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Volatility Index Indicates Recession Fears Are Taking a Back Seat…For Now

April 19, 2023

Let's run through the wild ride happening in the Asian markets on Wednesday. It was a mixed bag, to say the least. Traders were scratching their heads, trying to figure out what's what. The US corporate earnings results were good, but not great. The Chinese data was pretty solid, but there were some misses in industrial production and fixed asset investment figures. And let's not forget the elephant in the room - the possible recession that everyone's been talking about. Will it arrive this year or not? That's the million-dollar question.

Despite all the uncertainty, there are some positive signs. Corporate earnings so far have been painting a rosy picture. That's giving traders some confidence that the economy can weather any potential recessionary storms on the horizon. And the Chinese GDP figure of 4.5% is inching closer to the 5% target. With a little more pick-up in domestic demand, we could see GDP prints of 5% and above in the second half of the year.

But what about the looming recession? The FOMC has warned that it could be coming this year. But based on the recent performance of the VIX (the CBOE volatility index), financial markets seem to be more focused on what a contracting economy may mean for lowering interest rates rather than on the broader economic implications of a recession itself. So for now, recessionary fears appear to be taking a backseat.

In the midst of all this, we're seeing some interesting developments. The USD is taking a dip, and treasury yields are lowering, which is allowing the gold price to climb back up to the US$2k level. Meanwhile, the WTI oil price is clinging onto the US$80 per barrel handle, with the Chinese data not quite convincing enough to spark a break higher beyond current resistance levels.

And let's not forget about the euro, sterling, and AUD, which are all clawing back some ground against the greenback. There's talk of a May hike by the Fed, but the outlook beyond May is far from certain. That's curbing any potential USD upside. However, the RBA minutes released this week showed a willingness by the central bank to keep going with rate hikes. That's providing support for the AUD from a yield-expectations perspective.

Later this week, we have plenty of key data due for release in both the UK and Eurozone. Traders will be using this to assess the interest rate outlook for both the BOE and ECB, respectively. But for now, it looks like corporate earnings season will be the main driver of market sentiment. Traders will be combing through the results looking for any underlying weaknesses stemming from the banking crisis from March. Buckle up, my friend, it's going to be an interesting ride!

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