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Friday, November 16, 2018

VTB: Risk aversion continues

Risk aversion triggered by concerns over China's credit risk, EM currency pressures and some U.S. earnings disappointment weighed on global equity markets last week, according to VTB Capital analysts Alexey Zabotkin, Neil MacKinnon, Olga Danilenko, Akin Tuzun, Digvijay Singh, Sergey Galkin and Ilya Piterskiy

They noted that the S&P500 index closed the week down 2.6 percent; the VIX index, Wall Street's "fear gauge," jumped to its highest level since mid-October; and Germany's DAX fell 3.6 percent while the French CAC-40 slid 3.8 percent.

Risk aversion was also seen in FX, with JPY dropping two yen over the week as EM currencies such as the ARS and TRY hit record lows.

Gold was a two-month high at $1,272/oz. The U.S. 10-year Treasury yield fell 10bp on the week to 2.73 percent while U.S. natural gas moved above $5 for the first time since 2010.

The analysts also pointed out that the S&P500 index is some 3 percent off its recent record high. Since the equity market low in 2009, U.S. market corrections have been in the order of 5-10 percent. Last year's taper correction was 7.5 percent, so there is scope for corrective activity to continue this week for both EM and DM markets.

Risk aversion favors fixed income, especially U.S. Treasuries and this level provides a benchmark for a near-term reduction in yields.

The next U.S. jobs report in early February is a key test for the Fed's monetary stance, as a cold weather rebound in jobs plus the effect of a lower labor participation rate in lowering the unemployment rate could throw the Fed's forward guidance strategy into turmoil.