Risk Off - Is it coming to an end?? + GBPUSD FX update.

Over the past few weeks I have outlined a number of possible bearish scenarios, and more recently I have posted some possible more bullish outcomes. The market has now taken us to a neutral/pivotal zone where direction is likely to be determined by which ever side of this zone makes a solid breakout. I believe 1070 - 1100 defines this pivotal zone for now. - In the meantime I have outlined two further pieces of analysis which argue both the possible bearish scenario and make a case for a more bullish outcome.

Firstly I have decided to look purely at the trend, as defined by the direction of highs and lows at reaction points. As the chart below shows, the past 2 months has seen a series of lower lows and lower highs since the end of April. This simple analysis supports the notion that the SP500 may have entered a downtrend in the past 2/3 months. - Until and unless 1130 is exceeded, this would suggest the odds favour a move to lower levels.

With regard to the more bullish possible outcome: The recent risk-off episode appears to have largely abated over the past couple of weeks. Stock markets have rallied, European currencies have rallied versus the USD and some of the periphery European yield spreads versus German yield spreads have eased. I have noticed looking at a number of charts, strong similarities over the past couple of months with the previous risk-off episode at the end of 2008/early 2009 in the wake of the Lehman's collapse, albeit generally on a much smaller scale. I will highlight this with a series of charts, in these charts I have defined the Post-Lehmans risk-off period as 'Risk-off 1', and the more recent period in the wake of the ratcheting up of the Greek crisis as 'Risk-off 2':

Firstly - Equities via the SP500 Index. (Top Chart) , UK FTSE (2nd Chart)

 

Then via FX in the form of the USD Index (Top Chart), AUDUSD (2nd Chart), AUDJPY (3rd Chart), EURJPY (4th Chart).

This can also be seen in may yield markets: German 10 year yields. (Top chart), US 10 year yield (2nd Chart), Spread of Belgium v German 10 Year Yield Spread (3rd chart) and 2 Year German Swap Spread (Libor v Gov yield) (Lower Chart),

 

The comparisons are not exact, and clearly other factors particular to each asset class or currency have their own effect. For example the USDJPY has behaved very differently, and commodities have also not shown a similar pattern. but by and large there is a strong similarity across a number of markets between the 6 month period following the Lehman collapse, and the past 2 and half months in the wake of the Greek crisis.

What does that mean going forward. Personally I believe in the short-run (over the summer) I guess it favours further reversal of the flight away from risk: In other words further recovery in stock markets, further USD weakness, and a slight backing up in longer yields. Beyond that the outlook is cloudy, though I struggle to see how markets could remain buoyant in the face of strong deleveraging headwinds.


Further to my GBPUSD update yesterday (That analysis can be seen at the bottom of yesterday's posting by clicking here) . The currency pair surged further yesterday, and the odds still favour some more upside, however it is likely to face some tough resistance around 1.5500/50.  This is where there some old highs from April are lurking, and is just below the 50% retrace of the downtrend which began last November.