RBNZ Cuts, VIX Surges, Gold & JPY Firm

Volatility is back in a big way as the VIX hit 4-month highs but we warn you that volatility here means what it exactly says it is: Large daily and intra-day fluctuations in global indices rather than a singular downwards move. NZD lost ground after the RBNZ cut rates. GBP flounders towards 1.30 on eroding hopes that poor local elections results would spur Labour and Conservatives towards a Brexit compromise. Elsewhere, a heavy round of risk aversion hit stock markets, while gold and yen are the biggest gainers. A new Premium trade was issued yesterday, while the stop was moved in another recent trade.

The RBNZ decision to cut by 50 bps interest rates was a surprise as the market was pricing a 40% chance. NZD plunged from 0.66 to 0.6527 before erasing half of those losses. The RBNZ was surprised by the impact of the global slowdown, but its communique did not give reason to expect addional easing in the near-term.

Brexit Cross Party Talks

The latest reports indicate no progress in Brexit negotiations but more talks planned later in the week. There was a small opportunity this week for a breakthrough but it has evidently gone nowhere. It's increasingly clear that all sides are far too dug-into positions to find a compromise and that will leave cable floundering.

US-China Talks at Epicentre

Elsewhere, worries about a US-China trade war hammered equity markets on Tuesday. The S&P 500 fell as much as 66 points before finishing down 48 points. It came after yesterday's tariff talk from Mnuchin and Lighthizer. The trading pattern continues to be that of aggressive declines in the afternoon session, followed by a slight rebound in the final hour. DOW30 closed below its 55-DMA, while SPX remains above its own 55-DMA of 2850, a level meriting extra scrutiny. We're also closely watching the 60 support in US crude oil.

What's notable is that the FX and bond markets were much less volatile that stocks. Yen crosses fell around 0.5% and Treasury yields were down 1-2 bps. That's an indication of a wait-and-see attitude rather than a flight to safety. The USDJPY Premium short is currently 120 pips in the green.

Every decline in the S&P 500 will sap Trump's will to launch the trade war but sometimes flows can take on a life of their own. The focus in the day ahead will continue to be on China's response and posture into this week's planned talks.