Fear and Risk-off v Risk-on.

         Last week I wrote a blog about whether fear was abating (can be seen here), I used an Investors Intelligence piece highlighting how Newsletter writers were at a level of bearishness which had previously seen the market rally strongly, I also pointed to the correction occurring in Japanese Government Bond yields, after their huge summer rally. - However, as I look at the bigger picture, this does not yet to me reflect a climate in which fear is abating, last week's stock market bounce, strong though it was, is just one of many sharp moves in recent months as equities have continued to gyrate in a wide range. Also the jump in Japanese Government Bond yields from 0.90% to 1.20% last week was a large move in a very short term, however it had dropped from 1.40% over the past 5 months. At the moment, a move such as this appears to me to be corrective (See chart below), though how it unfolds from here going forward will determine whether this is merely a short-term correction or the start of something more meaningful in a positive direction.

 

However when I look at various other indicators of fear I start to question whether fear is abating, or whether it is getting ready to re-assert itself.  The initial fear has certainly abated, in this case the fear that led to a sharp increase in volatility (as measured by the VIX index) through May and June, however US equity markets have not recovered, they have remained range-bound (though now nearer the top of the range) since initially rebounding in early July. 

Elsewhere, other measures of fear remain high. By this I mean the measure of fear as gauged by where investors are willing to park their capital. Over the summer, we have seen investors favouring a number of very low yielding products and markets, this surely would only occur if fear was high and people seeked certainty over return: Looking at 10 Year Government Bond Yields for most major western economies, these have seen yields drop sharply over the course of the summer; 

Japan      1.40% to 1.14%  (Low 0.90%) 

US          4.00% to 2.60%  (Low 2.41%)

Germany 3.20% to 2.23%  (Low 2.11%) 

UK         4.08% to 2.91%. (Low 2.79%)

Amongst FX markets, Japanese Yen and Swiss Franc (The traditional safe haven, and lowest yielding currencies) have been 2 of the strongest currencies over the summer. The charts below show the performance of the USD, AUD and EUR versus the JPY and CHF fx crosses.

 

Gold, Silver and Copper have remained strong over the course of the summer, and are currently pushing up against recent highs. But most strikingly the European PIIGS issue has failed to go away, in fact it has continued to trend higher, though it remains shy of the May and June spikes higher. See charts below; top chart is Greek 5 Year Credit Default Swaps (CDS), middle chart is Spain 5 year CDS over the past few months, lower chart is Spain 5 year CDS over past 3 years. (Note; I have highlighted a possible bullish Symmetrical Triangle on the Spain 5 Year CDS chart, which may be a precursor to this breaking out to a new higher level)..

I think it is still fair to say that 'risk-off' remains very much in vogue when it comes to the major western economies. This is probably holding back stock markets, which despite a number of attempts to rally and try and retrace the May/June losses (DAX excepted), become dizzy every time they try to break higher above the top of the recent range. - I would guess that until the fear of risk starts to abate, stock market will continue to struggle to make gains and hold on them. -- I would also be slightly concerned that the PIIGS issue continues to stir in the background, and is showing some signs that it may be preparing to move to a new accelerated level. Another major flare up of the PIIGS issue, could lead to a new flight from risk going forward.