White Hot Risk

Western European bourses continue their ascent amid subdued volumes and light offerings. The climb has been both massive and relentless since the lows reached in June. The pendulum has swung full circle; investors of all stripes are long, comfortable, and heavily reliant on the current trend. Many await the FOMC statement this afternoon in the US to bless their portfolios with an early Christmas present. Ironically, at this stage in sentiment and technical vulnerability, markets looking for a clear catalyst to herald a sell signal should study history more closely. Markets often fall on their own weight. On June 13, there was not a green light which signaled the time to add risk. There will be no siren at the top.

Implied volatilities on the Eurostoxx breached their MAY 11 levels earlier today. Risk-free yields in the Euro zone continue to rise, slowly but surely, altering the fundamental backdrop for stocks. Sector-wise, the last few days have seen a slow rotation out of financials into industrials and industrial metals. Again, the situation at hand is one of reluctant sellers, not aggressive buyers.

Perhaps, following the FOMC, people will be talking about the risk of further hikes, not the soft landing that has been fully priced-in at this juncture.