “frothy” simply reinforced what traders have been clearly thinking for a little while lately as the saw tooth volatility has increased.
So at the close this morning the Dow dropped 273 points or 1.61% to 16,719, the Nasdaq fell 1.57% and the S&P 500 lost 30 points, or 1.52% to 1,935.
As I highlighted last week the S&P 500 is at a big level and at risk of further declines.
The moves in stocks have been “confirmed” if I can call it that by the big reversal in USDJPY which is a natural safe haven in times of volatility and is this morning trading below 108 and US 10′s which rallied 8 points to 2.34%.
If 107.80 gives way we’ll know something is up in global markets
In Europe the best performing market was the FTSE but it too fell more than 1% off 1.03% to 6,496. The DAX lost 1.34% to 9,086 and the CAC was 1.81% lower at 4,209. In Milan and Madrid stocks fell 1.73% and 2.02% respectively.
The impact of the moves has not been lost on local futures traders with the December SPI down 58 points to 5200. This is not over yet so I’m still 100% cash in super.
SPI 200 = Yuk!
In Asia yesterday the Nikkei fell 0.67% after rallying from early lows the BoJ decision and Governor Kuroda’s speech to Parliament left traders cold with an afternoon selloff accompanying the rally in the Yen.
On currency markets the Yen rally is entirely normal given the circumstances but the reversal of the US dollars fortunes against the other majors is more a reaction to the full pricing of expectations for the moment. Looking at the Aussie dollar don’t believe reports that it was the RBA which helped drive the AUDUSD higher – that is not the case. Rather it was the USD move and the Yen specifically which took the Ausie with it yesterday afternoon.
This morning though all the majors are doing better against the USD. Euro is 1.2664, GBPUSD 1.6093, USDJPY 108.02 after being below 108 earlier and AUDUSD is above 88 cents at 0.8813.
That’s a remarkable performance from the Euro given the train wreck that is becoming German growth. Last night the release of the August industrial production data which fell 4% against expectations of a 1.5% fall reinforced how weak the economy is becoming.
Remarkably Euro might rally further.
A Weaker US dollar is normally good for commodities but in the context of the IMF taking the wind from the sails of the global growth bulls Nymex crude has crashed below $90 a barrel down 1.68% to $88.82. Copper was stable at $3.03 a pound and gold is at $1,210 and ounce. Wheat is up 2.24%, corn rose 2.11% and soybeans were up 0.84%. December iron ore rallied 29 cents a tonne to $79.33 while Newcastle coal was up 85 cents to $66.40 a tonne.
Today we see the release of the Chinese HSBC Chinese PMI but there is no Australian data of note or indeed European data and tonight we get FOMC minutes in the US.