Michael_Macdonald-XATSUK

Global Equity Risks Increasing In The Coming Months

TVC:VIX   Volatility S&P 500 Index
A more cautious tone is appearing across global equity markets.
Further gains to prove increasingly difficult to maintain.
China poised to break higher?



Global equity markets remain in their dominant bull trends.
Investor portfolios are overweight and investor sentiment is positive.

However, warning signals are now appearing, suggesting further gains are likely to prove increasingly difficult to maintain.

Geopolitical risks are growing – for example, heightened tensions in the Middle East and increasingly strained rhetoric between the US and North Korea.


Against this backdrop, the Volatility Index, VIX , which is a measurement of market volatility , is showing signs of a trend change.

Since August 2015, the Volatility Index has been falling steadily. This reduction in volatility has helped to quell market fears and increased investor confidence. Their portfolios have thus been balanced around a ‘risk-on’ approach – overweight equities.

Recent political developments are now being reflected in the VIX , as prices begin to trade higher from historic supports. Positive divergence in rising momentum studies and steady improvement in the proprietary Tension Indicator highlight potential for a price bounce into the coming months.

As the VIX trades higher, volatility increases and investors become more cautious.

This will lead to adjustments in portfolio equities, and a corrective pullback in equity prices.

We thus maintain a cautious stance to US equities and expect further gains will prove increasingly difficult to maintain.


The UK FTSE100 Index is also being driven by investor insecurity.

Following the UK prime minister’s shock announcement of a snap General Election in June of this year, the FTSE100 has fallen sharply from historic highs.

This sharp pullback is helping to unwind overbought momentum studies, and is expected to keep prices under pressure into the coming months. A break below 7000 would not do too much damage to the dominant bull trend. However, a close below the 6675/80 lows of November-December 2016 would increase downside risks, and lead to renewed portfolio reduction.


Against this gradually deteriorating backdrop, European bourses are also coming under pressure. The European EuroStoxx50 Index and the German DAX Index are expected to turn away from current highs. In Asia, the Hong Kong Hang Seng Index is also vulnerable to a pullback.


The China Composite Index, however, is showing signs of stabilisation within the prolonged consolidation pattern. Improving studies highlight potential for a break above critical resistance at the 3285, (61.8%) Fibonacci retracement of the 2015-2016 fall and 3301.66 high of November 2016. Subsequent gains would confirm continuation of the broad 2016 rally and turn investors outright bullish .
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