Risk off, but US dollar drops with it, AUD steady while Japanese yen strengthens, North America leads equities sell-off, ASX futures down 60 points

US equity volatility has re-emerged, with the S&P 500 falling 1.62% and the VIX index rising to 18.53. It's the first time a sharp sell-off in US equities has emerged in a while, with commodities having been such a focus of late, with particular regard to crude oil. US equities, buoyed recently by strong employment numbers and the relaxation of threats to its loose monetary environment by low inflation, have been looking toppy for some time. In today's first chart you can see the significant 10%+ S&P 500 rally (black line) that took place from its October lows, while the world channelled month to those economies who benefited from falling oil prices and away from those who did not. The orange line represents the ASX 200 futures, which have significantly underperformed due to the bitter taste of our commodity-dominated export economy and gridlocked fiscal environment.

We might now discuss something that I'd certainly love to see more of - a weakening US dollar. I've discussed recently why I don't think the world is ready for an exponentially strengthening US dollar (due to its ballooning effect on emerging economy debt). While it is often the case that a swift sell-off in US equities will push investors to safe-haven assets including US-dollar-denominated bonds, last night's risk off move pushed the US dollar lower. This broke the back of recent highs in the USDJPY pair (which represent lows in terms of yen weakness). It also bolstered the position of US dollar spot gold and the AUDUSD currency pair, which both seem to be consolidating in price at present. Today's second chart shows the AUDUSD pair (orange) and the USDJPY pair (black). There is a lot of speculation around about changes in China's policy toward spending its foreign currency reserves, which would see it gently diversify away from US Treasury bonds. The FT quotes an unnamed Chinese official, “This is a big change and it cannot happen too quickly, but we want to use our reserves more constructively by investing in development projects around the world rather than just reflexively buying US Treasuries. In any case, we usually lose money on Treasuries, so we need to find ways to improve our return on investment.” It's a cracking second line and, assuming this person is real, hints that if the US doesn't maintain efforts to be a great friend of China, maybe the Chinese will alter its stance on US bond buying from philanthropic to commercial!

In today's last chart I've shown the S&P 500 futures (black line) versus the VIX index (orange line). Do not be surprised to witness some continued volatility as the European Central Bank goes quiet on stimulus progress over the break, drops in the oil price spook investors who aren't quite sure what it means for the world (i.e., is this a good things because manufacturers will make more money, or is this a bad thing because it's telling us global growth is weakening and taking oil demand down with it?), and also this story emerging relating to the CIA's post-911 torture methods are creating diplomatic woes for the US - there are a few things hanging around that could see some retracement of the October-December S&P 500 rally. 

Today’s charts are taken from the Rivkin Trader platform. 30,000 global instruments available to trade including FX, commodities, index, ETFs and international shares. Trade Australian share CFDs from just $8 or 0.10%. Click here or phone 1300 748 546 to get your free $100,000 demo account.

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