As we near the finish line of a long week in politics, the Fed is swinging back on the radar for investors.
Minutes published by the central bank on Wednesday, which showed a September rate increase is firmly on the cards, have helped distract from some legal heat circling former Trump advisers. Jackson Hole here we come.
Those Fed musings also took a bit of steam out of the S&P 500, something that could continue this morning as the buck stomps ahead. And it could muddy the waters for those wondering whether to dive into the longest bull market on record.
Our call of the day, from Saxo Bank's Peter Garnry, advises opting for the latter strategy as he warns of a “dangerous trade” that’s been making a comeback, and which he says could blindside the market.
He says investors have been buying stocks and pushing the S&P 500 to new highs while paying “record premium” for hedging against downside risk in the index via the Cboe SKEW Index SKEW, -0.66% That’s shown in the following chart:
“The most popular ETN engaging in shorting short-term VIX futures is up 25% from its April lows,” said Garnry, in a follow-up email to a recent webinar where he laid out those concerns.
He says this structure was in place during all of 2017—notable moments are here and here—and then earlier this year. “It is a big worry for me that we are back to this market structure again…with the U.S. equity market having outperformed massively all other markets on top of compressed implied volatility,” says Garnry.
He says it “sets the stage for a violent drop in U.S. equities should we get some exogenous shock to the system.”
One alternative? Emerging markets.
Garnry acknowledges that emerging markets have lots of structural issues, but maintains they can still yield attractive returns. To be sure, there are plenty of emerging-markets haters out there, which some could be a reason to dive in. Don’t count Deutsche Bank in that camp. They’ve got a laundry list of reasons why it is too soon to seek out those far-flung stocks.
Key market gaugesDow YMU8, -0.06% S&P 500 ESU8, -0.04% and Nasdaq-100 NQU8, -0.12% futures are straddling the flat line this morning. That is after the S&P SPX, -0.04% and Dow DJIA, -0.34% snapped a four-day winning streak Wednesday as after those heavy Fed hints over a rate increase next month.
Read more in Market Snapshot
Elsewhere, Asia stocks generally rose even as fresh U.S. and China tariffs kick in, while Europe stocks SXXP, +0.04% are up modestly. Oil prices CLZ8, -0.51% are edging back from a two-week peak, while gold GCZ8, -0.54% is off.
The dollar DXY, +0.32% is up, notably against the South African rand USDZAR, +0.7117% which is taking a big hit after Trump tweeted about the country’s land- seizure crisis:
I have asked Secretary of State @SecPompeo to closely study the South Africa land and farm seizures and expropriations and the large scale killing of farmers. “South African Government is now seizing land from white farmers.” @TuckerCarlson @FoxNews
— Donald J. Trump (@realDonaldTrump) August 23, 2018
