Quarterly witching: dark spell ahead for US markets?

2 mins read

By Han Tan, Market Analyst at FXTM

Asian stocks are edging higher with the MSCI Asia Pacific index set to register its first weekly gain this month. However, the selloff in US stocks is set to extend as futures for the S&P 500 and the Dow Jones indices are falling into the red early Friday.

Nasdaq 100 futures are edging into the green, suggesting that the index could have a shot at pulling out of its technical correction by the weekend. The sense of trepidation in the markets is also evident, with a modest bid in safe haven assets and Gold prices set to register a second consecutive week of gains.

Market participants are bracing for potentially heightened volatility, with US markets set to undergo their ‘quarterly witching’ as Futures and Options contracts on stocks and Indices expire on Friday.

And it may not end there.

The seasonal end-of-the-quarter portfolio rebalancing by large institutions, such as pension and sovereign wealth funds, could also contribute to choppy market conditions over the rest of September. Indeed, the looming US elections and the political uncertainty could paralyse some segments of the markets in the lead up to November 3.

Set against such a backdrop, no wonder the Volatility Index (VIX), also known as the market’s ‘fear gauge’, is retracing towards the 30 mark and testing resistance levels at its 100- and 200-day moving averages.

Since the dramatic drop earlier this month, investors are awaiting fresh catalysts that could jolt the markets either way. In the interim, the 50-day moving average is proving highly significant for multiple assets, from the S&P 500 to Gold, as it is being relied on for key support.

Investors drew little cheer from the continued recovery in the US jobs market on Thursday, despite the drop in both the initial and continuous jobless claims.

The forward-looking nature of the markets demands that more US fiscal stimulus is rolled out, although such prospects look slim over the near-term given the current impasse between the Democrats and Republicans.

The drawn-out political stalemate that only delays much-needed financial support would severely undermine the recovery in the world’s largest economy, a risk that global investors are very much aware of. After all, market participants were reminded of such a risk by Fed Chair Jerome Powell during the latest FOMC meeting earlier this week.

Still, any declines in the stock markets over the weeks ahead may translate into buying opportunities for long-term investors.

Considering that the Federal Reserve is looking to keep US interest rates ultra-low, possibly until 2023, the lower-for-longer interest rate regime should only boost the appeal of equities. Perhaps the bouts of volatility that may arrive over the days and weeks ahead will be useful in offering timely reminders about steeling one’s resolve in the face of more fearful times.


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