By Michael Brown, Senior Research Strategist at Pepperstone
DIGEST – A sudden surge in cross-asset vol sparked a violent unwind of several momentum trades yesterday, though the fundamental backdrop remains little changed. Today, a busy docket awaits, with weekend gapping risk also a consideration.
WHERE WE STAND – Up until early yesterday afternoon, everything was fine and relatively calm; then, rather abruptly, it wasn’t.
What changed?
Frankly, nothing – there was no especially obvious headline or data catalyst to drive the rather sudden bout of risk aversion that swept across the board, either at the time, or that we can point to with the benefit of hindsight. That said, the fireworks did start bang on the cash open stateside, where Microsoft in particular came under notable pressure, as participants digested Wednesday’s pretty inauspicious earnings release.
In turn, that pressure then appeared to broaden out, first to the tech sector, then to the wider equity market (spoos down over 1%, NQ down over 2% intraday at the lows), and then into other asset classes, as haven demand spurred bids into Treasuries and the dollar, while participants bailed out of those momentum trades that have worked so well of late – gold (down over $400/5% from peak to trough), silver, copper, etc. – en masse. Put simply, a sudden surge in cross-asset vol will have triggered a wave of forced selling, as participants deleveraged and de-grossed rapidly, with ‘winners’ naturally being the first things that participants reached for to sell down.
On precious metals, an unwind of incredibly stretched long positioning will undoubtedly have exacerbated the pressure that we saw come into the complex, with dealers unwinding delta hedges placed early doors in gold’s run to a record high at $5,600/oz also likely playing a significant role in the incredibly rapid declines that we saw. Those declines, incidentally, being a useful reminder, if one were needed, that momentum works both ways!
Regardless, some context is useful, as even those 5% or so intraday declines in both gold and silver simply took spot back to where we were trading on………….Tuesday. I guess that speaks volumes about how violent the run higher has been, if nothing else.
Obviously, the big question now is how things shake out as the dust settles, and where markets head next now that we’ve had a bit of a shakeout in terms of positioning. Importantly, the majority of those cross-asset moves had pared by the end of the day, with stocks in particular seeing a notable bounce, with dip buyers emerging once more, as they have done so often in recent months, with the S&P closing basically flat.
Here, I’d stress that despite a volatile and choppy day yesterday, with markets jumping around all over the place in what could reasonably described as irrational fashion, nothing fundamental has really changed. The economic outlook remains robust, the monetary backdrop is still on track to loosen as the year progresses, fiscal policy will provide an increasing positive impulse too, and earnings – on the whole – continue to grow at a solid clip.
With that in mind, I am inclined to ignore the intraday noise, and set aside the hysteria, to reiterate my view that the ‘path of least resistance’ continues to lead higher for equities over the medium-term, with dips continuing to represent buying opportunities. Similarly, the Trump Administration’s ‘run it hot’ approach hasn’t changed, and is unlikely to change, leading me to remain in favour of curve steepeners. The Admin’s apparent preference for a softer dollar also leads me to still view the near-term balance of risks as pointing lower for the buck, too.
It’s metals where I have more difficulty in holding a high conviction view, to be frank. While positioning is now much cleaner than it was, both XAU and XAG continue to show signs of dysfunction, and vols (realised & implied) remain at quite frankly ridiculously elevated levels. Yes, the fundamental bull case for both continues to hold water, but the risk/reward of entering fresh longs here still doesn’t seem especially attractive.
Price action over the next few days will be key – naturally, $5,000/oz in gold, and $100/oz in silver stand as key ‘lines in the sand’ while, bluntly, the two moving sideways and becoming rather boring for a few days would probably be the most constructive signal that the market could offer right now.
LOOK AHEAD – A fairly busy docket to round out the week, though it’s tough to imagine much of it being market-moving.
Before that, though, it seems set that former Fed Governor Kevin Warsh will be formally announced as Trump’s pick for Fed Chair today. Trump’s picking the worst of the four on his shortlist here in my view. Warsh been a monetary hawk for his entire career, even advocating an end to QE in the midst of the GFC, when the labour market was being wrecked, due to perceived worries about inflation. That’s before this nonsensical idea that you can lower rates by shrinking the balance sheet. Conveniently, he became an uber-dove in November 2024, just in time to position himself for the job that he’s always wanted as a perennial ‘nearly man’ until now.
His dovishness stems not from data, but from political expediency. Trump seems to have been duped by Warsh’s recent rhetoric, and the latter’s true hawkish colours will probably return once he’s on the Board. Still, he’s only one vote, and as with all the candidates for the top job shan’t be able to force the Committee in any direction unless there’s a cogent and logical argument in favour of a particular policy action.
As for the data, this morning brings the first read on Q4 eurozone GDP, with the economy set to have grown by a modest 0.2% QoQ in the final three months of 2025, while we will also receive ‘flash’ inflation stats from Germany, ahead of the eurozone-wide figures next week. Across the pond, the latest US PPI and MNI Chicago PMI reports are both set for release, while Canada provides the incredibly stale November GDP report. There’s also a smattering of Fed speakers scheduled as the ‘blackout’ period ends, with Governors Miran and Waller both likely to issue comments explaining their dissenting votes.
Besides that, US government funding expires today, though all parties involved seem intent on avoiding another shutdown. There may, however, be a temporary lapse in funding over the weekend depending on when the House are able to vote on stopgap funding measures, though this shouldn’t have any impact on economic data due to be released next week. It’s also important to bear in mind the potential for gapping risk on Sunday’s re-open, especially amid elevated tensions in the Middle East.