First comes the move into defensive stocks, then comes the spike in the VIX, and then comes panic. The TPP midweek commentary

First comes the move into defensive stocks, then comes the spike in the VIX, and then comes panic.

We may not reach stage three, but we’ve already seen one and two and TPP traders are reducing long positions ‘just in case’, with many active strategies going short.

The stock market has been largely unfazed by tensions in the Middle East so far but the FTSE 100 has remained steady this week while other major indices fall partly because of its defensive nature, helped by strength in energy stocks as oil prices continue their march upwards.

Iran’s missile attack on Israel Tuesday caused a spike in oil prices and a classic flight to safety. Now investors are awaiting Israel’s next move and the Cboe Volatility Index, or VIX, known as the market’s fear gauge, has risen sharply amid fears of disruption to oil supplies and the transportation of crude.

The VIX started rising on Friday and is now around 25% higher than where it was at the end of last week. It may not happen, but the fear index is on the rise.

Having said this, if the previous missile strike on Israel by Iran in April is an indicator, this latest escalation could be short-lived and looked at purely from an investment point of view, could provide a buying opportunity, but this feels different.

There are reasons to be more wary now. Israel’s strike against Hezbollah has shifted the regional balance of power, and US politicians’ ability to influence events could be hampered by the coming presidential election. Meanwhile, Saudi Arabia is piling more pressure on its OPEC allies to toe the line on oil production quotas, the likelihood of a crude price shock seems to be rising.

Investors might want to watch Chinese shares for the first signs of panic.

Rising prices might not be a significant concern for American investors, considering the strength of US domestic oil production. However, the same can’t be said for China, which is heavily dependent on Middle East oil. Chinese stocks have enjoyed a historic rally over the past couple of weeks amid hope that stimulus from Beijing will reignite economic growth.

The China trade is now a crowded one with distinct signs of euphoria. An energy shock could stop that in its tracks and send reverberations through global markets.

As Iran’s cruise missile attack on Israel and fresh strikes on Hezbollah in Lebanon have unnerved investors. The uncertainty has made safe-haven assets like gold more popular, with demand for the precious metal ticking up close to record levels, as violence spills further across the Middle East, briefly climbing above $2,670 an ounce.

Already sought after, amid concerns that inflationary pressures would persist, fresh geopolitical fracture has increased demand for gold. The dollar has steadied after gaining ground and US Treasuries proved more popular, indicated by falling yields, as investors have sought out trusted shelters amid the widening conflict.

Oil prices are climbing, with Brent Crude now above $75 a barrel, as supply concerns swirl again, sparked by heightened aggression. These worries are being mitigated by expectations that Saudi Arabia will turn on the taps more fully, and lower demand from China, but upward pressure is likely to continue while uncertainty reigns about just how far conflict will spread."

In equity markets, oil giants BP and Shell were among the top performers on the FTSE 100 with defence firm BAE Systems, all up over 2% on the day.

Heavily weighted miners also advanced, with Rio Tinto, Anglo American, Glencore and Antofagasta are also all doing well today.

In France, gains are predictably being led by TotalEnergies and Thales while in the US we expect the money to continue to filter into Marathon Oil, Lockheed Martin and Occidental Petroleum all of which were up over 3% yesterday.

The fear may not lead to collapse. The market can be very resilient, and many will see buying opportunities, but we will all be on tenterhooks for the next few weeks especially if tensions rise.

Aside from geopolitical instability in the Middle East, we have had a mix of economic data releases this week. On Monday we heard that the UK economy increased by 0.5% Quarter over Quarter and that house prices are up once again with the Nationwide Housing index increasing by 0.7% in September, 3.2% higher than this time last year.

Germany’s inflation rate dipped -0.2% month over month to come in at 1.6%, below the 2% target. Inflation was even lower in Italy falling to 0.7% down from 1.1% the previous month. Much of the drop in European inflation has been led by energy which was down -6% on the month. With oil on the rise, this may not last.

Finally, the S&P Global US Manufacturing PMI was revised higher to 47.3 in September 2024 from a preliminary of 47 but remained the lowest since June 2023. It marked the third consecutive month of contraction, with both output and new orders falling sharply due to weakened demand and political uncertainty.

Employment dropped at the fastest pace since 2010 (excluding the pandemic). However, business confidence improved slightly, with optimism around post-election demand recovery. Input cost inflation softened but remained high, and firms raised prices at the fastest pace since April.

source: S&P Global

In Asia, The Securities and Exchange Board of India on Tuesday imposed tough measures to curb the frenzy among millions of young retail investors who have piled in high risk derivatives.

“The equity cult has been going up in India,” said Kranthi Bathini, director of equity strategy at WealthMills Securities in Mumbai. The problem is “uninformed, uneducated investors are becoming prey to this retail speculative frenzy, that’s where the regulator and the ministry of finance is concerned”, he added.

Many Indians have also been spurred on by a proliferation of cheap discount online brokerages and popular, if largely unregulated, “finfluencers” who dish out trading tips on social media. In a recent study, Sebi said fewer than 1 in 10 future and options traders made a profit.

This is exactly what TPP was built to prevent and why we will continue to offer more trading strategies built by our professional traders with decades of experience. If you don’t already have a portfolio with us, please contact us here and one of our traders will get back to you.

Frustrated with your wealth manager and their never ending excuses? At TPP, we might well have the solution.

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