By Michael Brown, Senior Research Strategist at Pepperstone
DIGEST – Broad-based deleveraging and de-risking dominated trade on Tuesday, with the dollar again shining as a safe haven. Today, geopolitical events will remain in focus, despite a busy data docket.
WHERE WE STAND – When cross-asset correlations go to 1, it’s never a great sign.
So it proved yesterday, where the relatively contained conditions that we saw on Monday, gave way to something altogether more chaotic.
Importantly, while participants did shift into ‘sell everything’ mode for a time, trading conditions were still orderly, and markets were not dysfunctional. That said, in a market where participants were in the mood to ‘sell first, ask questions later’, we did see some fairly ugly moves. As is often the case in such an environment, especially where margins have to be covered, it’s not necessarily a case of selling what you want to, but selling what you can.
This helps to explain the fairly indiscriminate nature of the downside seen across the board. In fact, the only things that rallied yesterday were crude benchmarks, as markets priced a greater geopolitical risk premium, in turn allowing Brent to briefly take out Sunday night’s high, and the dollar, which remains the only true haven in true times of strife, as recent events are evidencing well. Crude benchmarks, though, did trim gains fairly substantially after confirmation from President Trump that the US would underwrite insurance, and escort tankers through the Strait of Hormuz, in order to ensure safe passage, and get product flowing again.
Elsewhere, it was a bit of a ‘sea of red’. At one stage, intraday, we had gold down over 5%, spoos down over 2%, and the DXY over 1% higher. That combination has only been seen on two other days in the last 25 years, both of which were in October 2008!!
Precious metals fell off a cliff, with gold briefly trading beneath $5,000/oz, as participants bailed out of stretched leveraged longs, creating a vicious cycle that bred further selling pressure with every downtick. Govvies sold-off again across DM, with Gilts markedly underperforming, as participants continued to discount the potential inflationary implications of the ongoing commodity price shock. Stocks, meanwhile, also sold-off, on both sides of the pond, though losses in Europe were again substantially greater than those seen on Wall St.
This reflects not only a view that the US economy will be less exposed to downside risks as a result of higher energy prices (which is true!), but also a notable difference in how participants on either side of the pond are perceiving the current geopolitical backdrop.
Here in Europe, focus is more on the left tail risk, the potential for conflict to prove prolonged, or even escalate, and the subsequent inflationary, and negative growth, implications that could stem from such an eventuality. Across the Atlantic, though, the vibe seems different, amid a general view that military action will be short-lived, that the aforementioned tail risk is lower, and that the current situation could even prove a net-positive in the longer-run if the eventual resolution brings about a calmer Middle East.
I’m inclined to side with the Americans with this one, if I’m being honest, though in any case this dynamic does explain why – for two days running – we’ve seen markets pare from their defensive extremes once NY desks have started their days.
On this, I’d also add that we’re seeing increasing signs of sentiment having moved to something of a bearish extreme. Not only do we have that GFC parallel I drew above, but there’s also the slightly farcical hawkish repricing of STIRs, which at one point were fully discounting an ECB hike by year-end, as well as the fairly chunky backwardation in the VIX curve. This is typically a sign of stress, and of sentiment reaching a nadir, with such a signal often marking turning points for equities. I’m not going to sound the ‘all clear’ right now, but again would stress that the fundamental bull case is still robust, and that geopolitical events tend not to be triggers for shifts in the underlying trend. I remain a dip buyer.
As for markets elsewhere, with implied and realised vol remaining at such elevated levels, remaining nimble and agile from a strategy perspective, at least for those taking a short-term view, remains key. Smaller position sizing is also a must. Regardless, zooming out, snapping up gold at $5,000/oz seems a bit of a no-brainer, with both retail and reserve demand set to remain robust, while I’d be tempted by dollar longs too, with the DXY now north of the 200-day MA for the first time since late-Jan, and the bulls likely targeting the 100 handle.
Finally, I couldn’t let this morning pass without a brief word on the ‘Spring Statement’.
It was, ultimately, the non-event that we’d been briefed to expect, with Chancellor Reeves announcing no new policies whatsoever, instead spending 20 minutes reading aloud the latest OBR projections, which at least didn’t leak out early this time. Anyway, Reeves stressed that her plan for growth is working, before in the next breath revealing that the 2026 GDP growth forecast is now 0.3pp lower, at 1.1%, than it was last November. Please, give me strength!!
LOOK AHEAD – Once again, calendar events probably won’t matter especially much today, with focus remaining squarely on developments in the Middle East.
Still, we’ve got plenty of services PMI surveys to chew through, with focus falling largely on the stateside ISM services gauge, where the headline metric is seen slipping a touch to 53.5 last month, from the 53.8 print in January. Besides that, we also get the latest US ADP employment report, as a precursor to Friday’s official jobs report, along with the latest eurozone PPI and unemployment reports.
Elsewhere, the Fed release their latest ‘Beige Book’ of anecdotal economic evidence tonight, while earnings from Broadcom (AVGO) are due after the close, in a market where AI-linked jitters haven’t entirely gone away, despite the centre of attention being elsewhere for the time being.
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