From Boris Schlossberg: 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 weary. 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.
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.
The iPath S&P 500 VIX Short Term Futures TM ETN (NYSE:VXX) was mostly flat in premarket trading Wednesday at $31.58 per share. Year-to-date, the largest ETF tied to the VIX volatility gauge has plunged 61.78%.
This article is brought to you courtesy of Money and Markets.