Global Macro: A Volatile Environment

The macro outlook is currently littered with uncertainty, yet it contains a hint of predictability too. The decisions to be made over the next month are primarily concerned with political action. Bernanke meets in Jackson Hole on Friday, and there is the belief that he may reveal his hand.

The ECB meets throughout September, but the date on which a solution will be presented has less clarity. Along the same line, there is an idea that China may intervene to compensate for the East's recent string of bad data. All events are known to be pending, but their outcomes are unknown.

With the overhang of uncertainty, the call for volatility is valid. The VIX (VXX) has been silent as of late, but a swift return remains. An indicator that highly correlates with VIX is utility stocks (XLU) over equity markets (RSP). It and VIX trade near a .75 correlation, yet their charts vary. What is clear in the image below is that the ratio looks ready for a pullback. Its MACD is fairly below the downtrend line and the price action in general looks to be rounding back. This could foretell the coming weeks of announcements, and a move lower in equities.

The next look is gold (GLD) over the JPY/EUR cross (FXY)(FXE). The JPY/EUR is another asset that has been trading alongside volatility recently. By comparing its move to inflation linked gold, one can measure market sentiment toward riskier assets. Gold has gotten a footing, but fear must sufficiently leave the markets for the yen to experience selling pressure. If both assets can sustain their respective trends, then risk should avoid a drastic sell off.

Spanish equities have similarly been in the spotlight recently, and their future direction speaks volumes for the markets as a whole. Spain equities (EWP) over world equities (VT) is the indicator below, and it shows a compelling story. With the paradox being that the ECB won't initiate bond buying until Spain agrees to their measures and the other way around, Spanish equities are at a standstill till a decision is made.

Spain has been leading as of late, with a steep slope, the indicator is primed for consolidation. Within the broader framework of the chart, the price action's next move has strong implications. If it continues higher with vigor, the chart has bottomed; but if it bounces off resistance, the downtrend becomes stronger. The next few weeks should give a sense of direction to this sideways indicator.

With the various indicators above each telling a story of their own, they all inherently reflect a bigger picture. The markets have been moving on an idea, but this idea has yet to manifest itself. If one is to believe that we have priced in easing, then the lack thereof should ignite selling. The money that now resides in the market is playing a guessing game with central banks. In other words, their premises are pure speculation.