The US dollar continues to ride high this morning following yesterday's battering of the single currency at the hands of a dovish European Central Bank governor.
Article / 12 September 2016 at 8:43 GMT

From the Floor: Assets plunge as fear stalks markets

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  • Friday was a very big day in terms of volatility – Jakobsen
  • Highly correlated assets amid low volatility is dangerous –  Jakobsen
  • We will see some selloff in the market – Jakobsen
  • G3 currencies up at the expense of EM and commodity FX 
  • G3 currencies gain to the cost of EM & commodity counterparts – Hardy
  • Three Fed speakers on today's agenda: Lockhart, Kashkari & Brainard
  • Oil pressed but won't break its range – Hansen
  • Further declines in equities are likely – Garnry
 By Clare MacCarthy

Global assets are being hammered by a tsunami of negative sentiment as investors and traders worldwide mull Friday's 2.5% selloff in the S&P 500 and fret about the likelihood that Wall Street will continue lower today and that the Federal Reserve may spring a rate hike next week.

"We had a very big day on Friday in VIX terms – it was the eleventh biggest day ever in terms of volatility. However, what's important to note is that we have two combinations which are really dangerous for the market overall in terms of risk, and that's the fact that we have very high cross-asset correlation. In other words, it's very difficult to hide or hedge from anything in the marketplace. If fixed income goes down so do equities and even commodities to an extent. This combines with a VIX index which until Friday was the lowest in many, many years," says Steen Jakobsen, Saxo Bank's chief economist. [See chart below.]

This combination, Jakobsen says, makes it extremely difficult to have the correct level of value-at-risk. "What we'll see for the start of this week is that a lot of the risk mandate will be under attack because the sharp increase in VIX will create a need to reduce overall exposure to the portfolio. One outcome is that value-at-risk will be reassessed higher and hence will dictate by natural force that we will see some selloff in the market," Jakobsen concludes.

High cross-asset correlation combined with low volatility:
 Source: Citi Resesarch

In term of currency, Friday's rout, says John J Hardy, Saxo's head of FX strategy, "has given a boost to every thing that's liquid at the cost of everything that's illiquid. So we're seeing the G3 currencies showing varying degrees of strength while the EM and commodity currencies are suffering the most".

But why did markets so abruptly end a longish period of relative calm? Hardy says that a speech by the Federal Reserve's Eric Rosengren on Friday, in which he warned that delaying a hike in interest rates could overheat the economy, was the spark, but it was the European Central Bank's dovishness and the talk of a steepening Japanese yield curve that really caught the market off guard.

So where to from here? "There's tremendous uncertainty in dollar-yen whereas it's pretty clear what to look for elsewhere: Aussie-dollar and other riskier currencies looking lower against the dollar," Hardy predicts. In terms of today's focus, each and every soundbite from the Fed will be analysed and parsed to pieces and there are no less that three Fed speakers on today's roll call: Dennis Lockhart (1205 GMT); Neel Kashkari (1700 GMT) and Gael Brainard (1715 GMT).

Oil under pressure but will remain range-bound:
 Source: Bloomberg

Meanwhile, over in the commodities sphere crude oil is lower on the general market uncertainty, rising rig count and the renewed focus on the global oil glut, reports Ole Hansen, Saxo's head of commodity strategy. Further price weakness will test the Russian/Saudi resolve ahead of the informal meeting on Algiers on September 26-28 but oil is unlikely to spiral out of its current range.

Finally, Peter Garnry, Saxo's head of equity strategy, says that further declines in equities are likely. "We're cutting back on some of the exposures in our portfolio, which incidentally did relatively well with a decline of just 1.2% Friday because of all the short positions we have. We're closing our long position in Deutsche Bank and Unikredit this morning as we don't like banks in the current environment," Garnry says, adding, "We're also initiating a short position in Siemens to get some downside beta into the portfolio."

red sea
 A sea of red. Pic: iStock

Clare MacCarthy is deputy editor at

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