Markets jittery before Jackson Hole

Normally the latter half of August is a sleepy time for markets as fund managers and the associated financial ecosystem head for their summer breaks.

2022 has certainly provided enough volatility and drama to warrant such a break. However, all leave is cancelled until after the Jackson Hole Economic Symposium this weekend. The world will be watching with interest the upcoming events in Wyoming.

In the meantime, markets have been jittery this week as traders and investors try to anticipate the outcomes from this meeting and what Federal Reserve head Jerome Powell will say in his speech on Friday.

Traders and investors, who had until recently expected the Fed to take a less hawkish stance, now expect it to reinforce its pledge to bring inflation down.  

Comments from the Fed’s Neel Kashkari suggested the FOMC can only relax rate hikes when there is compelling evidence that inflation is heading towards two percent. These comments, along with the disappointing US PMI data, led to a continued slide in the markets.

In particular, Asian equity markets fell for an eighth straight session, while the Euro remained under pressure and near a two-decade low of $0.99005. The US dollar, which has gained considerable support from higher interest rate expectations in the US, has also benefited from the poor comparative outlook in other parts of the world.

Invariably, lots of attention will fall on recession worries and whether Powell and his team acknowledge, expect and accept its impending arrival and whether there is a credible plan to circumvent one.

If we take a look at the technical picture, we see markets preparing to make their moves.

Volatility and market expectations

The CBOE Volatility Index (VIX) is a real-time index that represents market expectations for the relative strength of price changes within the S&P 500 Index. This volatility is often seen as a way to gauge market sentiment and - in particular - the degree of fear among market participants.

Historically, readings above 20 were deemed to express excess volatility and fear within US stock markets. However, as markets have become more volatile over recent years those numbers have been revised, with levels above 25 and 30 seen as cause for concern.

What we can see from the daily chart above is that the VIX has traded above both 25 and 30 on a regular basis this year. This is a simple indication of the volatility that has been seen in 2022 markets.

Noticeably, since a June high of 35 we have seen volatility subside in a descending channel back to a level of support at 20. Many would have expected this as markets quietened down over the summer break. However, that channel has cracked in the last two days as the volatility jumped back up to 24.

Is this an early indication of volatility returning prior to Powell’s speech on Friday?

Dow Jones

As the VIX has rallied we have seen all four major US indices slide this week, and the Dow Jones daily chart is a good representation of this. Having bottomed out at the Big Round Number (BRN) of 30,000 in mid-June, we had a significant relief rally of more than 4000 points over the last two months. That recently came to an end in the last few days and we now see the price has slid beneath 33,000. The Dow is likely to pivot around here until markets gain some clarity from Jackson Hole.

Dollar Index

The bullishness of the US dollar shows no signs of ending. We see the daily price chart reflecting a strong dollar run over the last week and the price has now rallied back to the 2022 highs of 109.29.

Reversal traders may well want to note whether the price creates a Double Top Reversal pattern, indicating a change in sentiment against the US dollar. That would be a rather brave call in the present circumstances. A more likely scenario may well be to see some volatile price action at recent highs, but the USD bull run to ultimately continue.

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