Volatility Spike Could Continue, UK Retail Sales & Trade War Under Focus

US futures and European markets are trading lower due to the trade pessimism and the rotten US retail sales number. Global equity markets have retreated from their highs and the theme is the same across all markets. Basically, investors aren’t sure if there is enough progress made on the US-China trade dispute, a factor which has been impacting the markets for months now. As for the US retail sales number, no matter how you look at it, and whatever reason you may choose to blame this, the fact is: if December’s number is this much weak, January number is going to have even nasty smell, because of the US government shutdown.

Nonetheless, the S&P 500 index is still up 9.53% year-to-date and the theme is similar for the Dow Jones and the Nasdaq, both of them have recorded solid gains of 9.05% and 11.93% YTD.

The biggest move which we have seen yesterday was in the volatility index, the SPX volatility jumped by 3.64% touching the level of 16.22. It was the volatility of the VSTOXX index which deserves the most amount of attention, it jumped more than 12% and closed at 15.75. We are expecting this trend to continue to today and this may help both of the indices to erase some of their year-to-date losses of -36.19% and -33.97% respectively.

According to yesterday’s report, both sides: the US and China, are still far apart on reforming any kind of trade deal. This makes it clear why Donald Trump has shifted his stance;  he is weighing on the option of extending the deadline of trade deal by 60 days. The fact is that if both Washington and Beijing continue to disappoint the markets in this manner, market participants will have no option but to radiate their anger.

Further pessimism in the markets comes from the fact that the Chinese economy continues to disappoint. The Chinese factory inflation took another nose dive- reflecting softening demand in the country- a message which investors are highly sensitive to. It appears that there is no shortage of feeble economic numbers no matter where you look: yesterday, the German GDP number showed the growth is stagnating, the US retail sales number also painted a horrible picture about the state of the consumer health. All these developments are only adding to the ongoing pessimism that we are experiencing in the markets today.

Closer to home, after another humiliating defeat which Theresa May suffered in the parliament yesterday, the message to the EU is even more clear: the prime minister doesn’t have any support and there is even more divide in the parliament. This Brexit chaos is keeping sterling below the 1.28 mark against the dollar, and if the upcoming US retail sales number miss the forecast of 0.2%, we could see some serious plunge in the currency, because it is only consumer spending which is holding the economy in reasonable shape.