Risk Off Sentiment, Ahead Of J. Powell Testimony

Market risk measures show continuing fear sentiment across the board as inflation expectation is driving long-term bond yields higher.

The risk-off sentiment that starts to show up is not mainly driven by inflation fears but actually, this rise in inflation is a major element that could push the Fed to be prematurely HAWKSH.

The Fed chair J Powell and other FOMC members try to calm the market on every single occasion and reassure that such a move is not on the table for the time being. But the bond market, especially at the long end of the curve is telling another story.

The US DOLLAR index starts rebounding from the bottom of the 90 – 91 range and is expected to remain within the range for a much extended period.

dxy, the us dollar index

The S&P500 implied volatility index VIX persists near 25, signaling a further decrease in the SPX.

Another volatility parameter that we use, and leads the price movement for many occasions,  is to plot the VIX / VVIX ratio on the SPX chart.

As we see in the graph below, the implied volatility ratio is expected to drive the S&P500 towards further lows.

spx and the vix

 The U.S 10 year bond yield is expected to stagnate for a while, as it represents, along with the dollar, a safe haven asset during volatile periods.

 10 year bond yield

The chart above shows that the U.S 10 year treasury bond yield is now touching a critical long-term support level that is now a resistance.

The technical setup confirms our fundamental view that the US 10 year yield may stagnate for a while before a clear breakout to the upside.

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