Markets driven by fear
Written by A Forex View From Afar on Tuesday, September 16, 2008The markets are now being driven by fear, jumping up one day and down the next, and traders move in and out of the treasury’s safety with every news story regarding financial stocks.
The mechanics behind the volatility seen lately may vary, but the main motive remains fear. Nowadays the market is driven by rumors about who will follow Lehman and who is next on the Fed’s “Merger and Acquisition” list. This has led to a strong rise in the CBOE volatility index over the past few weeks. On Friday, the CBOE volatility index (Vix) rose 5%, while today the Vix jumped 12% at mid session and is now trading at the highest point over the last month.
On Friday, the Euro and the Pound posted their biggest gains against the dollar in recent months. This occurred after both pairs were sold uninterrupted for more than a month. Just a couple of months ago, Fed Fund futures were pricing in a rate increase by the end of the year, but now, with Lehman’s failure, traders are starting to price in another rate cut, further reducing the yield differential.
Treasuries have had the biggest surge since January in the face of the financial crisis. Treasuries were bought in a flight-to-safety, as riskier assets are liquidated.
Another characteristic of the fear factor is the U.S. session becoming noticeably the most volatile session. This comes after the U.S. session had been as sluggish as the Asian session. The same thing occurred earlier this year, when the markets were trembling in the face of oil at $150 and the U.S. economy was staring at a recession.
When trading with a high leverage and with relatively small stop losses, as retail traders usually do, volatility becomes the biggest enemy. Whipsaw movements happen frequently and losses are logged that during other market conditions, would have been winners. If unsure about the next move, a wait and see approach might not be such a bad idea. Nobody can tell when the next rumor will hit the market these days or what the reaction may be.
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