Trading Desk Notes - April 13thSubmitted by Polar Futures Group on April 12th, 2019
From the Desk of Drew Zimmerman
Is it the middle of April or the middle of August? The weekly trading volume of shares on the US indices and the number of futures contracts that traded this week was the lowest since last summer and among the lowest weekly levels of the past several years. This low volume has reduced price volatility with the VIX index trading back to down to levels not seen since the beginning of October last year before the equity price decline started. Even the volatility in the G7 currencies is the lowest it has been since the middle of 2014!
So its quiet out there….what does that mean? Equity markets are only a couple percentage points from all-time highs, things must be good! The central banks have done their job, they have all gone back to accommodative policy stances, and China easing more aggressively. We have gone from worries of a global slowdown to not a worrying at all because the central banks have our back, and in that environment taking more risk pays. The central banks must know what is best right?
However, when we see broad markets get this quiet, it usually means we are about to get a rude surprise. When things coil up, it is common to see some explosive moves. Given the very low level of volatility, it may be an opportune time to buy some protection.
Equities had a quiet week of trading, but got a final boost higher on Friday as China posted much better than expected export numbers. The recent few weeks of data out of China has shown the additional stimulus this year has started to help as it works to offset global slowing and trade issues.
Bond Markets had a key move lower (higher rates) this week as we got firmer messaging out of the Fed on the future path of rates. The market had been pricing in an 80% chance of rate cuts by the end of this year, but that has been reduced to 40%. Given the Fed minutes this week only mentioned be patient (on pause) or possibly raising rates again this year, they seem to be at odds with market pricing. If economic data points stay positive for another few weeks we could see a further move higher in rates.
Canadian Dollar has epitomized low volatility trading of late. We still see short term interest rate spreads weighing on CAD, but stronger oil prices have helped it stay firmer. However given the strong oil and equity markets, I would have expected that CAD could have traded a little better. A market that won’t rally on good news could be in for more trouble.
Gold prices took a sharp break lower at the end of this week. My biggest drivers of gold prices are USD strength or weakness and real interest rates. As rates started moving higher after the fed this week I think it was the interest rate side of things that pushed gold lower. Gold prices have held the $1280-5 level the past several months but could be vulnerable to break lower.