Markets remain skittish as caution prevails

There has been a slight easing in tensions overnight as reflected in the small decline in my risk barometer and the VIX ‘fear gauge’. However, markets remain skittish and the mood is somewhat cautious as the focus remains on emerging market travails.

Additionally a sharp fall in Apple shares in after hours trading may also dampen equity markets today. Although specific country specific factors may have provoked the current bout of pressure contagion has spread quickly, reminiscent of the onset of previous crises.

The current bout of pressure may yet be contained but there is still some way to go before market stress is alleviated. Consequently correlations between asset classes have strengthened, in particular for currencies. Indeed most emerging market currencies have depreciated especially those of the “fragile 5”.

Overnight US yields rose while US and European equities continued to sell off and gold prices dipped following recent gains. The USD index held gained slightly following the rise in US yields.

Aside from emerging markets attention will focus on the US, with President Obama’s State of the Union address, December durable goods orders and January consumer confidence on tap most attention will quickly shift to tomorrow’s Fed FOMC policy decision. UK Q4 GDP will also garner some attention.

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