We saw another major risk off day on Monday when S&P500 lost 81 bps and Nasdaq 67 bps. Volatility, measured by VIX, spiked to 32.5 – levels last seen during September correction. VIX broke its 200-day Moving Average, and the Squeeze that had been building since early September fired upward. VXN, or Nasdaq 100 volatility index, exhibited a similar price movement, albeit being still in a daily Squeeze.
It should be noted that all but one main equity sectors were down on Monday. The only exception was XLU, or the utilities sector that has been marching higher since early October. Also, noteworthy that both SPY and QQQ (S&P500 ETF and Nasdaq 100 ETF respectively) broke their 50-day Moving Averages intraday but closed just at the level of 50-day and 34- day Moving Average.
These heightened volatility levels put us in a territory where equity prices can be choppy. Nothing surprising, given the fundamentals that dominate the headlines. US Presidential and Congressional Elections are a week away and national polls show a marginal lead for Biden. Polls' data should be taken with a pinch of salt due to potential oversampling of Democrats and the ‘lying' component – a phenomenon among Trump supporters to lie about their preference.
Moreover, coronavirus outbreak doesn't show any signs of slowing down as a number of countries, including the U.S., have been hitting record daily infections day after day. Moreover, hospitalizations are up by 33% this month and a number of states are experiencing the highest rates of hospitalizations since the start of the COVID-19 pandemic. France and Italy have also reported new daily record infections with additional lockdowns and restrictions imposed on movement of people, resulting in violent riots in Italian towns.
Lastly, the long-awaited stimulus from the U.S. Congress is still being negotiated between House Speaker Nancy Pelosi and the Treasury Secretary Steven Mnuchin. Time is running out to come to an agreement before the Election Day on the 3 rd of November and the markets are getting restless.
Risk-off mode was also reflected in Treasuries markets as measured by TLT ETF that bounced 77 bps from Friday's closing, kissing 8-day Moving Average. 10-year yield is currently at 65 bps, shedding 2bps from Friday's level of 67 bps.
Gold futures have been stubbornly range-bound, trading between 1,904 and 1,913 since late September. Gold futures have attempted to break 1,920 resistance level a number of times in October but constantly being forced to retreat. Gold futures have also been in a daily Squeeze since 14 October.
On the currencies side, USD was up 20 bps, closing at 93 and being stopped by 8-day Moving Average. USD strength was echoed in weakness of commodities. Oil futures offered an interesting price movement as the price collapsed by 2.9%, or to US$ 38.54 – not too far from 200-day Moving Average of 37.89.
A potential and larger catalyst for the markets to turn positive is additional US$ 2.2 trillion stimulus bill that has been on the table since summer. Without this additional liquidity injection we can expect the markets to remain choppy and volatile until we have a clear outcome on who would be the next President, and whether the Democrats were able to contest Senate seats needed for gaining majority and control.
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