By Ron William, CFTe, MSTA

Are the Dominoes Starting to Fall?

BlackRock CEO Larry Fink asked in his annual letter to shareholders whether "the dominoes" are "starting to fall" in the U.S. financial system, pointing to the collapse of Silicon Valley Bank (SVB) last week and a number of other issues that could emerge following years of easy money. He further warned, “it’s too early to know how widespread the damage is.” Ray Dalio of Bridgewater Associates, expects problems to start mounting in the fallout from contractions in debt and credit markets, saying the recent SVB failure was just a “canary in the coal mine.” (Incidentally, the collective noun for canaries is an opera!)

While more banks are likely to fail, the predominate moderate narratives consider the threat as contained and not systemic risk leading to a financial crisis 2.0. Rather than perform a forensic autopsy of what happened and its implications, I will focus my analysis on what it means broadly for investor sentiment and the major macro markets. In terms of sentiment, the SVB fallout rhymes with the Lehman crisis moment (Figure 1), thereby amplifying fear in the hearts of investors.

Are the Dominoes Starting to Fall? Figures 1-6

[Click chart to enlarge.]

The bond market volatility index $MOVE has reached its highest level since 2009 (Figure 2 above). This does not bode well for risk assets and is already pushing the VIX from the low 20s to 26.14 in recent days. S&P500 continues to breakdown, having failed to hold above its tactical YTD bullish price zone between 4100-4200. Watch near-term support at 3760 (Figure 3 above). A break here will unlock further downside risk into 3590 (pre-pandemic peak) and 3490 (October 2022 low).

EUR/USD’s latest sell-off is now retesting key support at 1.05, verging on confirming a multi-month top reversal pattern (Figure 4 above). This would equate to a minimum price objective (MPO) of 1.0180. WTI Crude Oil also broke down from its range under the December 2022 low, resuming its major downtrend, with next support at 61. Meanwhile, investors dashed to the safest corners of the market, with gold reversing its losses, outperforming traditional safe-haven FX rates JPY and CHF. In fact, Gold/JPY is currently breaking an important price barrier (Figure 5 above).

Aside from the bank turbulence, bond traders also reacted to US economic data, which fueled bets that the Fed will not accelerate its pace of rate hikes for now. US10YR plummeted into key support around 3.40%. Recall our view is for rates to be higher for longer, marked by waves of volatility between a hi-lo watermark of 5%-3%.

More traditional metrics, like the yield curve, have been flashing warnings for the past 6 months, closing last week near its lowest point in the cycle. It now signals a potential Fed policy change or mistake that could trigger another stage of the domino effect. Our cycle model also continues to signal growing risk into H2 2023. Stay alert!

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Ron William, CFTe Bio

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Ron William, CFTe, is a market strategist and educator/mentor with more than 20 years of experience working for leading macro research and institutional firms, producing tactical research and trading strategies. He specializes in global, multi-asset, top-down framework, grounded in behavioural technical analysis, driven by cycles based on the "Roadmap" signature model of veteran market technician Robin Griffiths, published in his book Mapping the Markets.”

Ron also applies a "market & mind" approach at IntensiChi, using the latest techniques in behavioral-risk models and neuroscience sourced from expert groups. He further supplements with mentoring/coaching, trained by the International Coaching Federation (ICF), and teaches a regulatory approved masterclass in Applied Behavioral Science, with investment, private banks and CFA Societies.

Ron's primary work, as part of his current institutional market advisory firm (RWA), acquired global industry recognition as winner of “Best FX Research” in 2020. Financial media programs and industry publications regularly feature his market insights, including “Is the big cycle about to turn?”, predicting the 2020 crash and alerting the “Minsky paradigm” of 2020 H2-2022.

Driven by high-integrity education, Ron serves as part of the education committee of the International Federation of Technical Analysts (IFTA), Development Director at the Foundation of the Study of Cycles (FSC), Head of SAMT’s Geneva Chapter, and an honorary member of ESTA. He is also a visiting lecturer at universities, active guest speaker for the CFA, CAIA and CISI, and senior teacher at colleges offering an accredited diploma in trading and investing.