Watch VIX in the face of uncertainty

Risk of recession heightens

Trade concerns and aggressive moves by central banks on Wednesday was seen stoking fears over growth prompting risk aversion in the early hours of Wall Street.

Following the sustained weakness in the yuan against the greenback post Wednesday’s fixing by the People’s Bank of China (PBOC), the Trump administration was again seen lifting tensions with banning agencies from directly buying from Huawei. Over and above the wide swings registered by Wall Street, haven assets such as USD/JPY (大口） was seen trading briefly around this week’s low of around $105.60, emphasizing the potential for greater depths should things take a turn for the worse.

Likewise, with bond yields, the gravitational pull had been particularly overt, sending the likes of the US 10-year yields briefly down to the lowest level seen since October 2016. In turn, our familiar recession indicator, the US 10-year, 3-month inversion had further deepened.

To some extent, looking at the peak to present decline of approximately 4.8% for the likes of the S&P 500 index, one would reckon that it is not entirely reflective of the signal that the bond market is sending. This could mean that the worst is not over for the equity contingent. That said, the key driver for this downturn in outlook lies largely with the US-China trade conflict which carries with it significant uncertainties that may be difficult to be modelled by both investors and companies alike. This had also likely been why the first wave of bargain hunters assisted with the return of both the Dow and the S&P 500 index to a near-neutral close overnight.

Aggressive central bank support

With a situation whereby even central bankers may find difficult to assess, we have certainly seen a series of aggressive moves across Asia Pacific on Wednesday. The greater than expected cut by the Reserve Bank of New Zealand (RBNZ) and surprise coming from the Bank of Thailand (BoT) had both spoken in part of the fear of a growth slowdown from the policy makers, but also the shift we may be seeing in greater policy support. This is again another factor to seriously consider as we move forth into the yearend.

As such, amid the uncertainties on hand, look to the likes of the VIX in addition to the haven assets in the near-term. While the volatility index had reversed below the long-term average of 20.0 in the brief state of calm, spikes may well return in the lead up to the September 1 anticipated tariffs implementation with any further escalations.