One forex analyst I know recently joked that if he copy-and-pasted yesterday’s report, none of his readers would notice the difference.
The FX markets are experiencing their lowest volatility of the year with some pairs barely budging more than 10 points for hours at a time. But currencies are not the only markets that are asleep. Equities are treading water as well.
The VIX has recorded five straight days of declines. As a matter of fact, it’s been the quietest rolling, three-month period across all futures-traded markets in over 20 years.
There. Is. Literally. Nothing. Going. On.
When markets get this quiet, I always get very wary. Volatility unlike price is always mean-reverting. That means that what goes down must come up.
With traders lulled into a state of complacency, the prospect for some stomach-churning moves has risen markedly. It’s hard to predict what could set the markets off. But the longer we proceed at this somnambulant pace, the more likely that a sharp selloff is coming.
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One symptom of coming troubles in the global economy: Industrial Production has fallen significantly in China. |
On the surface, the global economy is chugging along at a reasonable pace. Just this week, we received news from Europe that showed demand in Germany and France picking up as the latest PMI readings rose well above the boom/bust level of 50.
And even though the euro is making fresh multi-month lows nearly every day, we actually like the single currency for a bounce because we think that the talk of monetary-policy divergence is way overdone. The ECB is not going to ease further and the Fed is not going to tighten nearly as much as the market thinks.
Although the Fed is likely to raise rates in December – if for no other reason than just to save face – it could be another six to nine months before they move on rates again. The fact of the matter is that the global economy is just not strong enough to absorb a normal monetary tightening by the Fed.
In China last week, the official data showed Industrial Production slipped to 6.1% from the 6.4% eyed, indicating that the manufacturing sector – which is the primary engine of growth in the Middle Kingdom – continues to struggle with demand.
Furthermore, our favorite canary in the coal mine – Australia, which is highly sensitive to economic conditions in Asia – saw a massive contraction in jobs last month, losing 50,000 full-time positions. That’s the equivalent of losing 500K U.S. full-time jobs, which certainly flashes a yellow warning light to anyone who thinks all is copacetic with the global economy.
Although the price action in the markets could make your eyes glaze over, now is not the time to be complacent. This sense of calm can be very deceptive. And as traders or investors, we should begin preparing for rough seas ahead.
Happy Trading,
Boris Schlossberg
{ 20 comments }
While some people might get weary, I tend to get wary.
Better wary than weary!
Do you still expect a 50% or so pull back in the market
( in the near future? )
I bought CGC-T at $7.00 CAD treading water should I sell take a lose?
wow…talk about buying at the top!…cannabis stocks will only go higher in the long term..I would probably double down on a pullback when the stochastics cross over from below as a buy signal… I use that as a buy signal for anything I’m watching and set a stop loss below the minimum price in the previous 10 periods before the crossover..works like a charm…
Hope you are right,… hope you are wrong,…guessing and timing is everything.
Industrial Production in China is falling becasue the American Consumer is deciding to buy less and less from China and more and more “Made In America”… Perhaps it has to do with China acting like NAZI’s in the South China Sea or perhaps Americans are, as a group, finally making a connection between buying from China and the loss of jobs here in America, aye?…..
Why not buy America? We need safety in things being sold. We don’t know their water and or their contents and how they manufacture. Their low prices would suggest to me that quality has to be neglected not to mention slave style labor for their own gain. If we honor America and her workers we fight China’s reason to make the garbage good sold here. We need to quit buying foreign anything and strenthen American assets and workers. DON’T Buy foreign goods.
Maybe the strong dollar will change that…
I agree . Watch out 31october….
Uncertainty is what we are dealing with at the moment. No one wants to be on the wrong side of a trade. Until we have answers to an election outcome and short term interest rates we are going to see sideways action. Cash is the safe way out and a quarter point increase has mostly been factored in, but where do you want to be placed, when the train leaves the station?
The title should read “A Calm Before the Collapse” instead of “A Calm Before the Storm”. How much more government debt can be racked up before the people, of this once great country, take notice? How long can the government buy its own bonds to keep the gears of production or lack of going? This country has become a country of worthless paper producers which is only fit for the garbage can. Our production is: more government employees, more military spending, and a corrupt insurance and medical system. Does this booming economy really feel right to you? Well it sure as heck doesn’t to me, more bureaucracy does not make for a good economy.
I agree!
obama has lied to everyone for years…. where i ask……… all of you is the 6% or more of growth in the economy he promised for every yr he was in office , nothing but complete fabrications, obamacare is a complete disaster with billions spent of taxpayers monies just to make a website for it to function properly to me building a website that cost billions to make smells of corruption …….oh well nothing new with obama/ hillery clinton their corruption goes from top to bottom its too bad the low I.Q. voters cant see the smoke and mirrors tricks the progressive liberal democrats have done to them they really have the wool pulled over their eyes maybe some day they will wake up but by then its going to be too late
I think your report is very timely.
