Is anyone paying attention to the VIX and the state of global equity markets?
A week ago global markets took a major hit. The S&P500 shed hundreds of points over the course of a few days, and then seemed to stabilize last Tuesday.
While markets have been more or less flat since the S&P500 found a near-term bottom a little bit under 2800, the VIX has been ramping up. It doesn’t seem to be of much concern to the markets, which could be a big warning of nasty things to come.
Global Stock Markets are Primed for a Crash
As Bloomberg reported last week, one of the big reasons why markets bounced early last week was companies who were buying their own shares. Lower stock prices make a company look weak, so it makes sense that companies were gobbling up their own shares.
The background for a sustained rally at this point isn’t looking so hot.
It is easy to find a macro-event driven narrative for much lower stock prices. In fact, there are so many, it is difficult to point to a single pressure point that could be the impetus for the next global stock market meltdown.
Hong Kong is Ready for War
The Chinese government is piling up PLA soldiers on the China-side of the China/Hong Kong border, presumably to step in when Beijing has had enough of the civil unrest in one of the globe’s most affluent regions.
Much like the US-led invasion of Iraq, the idea that Hong Kong’s rabble could actually challenge the PLA ‘peacekeepers’ is absurd. The invasion of Hong Kong would spell a 10,000 point drop on the Hang Seng, and goodness knows what else.
The biggest questions surround the Western banking infrastructure that is housed in Hong Kong, and the trillions of USD in international capital that flow through the city-state. If China is taking over Hong Kong early, it would roil global equity markets severely.
Of course, any escalation in Hong Kong would further complicate the ongoing US/China trade war, which is terrible news for the global equity market bulls.
Ummm…The Straight of Hormuz?
Never mind the fact that oil prices don’t seem to be reacting to the largest naval build-up in the Gulf in recent memory, the real story is what could happen to global equity prices if something ugly happens off the coast of Iran.
Iran warned that if Israel deployed its navy to the Straight that it would be seen as a provocation for war, which is never good news for global commerce.
It is difficult to see how this situation will end peacefully. Actually, it is nothing short of a miracle that war hasn’t broken out already, which may be one of the reasons why many global equity markets are still within 10% of their all-time highs.
Look Out for Bad Weather in Global Equity Markets
It’s no secret that governments and central banks prop-up equity market prices.
From the direct buying that the Bank of Japan engages in, to whatever the ‘Plunge Protection Team’ at the US Fed is doing, we know that global equity markets are something along the lines of a shell-game.
If we see a big reaction to any of the events discussed above, we know that the powers that be are losing their grip. There are many other things that could also cause a big drop in global equity prices, so keep an eye on the markets.
We could easily be on the cusp of another ‘Lehman Moment’, or even a 1987-esque plunge.