At -0.46 (vs -0.36 on 15 September) our Risk Index moved further into risk seeking territory. The latest development was mostly reflected in falling cross market volatility.
However, other subcomponents of our risk index look less appealing. Increased demand for defensive stock market sectors as well as widening credit spreads provide a warning signal.
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Looking ahead, growth conditions will continue to drive risk sentiment, especially as the Fed to some extent remains data dependent.
This week’s BoJ announcement should be taken with caution as it supports the view that the central bank is running out of ammunition, regardless of them stressing that more can be done. Most importantly the central bank did not make a case of rising liquidity expectations.
As a result of the above outlined conditions we remain in favour of precious metals such as gold. Elsewhere, we believe the NZD should be sold on rallies*. The currency has been holding well of late. However, capped rate expectations and elevated long positioning keep it subject to downside risks should risk sentiment soften anew.
*Credit Agricole is short NZD/USD from 0.7292 targeting 0.70.