We’ll just have to wait & see how the system unfolds.
A Message from the Queen!
Hi Boris,
As you like to have a go at us Brits about our decision to leave the EU, perhaps you will like this comment :
I hope you all have a sense of humour!
To the citizens of the United States of America from Her Sovereign Majesty Queen Elizabeth II.
In light of your failure to nominate competent candidates for President of the USA, and thus to govern yourselves, we hereby give notice of the revocation of your independence, effective immediately.
Her Sovereign Majesty Queen Elizabeth II will resume monarchical duties over all states, commonwealths, and territories (except North Dakota, which she does not fancy).
Our new Prime Minister, Theresa May, will appoint a Governor for America without the need for further elections. Congress and the Senate will be disbanded. A questionnaire may be circulated next year to determine whether any of you noticed.
To aid in the transition to a British Crown dependency, the following rules are introduced with immediate effect:
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1. The letter ‘U’ will be reinstated in words such as ‘colour,’ ‘favour,’ ‘labour’ and ‘neighbour.’ Likewise, you will learn to spell ‘doughnut’ without skipping half the letters, and the suffix ‘-ize’ will be replaced by the suffix ‘-ise.’ Generally, you will be expected to raise your vocabulary to acceptable levels. (look up ‘vocabulary’).
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2. Using the same twenty-seven words interspersed with filler noises such as ‘like’ and ‘you know’ is an unacceptable and inefficient form of communication. There is no such thing as U.S. English. We will let Microsoft know on your behalf. The Microsoft spell-checker will be adjusted to take into account the reinstated letter ‘u” and the elimination of ‘-ize.’
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3. July 4th will no longer be celebrated as a holiday.
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4. You will learn to resolve personal issues without using guns, lawyers, or therapists. The fact that you need so many lawyers and therapists shows that you’re not quite ready to be independent. Guns should only be used for shooting grouse. If you can’t sort things out without suing someone or speaking to a therapist, then you’re not ready to shoot grouse.
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5. Therefore, you will no longer be allowed to own or carry anything more dangerous than a vegetable peeler. Although a permit will be required if you wish to carry a vegetable peeler in public.
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6. All intersections will be replaced with roundabouts, and you will start driving on the left side with immediate effect. At the same time, you will go metric with immediate effect and without the benefit of conversion tables. Both roundabouts and metrication will help you understand the British sense of humour.
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7. The former USA will adopt UK prices on petrol (which you have been calling gasoline) of roughly $10/US gallon. Get used to it.
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8. You will learn to make real chips. Those things you call French fries are not real chips, and those things you insist on calling potato chips are properly called crisps. Real chips are thick cut, fried in animal fat, and dressed not with catsup but with vinegar.
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9. The cold, tasteless stuff you insist on calling beer is not actually beer at all. Henceforth, only proper British Bitter will be referred to as beer, and European brews of known and accepted provenance will be referred to as Lager. South African beer is also acceptable, as they are pound for pound the greatest sporting nation on earth and it can only be due to the beer. They are also part of the British Commonwealth – see what it did for them. American brands will be referred to as Near-Frozen Gnat’s Urine, so that all can be sold without risk of further confusion.
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10. Hollywood will be required occasionally to cast English actors as good guys. Hollywood will also be required to cast English actors to play English characters. Watching Andie Macdowell attempt English dialect in Four Weddings and a Funeral was an experience akin to having one’s ears removed with a cheese grater.
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11. You will cease playing American football. There is only one kind of proper football; you call it soccer. Those of you brave enough will, in time, be allowed to play rugby (which has some similarities to American football, but does not involve stopping for a rest every twenty seconds or wearing full kevlar body armour like a bunch of nancies).
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12. Further, you will stop playing baseball. It is not reasonable to host an event called the World Series for a game which is not played outside of America. Since only 2.1% of you are aware there is a world beyond your borders, your error is understandable. You will learn cricket, and we will let you face the South Africans first to take the sting out of their deliveries.
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13. You must tell us who killed JFK. It’s been driving us mad.
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14. An internal revenue agent (i.e. tax collector) from Her Majesty’s Government will be with you shortly to ensure the acquisition of all monies due (backdated to 1776).
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15. Daily Tea Time begins promptly at 4 p.m. with proper cups, with saucers, and never mugs, with high quality biscuits (cookies) and cakes; plus strawberries (with cream) when in season.
God Save the Queen!
I suspect that at least some of the calm is related to folks awaiting the outcome of the presidential election.
Brian,
the Central Bankers are manipulating the markets with their endless, mindless intervention.
They’ve succeeded in flattening the curve …. now we’re like zombies on life support! I’m hoping that they’ll see the madness of their actions before it’s too late. And I hope they are not using this corrupt data that they’ve created and are not using it to make financial decisions regarding the world’s economy and markets!!!
It seems to me the name of the game is: Cry Wolf, Wolf!! When the worst happened the new name of the game is: I TOLD YOU!!