Investors losing confidence in recovery

Cyclicals falling, while VIX heads higher again

Chart of the Day

Yesterday brought further signs of risk-off sentiment which could mean a broader correction is on the cards. One sign of that was the underperformance of the cyclical financial index relative to the overall S&P 500, which tends to move up during positive periods for the market and down during negative episodes, as the slump earlier this year demonstrates. It’s hard to see an obvious trend there just yet, but it would be a worrying sign if the ratio dropped lower again today.

Macro

While the US data have disappointed lately, the Chinese data look brighter. Retail sales growth rose further to 5% YoY in November, while industrial production held up near 7%.

That’s a much better result than in the eurozone. Although industrial production growth picked up, it was still negative at -3.6% YoY.

In India, consumer inflation dropped in November but remains above the RBI’s target of 4% and its upper limit of 6%. Wholesale price inflation remains much weaker.

Markets

Equity markets continue to muddle along across the world. The 0.5% rise in the Nasdaq yesterday was the largest move of note, but even there the big picture is that the index is little change in the past week.

While the headline indices don’t betray much, the S&P 500 sectoral moves look more concerning. The cyclicals sectors all underperformed the broader index yesterday, with energy slumping by almost 4%, while the tech sectors did better.

As the VVIX seemed to indicate in the Chart of the Day in Monday’s edition, VIX did indeed rise further yesterday, to almost 25. The MOVE index of implied bond-market volatility also increased but remains lower than it was last week.

There were also some signs of risk-off sentiment in EM FX. Most of the major currencies dropped back against the USD, although the South African rand was one exception.

Inflation-linked swaps did not betray any weakness, though, with the USD 5-yr/5-yr rate bouncing back up by 7 bp.

Here’s one to watch: bitcoin and ethereum both seem to be on the move again.

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