“Our quant model is giving a near-term sell signal on the equity markets with a risk of a complete unwind of the run up in markets we saw from mid-June,” said Gary Dugan, chief executive at the Global CIO Office in Singapore.
The VIX Index surged on Friday, with the “fear gauge” ending the week at around 25 points and drifting higher again on Monday morning. However, the volatility index is only back at its average level for the year, a signal that Friday’s selloff in US stocks was less driven by panic selling and more by a sudden recalibration of rate expectations.
The one asset that appears to be spared for now is the dollar.
A Bloomberg gauge of the dollar’s strength is edging closer to an all-time high broached last month, and strategists from Goldman Sachs to RBC Capital Markets say more strength lies ahead as investors pile into the world’s reserve currency for safety.
Bloomberg's dollar gauge recovers from recent decline to resume uptrend
“Tightening pain equals dollar gain,” Goldman strategists including Kamakshya Trivedi wrote in a note. The Fed’s uncertainty on allowing a slowdown in the pace of rate hikes next month and rising European recession risk mean “the dollar still looks like the clearest long in the near-term.”
It’s a sentiment shared by Brown Brothers Harriman & Co.’s Win Thin.
“The Fed has made it clear that recession risks will not deter it from its fight against inflation,” the New York-based head of currency strategy wrote in a note. “Our broad macro calls remain in place: stronger dollar, weaker equities, and a flatter U.S. yield curve.”
--With assistance from Abhishek Vishnoi, Farah Elbahrawy and Jan-Patrick Barnert.
This article was provided by Bloomberg News.