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From the Floor: VIX plunge 'shatters short dreams' #SaxoStrats

   • US retail strength could see USDJPY reaction: Hardy
   • Global stocks gain 1% driven by tech, financials
   • 'We are switching to neutral on Hong Kong stocks': Garnry
   • Gold vulnerable after three weeks of strong buying: Hansen
   • Nasdaq 100 poised for a run at 6,000: Larsson

By Michael McKenna

One of the major questions surrounding the recent escalation of tensions with North Korea has been whether Pyongyang is a rational actor. The imagery seen in Western media is not generally confidence-inspiring on this front, featuring as it does a series of bellicose military parades alongside photos of the country's strange and detached-looking leader, Kim Jong-Un.

It is perhaps for this reason that the isolated Communist state's withdrawal from its stated goal of attacking the US territory of Guam has been met with such relief in world financial markets. It is not only that the move deescalates tensions between the US, North Korea, and ultimately China, but also that it appears to signify that Pyongyang's actions are based in some sort of legible calculus. 

After all, as Saxo Bank head of forex strategy John J Hardy points out, a strike on Guam would mean the wiping of North Korea from the map.

With North Korea fears receding and US president Donald Trump's Charlottesville woes safely confined to the sphere of domestic rhetoric, global stocks are seeing a strong bid with the VIX volatility index plunging Monday after hitting the 16 area Friday in the wake of a soft US inflation print.

"The spike lower seen in the VIX has shattered short-sellers' dreams of a market correction," says Saxo head of equities strategy Peter Garnry, adding that the rally seen across global bourses has been led by the tech and financial sectors.

Concerning the latter, Garnry says that "inflation needs to move" in the world's major economies if financial shares are to avoid seeing a rotational sell flow.

In the Nasdaq 100, Saxo Bank technical analyst Kim Cramer Larsson says that he sees support at 5,845 and a bull run as likely if the index is able to move past the 5,973 area. Such a rally, of course, would put 6,000 in view.

V-shaped reversal (Nasdaq 100):
Nasdaq 100

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Source: Saxo Bank 

Today brings Swedish inflation figures, and John Hardy notes that a positive surprise could be felt strongly in EURSEK as the relatively illiquid (compared with the majors) pair has been languishing in the late-summer doldrums.

US retail sales figures are due at 1230 GMT, and Hardy adds that an upside surprise would likely be felt most strongly in USDJPY.

The winding down of North Korean tensions has put gold on the back foot after three weeks of sustained buying, says Saxo Bank head of commodity strategy Ole Hansen, adding that he sees local support at $1,272/oz and a further pool of buying interest around the $1,267/oz level.

Hedge funds, notes Hansen, are cutting back on gold longs while the Japanese yen, real yields, and equities all point lower in the short term for gold.

As with gold and precious metals in general, Hansen sees crude oil futures at risk of funds adjusting bullish positions with crude prices falling in response to renewed fears of flagging Chinese demand.

This morning, Garnry reported that he is changing his view on Hong Kong equities from bullish to neutral on soft data, most notably the Nomura Chinese confidence indicator which has turned lower of late and now rests in negative territory.

This is also, of course, relevant to oil as traders flee from expectations of a demand shortfall even as price support comes in from the supply disruptions seen in Libya.

Today's morning call also features technical analysis on the S&P 500 and the German Dax index, as well as Hansen's view on copper prices, where he sees the metal as needing to hold gains north of 2.85.

Wary bulls are returning to the equities space. Photo: Shutterstock

Michael McKenna is an editor at Saxo Bank.


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