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Recession expectations, VIX panic index is extremely low, EUR/USD focuses on CPI data

Market view: USD/JPY is bullish above 141, EUR/USD is bullish above 1.0000, gold is bearish below 1750; liquidity is the initial option to consider the market potential, but next week we will see the recovery of market participation and low Volatility starting point; next week’s economic calendar is dense with key event risks, including Eurozone CPI and US PCE deflator (forecast for interest rates), as well as US consumer sentiment and NFP reports may show recession fears.

As many expected, seasonal conditions (i.e. the U.S. Thanksgiving holiday) will eventually dry up market liquidity. Although there are some fundamental events that are closely watched by the market (such as OECD economic forecasts, November PMI and Fed meeting minutes, etc.), the suppressed level of liquidity will not inadvertently trigger serious fluctuations in major capital markets. There will be a clear escalation in participation rate capping for the rest of the week, but this should not be taken as reliable evidence that the market will be fully contained. Illiquid market conditions can produce severe, short-term volatility. That is, as long as there are no major and unexpected headlines in the world’s largest financial center; we might be inclined to think that systemic developments will be delayed until next week. The S&P 500, a leading gauge of sentiment, will begin the return of liquidity after its narrowest nine-day trading range since January. The barriers of this restricted technical formation roughly coincide with the 200-day and 100-day simple moving averages, which should help make it easier to monitor for those less technically focused.

S&P 500 daily chart, with 100-day and 200-day moving averages and 1-day historical range

Chart source: TradingView

In the context of the expected increase in liquidity after the festival and the substantial increase in the risk rhythm of scheduled events, the author believes that it is necessary to reflect on the complacency in the market in the new trading week. There are many ways to measure the market’s ‘sit and die’ syndrome, but the most prevalent VIX index presents the market with a special kind of indifference. The VIX fear gauge fell for six straight sessions ahead of Wednesday’s close, as it closed at the low of the wedge around 20. It’s not an extreme low in the VIX’s history, but it’s a relative low that has previously caused a shift in expected (implied) volatility, as well as some apparent shifts in related capital markets (here measured in the S&P 500 ). In general, these appear to be exceptionally low levels given concerns about recession risk, and not even “holiday trading conditions” justify adjusting exposure at this juncture.

VIX volatility index daily chart, with 20-day and 200-day moving averages and consecutive candlesticks

Chart source: TradingView

While liquidity will play a key role in the market’s ability to generate significant traction in the week ahead, top-tier scheduled event risk will play a huge role in our eventual activity levels. There are a number of unresolved, systemically important economic threats to the public markets that are easily stoked by high-level predetermined event risks. In general, I am monitoring fundamental updates — both scheduled and unscheduled — that relate to monetary policy developments and recession risks. That said, unforeseen financial disruptions should be considered a possible risk. Developments like the Russian invasion of Ukraine, the collapse of the UK’s “small budget” and the implosion of the FTX cryptocurrency are clear events so far in 2022; and they are unlikely to be the last unpredictable developments we encounter in the future. Unpredictability aside, there are very real and known threats in terms of recession risk and monetary policy pressure. On the former, over the past week the OECD has warned that the outlook for economic activity in 2023 is looking increasingly cold and dependent on expansion in countries such as China and India. Evidence of a shift from modest economic expansion to outright contraction appears to be in the form of lagging data, but markets still seem to be living with a sense of hope.

Key macro event risks on the global economic calendar for the next 48 hours

Recession expectations, VIX panic index is extremely low, EUR/USD focuses on CPI data

Diagram by John Kicklighter

For a market at the crossroads of key fundamental trends, few measures seem more exposed than EUR/USD. This does not mean that this exchange rate is due to a clear bearing and production trend. When scheduled events are risk-intensive, reality often caters to the exact opposite. When predetermined event risk from both sides of a currency pair tends to “beat” or “miss”, its effects are more or less offset in realized price action. Looking at the euro exchange rate, the euro zone’s consumer inflation indicator (CPI) and unemployment rate will be an important measure of the economy, which the OECD warns of idiosyncratic risks in 2023 and given that the ECB is being urged to join forces with the Fed” Narrowing the gap”. Meanwhile, the dollar will be boosted by event risk in the Conference Board’s consumer sentiment survey, PCE deflation (the Fed’s favorite inflation reading) and November non-farm payrolls for a full read on key fundamental concerns in the world’s largest market.

Recession expectations, VIX panic index is extremely low, EUR/USD focuses on CPI data

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Tags: Recession expectations VIX panic index extremely EURUSD focuses CPI data

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