Risk-on and risk-off: what are some markets to watch as volatility spikes?

Volatility has sparked in global financial markets, as the US-China trade-war takes a new and concerning turn-for-the worse. China has retaliated to the new tariffs announced last week by US President Donald Trump by actively devaluing its currency, and instructing Chinese state-owned companies not to buy US agricultural products. Markets are pricing in a world of potentially weaker global economic growth, as a result of these developments. The consequence has been a panic in financial markets, driving the VIX index to 25 -- its highest levels in almost 8 months.

But which markets might traders wish to watch as volatility spikes? Here are some markets that have either fallen, or rallied from increased volatility.

Gold

The perennial risk-off asset, gold has rallied to new 6-year highs this week, as traders seek safety away from traditional currencies. The reasoning is twofold. Firstly, traditional, fiat currencies could be entering a strange new world of relatively widespread intervention by global central banks, as policymakers look to ward-off financial market volatility in their economies. Secondly, the increased risk of a major economic slowdown is pushing down global bond yields, and making gold relatively more attractive to hold.

In the chart below, one can see the spike in gold prices this year, as momentum clearly pushes the price of the yellow metal through previous resistance at ~1360, and towards the next resistance level around ~1525.

Iron Ore

Iron ore’s astronomic rise this year looks to be under threat. The first strike to a multi-year high iron ore price came from news last month that Vale would be restarting production in some of the mines closed after a deadly mine collapse in January this year. The second came a few weeks ago upon news that Chinese stock-piles of iron ore have climbed, and point to a reduction in demand for the mineral from Chinese steelmakers. The possibly final nail in the coffin has been the latest escalation in the trade war, which has dented significantly the outlook for global economic growth, and therefore demand for iron ore.

As the chart below conveys, IG’s price derived from the iron ore futures contract traded on the Dalian exchange is showing a reversal in short momentum indicators. A double top emerged around the 860 level, with support around 760 subsequently breaking, opening up a challenge of trendline support around 700.

ASX200

The record-run higher for the ASX200 has come to an end courtesy of the recent escalation in the US-China trade-war. Bolstered by iron ores massive rally this year, as well as the fall in Australian interest rates, concerns about the future for earnings growth on the ASX has stolen the wheel as the primary driver of Australian stock prices. Earnings season is upon the ASX right now, with the market expecting earnings growth to be a paltry 1.6 per cent last half. Downgrades to the forward guidance is also expected. With risk-appetite low owing to greater market volatility, risk assets have sold-off, suggesting a potentially noteworthy plunge is unfolding for the ASX200.

The ASX200 chart below betrays this short-term shift in momentum. The MACD is showing a “bearish crossover” and the RSI has plunged into “oversold” levels. The 50-day EMA has also broken, opening up a long term support line at the market’s 200-day EMA around 6330.