Equity sentiment remains negative but orderly
S&P 500 futures fell to the lowest low since mid-July in yesterday’s trading session as a better than expected ISM Services Index print for August showed that the US services sector remains very strong despite tighter financial conditions. The market immediately pushed US yields higher and the forward curve on the Fed’s policy rate shifted lower indicating the market expects higher policy rates and fewer cuts next year. Equities are naturally responding to higher bond yields and stronger USD is causing havoc in emerging markets which are looking weak. The next test is tomorrow’s ECB rate decision with economists expecting ECB to hike the main refinancing operation rate from 0.5% to 1.25% making it one of the ECB’s most aggressive moves in its history.
The VIX forward curve has gone from being in steep contango, very bullish with the spot trading significantly below the 2nd VIX futures contract, to being flat suggesting increased stress but nothing extraordinarily yet. Since the drawdown in global equities started we have not yet seen the full capitulation. Our best guess is that we will not hit the definitive bottom in global equities until the economy is in a recession, the Fed pivots on policy rates, and we have had a capitulation.