The VIX may not have spiked this past week, but volatility definitely returned. Starting with Fitch’s downgrade of the U.S. credit rating, continuing with a number of high profile earnings reports and finishing up with another steady jobs report, investors seemed confused about which signals to follow. To be fair, intermarket relationships were kind of all over the place without much consensus on a single trend. Long-term Treasuries plunged by 5% through Thursday before staging a big comeback on Friday. Utilities were the worst performing sector of the week even though the S&P 500 was down more than 2% on the week. The “out of growth/tech & into cyclicals” trade extended another week with energy and financials outperforming once again.
The big question in my view right now is whether we’re seeing the start of the credit event. The U.S. credit rating downgrade and the yield curve control adjustment by the BoJ could have each triggered a larger change in conditions by themselves. The fact that they both occurred within the same one week period could be signaling that conditions are changing more broadly and that’s not even considering the lagged effect of interest rate hikes, rising bankruptcies, the crumbling commercial real estate sector, the manufacturing recession or other similar factors. Plus, the yen rose by 1.5% against the dollar from valley to peak in just the past TWO DAYS. Don’t think that some of these risks aren’t building up as we speak.
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