Post-crisis Chart Book: What now?
Global risk markets soared after the EU reached a major deal on Greek bonds. The CBOE S&P 500 Volatility Index (VIX) also moved decisively out of the crisis range.
The billion dollar questions I ask myself are whether the crisis is over and what is awaiting the markets. The bears will argue that we have seen nothing yet, while the bulls will hold the opinion that better days are ahead. To my mind anything is possible but the trends during previous crises perhaps hold the key for the immediate future. I compared the trends of the current crisis with those of the great financial crisis in 2008/2009 and the mini-crisis in 2010 (initial Greece debt crisis).
I have charted the series starting with two months before each crisis developed, then the crisis and ended all the series 11 months later. The respective series are as follows:
The anxiety level (measured using the CBOE S&P 500 Volatility Index or VIX) is following the same trend as in 2008/09 and 2010. If the trends of 2008 and 2010 are repeated, anxiety levels are likely to stabilize over the next three months before receding further.
The S&P 500 Index rallied as anxiety levels eased.
The rally of the S&P 500 Index was in line with that of 2010 while in 2008 price levels stabilized. However, the current rally is likely to falter in November and there is a real risk of a major sell-off in December through January next year.
The valuation of the S&P 500 as measured by Robert Shiller’s PE10 increased in line with the easing of the anxiety levels.
The jump in the PE10 compares to a flat trend during the same period in 2008 and 2010. It seems to me that the market has run ahead of itself and a correction of approximately 9% may lie ahead in November should the PE10 move back to 2010’s trend. There is a real threat that the market may derate in December through January next year.
The valuation of the S&P 500 compared to the anxiety level calculated by the PE10 divided by VIX, turned at levels similar to those that coincided with bottoms in major bear markets in the past.
The jump in the ratio slavishly followed the trend of that during the previous crises. November is likely to see a weakening in the ratio if the trend is repeated. There is a threat that the ratio may weaken further through January next year.
The yield on the US 10-year Government Bond Index rose as bonds were sold off as anxiety levels eased.
Shorter term (please note the reverse axis of the bond yield) the bond yield moved higher than what previous trends during crisis times suggested. The trend is similar to that of 2010, though. Lower yields may lie ahead in November if 2010’s trend is repeated. Yields are expected to rise further thereafter.
The reduction in anxiety levels increased the risk appetite of global bond investors. The JP Morgan Emerging Market Bond Yield Spread to US Treasuries narrowed in line with the fall in VIX.
The lower yield spread is in line with that of previous crisis times. The yield spread is likely to stabilize at current levels in November before resuming its decline through end January next year.
The trend in the U.S. dollar per euro that initially was behind the curve compared to previous crisis finally caught up as the U.S. dollar weakened against the euro as anxiety levels eased.
Contrary to declining trends in previous crises the U.S. dollar maintained its value against the yen. With central bank intervention rife the yen is likely to maintain its “peg” against the U.S. dollar.
Emerging-market currencies as measured by the ratio between the MSCI Emerging Market Index in terms of the U.S. dollar and that in local currency strengthened against the U.S.
The strength was in line with the trends during the 2008 and 2010 crises. Some stability is expected in November but there is a threat that the emerging-market currencies may falter again thereafter.
As in 2008 the sell-off in gold coincided with a peak in anxiety levels.
In light of the trends during the previous crises some further strength is expected in coming months.
The bottom in the silver price this time around was earlier than during the 2010 crisis but later than in the 2008 crisis. I expect further strength in coming months.
The current trend in the gold-to-silver ratio initially lagged that during the 2008 crisis but caught up recently. I expect the trend to decline gradually in coming months.
The platinum-to-gold spread initially also lagged the trend during the 2008 crisis but caught up recently. It seems to me that the spread has bottomed.
The price of copper also lagged the 2008 trend but rallied recently as it did in 2010. I expect the rally to continue.
Emerging-market equities as measured by the MSCI Emerging Market Index in terms of the U.S. dollar also rallied as financial market anxiety levels eased.
This timing was bang on target with that of the trends in 2008 and 2010. I expect some consolidation in November but there is a distinct possibility of further downside through end December.
South African gold shares in terms of the U.S. dollar weakened in relation to other equities but are likely to hold their own against other equities in coming months.
The reduction in anxiety levels has not led to an improvement in gold shares compared to the gold price yet.
The South African Volatility Index (SAVI) dropped in line with the CBOE S&P 500 Volatility Index (VIX).
The SAVI follows the same trend as that during previous crises and is especially mirroring the trend of last year. Some consolidation is expected in the next month or two before the SAVI heads lower.
The easing of anxiety is leading to a significant rally in the FTSE/JSE All Share Index in terms of the local currency.
The rally is mirroring the trends during the previous two crises. Some weakness may appear in November, though, while there is a real possibility that December may see further weakness.
The same is apparent if the FTSE/JSE All Share Index is expressed in terms of the U.S. dollar.
The valuation of the FTSE/JSE All Share Index increased significantly as anxiety eased.
The valuation levels as measured by Robert Shiller’s DY10 (the inverse of the PE10) is a mirror image of those that prevailed during the 2010 crisis. Some derating can therefore be expected in November. There is a significant possibility that a further derating may follow in December and January next year.
The U.S. dollar weakened against the rand as anxiety eased.
The trend of the U.S. dollar/rand exchange rate during the current crisis initially lagged that of previous crises but started to track those trends recently. Some consolidation is likely in November before the rand strengthens further in coming months.
South African long bonds rallied recently as yields dropped on the back of reduced anxiety.
Bond yields are likely to decline further in November, whereafter they are likely to stabilize and rise.
Sources: Robert Shiller; CBOE; I-Net Bridge; Plexus Asset Management.
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