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After the worst three day performance in stocks since 2011, global equities are continuing with their struggle to find solid ground, as investors scramble for safe-haven assets on another bout of weak European economic data.   As traders from both sides of the border get back to their desks from the Canadian Thanksgiving and U.S. Columbus Day holidays, and liquidity returns to the North American trading session, fixed income is outperforming while the greenback manages to reassert its dominance after the last week of rather stagnant price action.   Volatility has once again reared its head, with the cash VIX exploding to just below 25 during yesterday’s holiday trading session, the highest level since early 2012 as investors look to protect their portfolio against further moves to the downside in equity markets.   The term structure of the VIX has actually inverted with the cash contract becoming more expensive than shorter-term VIX futures, so we would caution that the recent sell-off in equities could find some support given investor concerns are more focused around the very short-term and ease further out into the future.

 

The recent tumble in oil prices has yet to abate, with both WTI and Brent on the move lower with a distinct offer tone this morning as front-month Texas Tea struggles to generate any buying interest north of $85/barrel, and the international Brent benchmark slides into the low $87s.   This comes on the heels of reports that Saudi Arabia is telegraphing to oil markets the Kingdom is comfortable with lower prices for an extended period of time, comfortable to accept between $90-$80 oil, and there are no immediate plans cut production in order to shore up prices.   The strategy is expected to increase market share for the Kingdom and bolster profits over the long-term as a lower price of oil would dampen energy investment in some of the more expensive plays such as US Shale, thereby lowering supply from rival producers.   The knock-on effect for currencies is one that will produce a volatile path, as petro-linked currencies like the Loonie will likely feel some pressure in the short-term as oil prices decline, though markedly lower petroleum prices should keep a lid on inflation in the US, and allow the Fed greater leniency on when to begin their tightening cycle.   The extra breathing room the Fed has to initiate a rate hike should help to limit the USD’s recent run higher, especially with doves like Charles Evans calling for the first rate hike in early 2016 as he expects a stronger greenback to inhibit growth into the end of the year.

 

Heading into the North American session, US equity futures are displaying a strong green colour before the opening bell, looking to claw back some of yesterday’s losses and turn around their overnight performance after disappointing economic figures from the Eurozone.   The concerns from market participants in the common-currency bloc are driven not by the periphery nations but by an economic slow-down in Germany, and worries that the economic powerhouse will not be able to save itself should things deteriorate further.   Sentiment as measured by the ZEW institute collapsed for the month of October, the first negative reading since 2012 with a print of -3.6 which missed economists’ forecasts for a flat reading.   On the heels of the worse than expected ZEW survey, the German government slashed its growth forecast for this year and 2015, downgrading economic growth to 1.2% in 2014 and 1.3% in 2015.   EURUSD has been pressured back into the mid-1.26s, though the pair has managed to find some initial support as a surge in equity futures has limited the greenback’s strength.   The Loonie is also on the defensive against the USD, though with the economic calendar devoid of any further economic data, the USDCAD pair is likely to take its cues from equity performance and price action in the oil market.   USDCAD has surged back above the 1.12 handle in overnight trading on the back of weak commodity performance, but has again run into issues with resistance in the mid-1.12s.

Further reading:

Greece could creep back to the headlines on political worries, primary surplus

EUR/USD Recoveries Are For Sale: Targets & Levels – JP Morgan