Although U.S. markets will be closed in observance of Martin Luther King Jr. Day today, it is likely that many portfolio managers will find it difficult to relax, as financial markets signal a fresh round of risk reduction. A flight to safety has lifted both the U.S. dollar and Treasuries. So far, however, these moves have been modest and orderly when compared to the gyrations of the period immediately following the 200809 financial crisis. Meanwhile, the CBOE Volatility Index (VIX) remains well below the highs of this past August, let alone seven years ago. Despite the constant media reminders that the first two weeks of 2016 have been the most bearish in history for some markets, all in all, the sell-off in developed-markets financial assets particularly in the U.S. has not yet exhibited signs of investor panic. If anything, the sell-off is indicating quite resignation. The question facing market participants now is whether the markets of the past two weeks portend recession or if the current risk off cycle is merely a symptom of the hangover resulting from years of extraordinary easing by central banks.
Taiwan election results present a challenge for Beijing. Tsai Ing-wens landslide victory in Taiwans national election yesterday brings the Democratic Progressive Party its first legislative majority. Tsai, the first woman to win the presidential office in Taiwan, is a strong supporter of independence for the island, presenting a challenge for leadership in Beijing who prefer to designate Taiwan as a breakaway faction of mainland China.
Oil at fresh lows. Oil futures markets slid further into the red for the year yesterday as investors braced for the lifting of sanctions against Iranian exports. Contracts for front month delivery of West Texas Intermediate-grade crude fell below $28.50 in trading overnight while Brent futures traded in London slid below $28. The Tadawul all-share index, Saudi Arabias equities benchmark, cratered by 5.4 percent in the first session of the week in response.