• 14 out of 15 indicators in the “Phillip Recession Tracker” remained well in check
• Remain bullish despite some early crack signs showing up in the price action, Ted spread and 2s10s spread
• Further deterioration in the Economic-Bases data is needed to confirm the bearish view
• Current bullish price action off the 200-day moving average in the S&P 500, DJIA and Nasdaq 100 index suggests the resumption of the uptrend next

Volatility returned in March as the S&P 500 index experienced some rally of 4% in early March followed by a -6.5% selloff in the second and third week of March. In total, the S&P 500 index fell –3.07% in March. On the flipside, the VIX index also traded above 20 for the most of March further validating the heightened volatility environment.

The main highlight in March that kick-started the risk-off sentiment was the departure of two key white house officials and the recent trade war tariff talks between US and China.

• On 6 March, Gary Cohn resigned as Trump’s top economic advisor due to their disagreement on imposing stiff tariffs on steel and aluminium as Gary Cohn was against the idea

• On 13 March, President Trump fired the Secretary of State, Rex Tillerson due to a disagreement on the nuclear deal with Iran

• On 9 March, President Trump signed an order to impose 25% and 10% Tariffs on Steel and Aluminium imports respectively, mainly aimed at China

• China retaliated by imposing $3 Billion worth of tariffs on US imports including pork, wine, nuts, fruits and scrap aluminium

• On 22 March, President Trump signed an executive memorandum that would impose tariffs on up to $60 Billion in Chinese imports over the intellectual property theft

Overall, the above news caused the market to enter into a risk-off mode as the market prices in new element of uncertainty.

Currently, the trade war scare still seems to be plaguing the market as the equity market struggles to move back into an uptrend.

Nonetheless, the overall economic data in the US remains rosy despite the ongoing trade war talks. More importantly, we will have to monitor a few more months of economic data to gauge if the trade war is taking a toll on the economy

Staying data dependent, the Phillip Recession Tracker remains in the healthy zone except for the VIX index and Ted spread.

Figure 1: Phillip Recession Tracker – some early crack signs are appearing

Source: Bloomberg, PSR

TED Spread

In the February monthly review, we mentioned the breakout of the Ted spread above the two months range of 0.36% is something to watch. With another month gone, it seems that the Ted spread has woken up from the slumber and shifted into a period of heightened uncertainty. The Ted spread continued to spike higher after last month’s breakout, reaching a new 52 week-high of 0.61% in late march signalling greater distress in the interbank level. Watch closely to see if this upward trajectory in the Ted spread sustains or not.

Note that the key threshold for signalling the extreme bearish scenario is when the Ted spread breaks above the 1% level. Ted spread will be one of the more important metrics to watch as it is following the footsteps of the VIX Index signalling some early crack signs.

Figure 2: Ted Spread – signalling distress in the interbank level 

VIX Index

After trading back below 20 range since mid-February, the VIX index began to spike erratically again on two occasions. On 19 and 22 March, the VIX index experienced sharp spikes of 20% and 30% respectively suggesting the market is still in a fragile state. As long as the VIX index trades sideways below 20, the general equity market should continue to enjoy the risk-on behaviour. If the VIX index does spike up above the 30 range again, that might signal further market turmoil and weakness.

The VIX index needs to show a few more anomaly spikes above the 30 range to signal real market panic. The point when the VIX index forms a new panic floor above the 10 euphoria floor is the confirmation of a shift in investors’ sentiment to a more warry one. Currently, the VIX index is showing some sign of establishing a new panic floor at 13.31 that was formed on 9 March. Continue to monitor the further development of the VIX index to see if the 13.31 low is the new panic floor.