Article / 15 September 2016 at 9:08 GMT

From the Floor: Equities cement base as volatility 'flattens'

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  • Three-month Vix volatility curve "flattens dramatically" to less than 1% — Hansen
  • Stock markets slowly beginning to stabilise after last Friday's drama — Garnry
  • S&P 500 rejects Friday lows to find new support — Garnry
  • Bank of England unlikely to take action as sterling stays steady — Hardy
  • Perceived lack of Brexit fallout may be embarrassing for BoE — Hardy
  • Vast majority of market activity now fully focused on September 21 meetings
  • USDJPY faces downside risk if Bank of Japan follows Draghi blueprint — Hardy 


By  Martin O'Rourke

From the brink

It may have felt like we were edging close to the abyss last Friday, but the S&P 500's rejection of that day's intraday lows overnight could signal that for now, we are emerging from this particular crisis.

"The rejection of Friday's lows is a very useful data point," says Saxo Bank's equities chief Peter Garnry. "It's a sign that the market may have exhausted itself for now and it seems like there is support down there."

Garnry has subsequently initiated a long position on the S&P 500 with a stop at 2,103 and a take profit level at 2,150. The S&P 500 closed Wednesday at 2,125.77.

The thesis that stock markets may have indeed stabilised is supported somewhat by the Volatility Index (Vix) which has seen the three-month contango "flatten dramatically over the past week" reports Saxo Bank's head of commodity strategy Ole Hansen.

"Stock markets have settled down and while we still see the Vix well bid, the contango on three-month vol is down from 4% to less than 1%," says Hansen. "We've probably seen most of the buyback of shorts in that market for now."

"It supports the theme that markets are starting to stabilise now."

S&P 500 rejected last Friday's lowsc

Source: Bloomberg

Embarrassed BoE

The Bank of England meets this lunchtime and as seems to be the way with central banks these days, is not expected to do anything dramatic on the policy front.

"There was a sterling bounce and the BoE is not going to do anything after this," says John J Hardy, Saxo Bank's head of forex strategy. "The most that they might do is hold out the prospect of some easing at the next meeting or as conditions merit."

"There is some chance of a 'hawkish surprise' rather than taking a bit more cautious wait-and-see stance because there is a bit of embarrassment at how little this Brexit vote triggered an immediate loss of confidence so be aware of that."

"Sterling should be the more volatile among the majors as elsewhere it is mostly about waiting for next week's big bank meetings on September 21 [the Bank of Japan and the Federal Open Market Committee]," says Hardy. "If we look at GBPUSD, we need to see out the BoE to see where the relative strength of sterling lies."

"Positioning is very nervous and we need to extend back to the earlier lows and or go back to test the highs," he says. "I prefer lower but we could see a squeeze if we get the right combination of factors."

A bounce in GBPUSD will likely keep the BoE quiet today

Source: SaxoTraderGO

Elsewhere, USDJPY is coiling ahead of next week's pivotal pair of meetings. 

"If the BoJ decides to go for a European Central Bank type of move, then we could get a very sharp downside move," says Hardy. "At the moment we have an Ichimoku Cloud and a descending triangle pattern and it is all about next week and we are going to see a breakout one way or another."

USDJPY was at 102.31 at 0655 GMT.

It's all about next week's meetings for USDJPY


Source: SaxoTraderGO

Oil's slide

Up to an extra 600,000 barrels/day could soon be flowing onto the oil market if Libya and Nigeria are able to ramp up to full capacity in the coming weeks, and that has sent both benchmarks sliding again.

"There have been several false starts with Libya recently but overall, it is the last thing the market needs for now," says Hansen. "WTI has broken the $43.82/barrel level and as we get close to Algiers on September 26, we could see some more verbal intervention."

And finally....

We're almost a year on from when Volkswagen was engulfed in dieselgate and while the German carmaker has seen its volumes rise 6.3% year-on-year, the underlying message is not quite so positive as the overall market has grown 9%.

"Volkswagen is losing market share but this number is not such a bad one for Volkswagen and it might put a stop on the share price," says Garnry. "But, if you have exposure to Volkswagen, you should be careful nevertheless."

Volkswagen is still facing nervous times one year on from the diesel crisis. Photo: iStock

Martin O’Rourke is managing editor at

Editor’s note:
From the Floor takes advantage of's unique real-time access to Saxo Bank’s various trading desks around the globe to put our community in touch with the developments that matter to their portfolios.

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