Volatility Down, but not Out

The theme over past week in financial markets has been less volatility and that continued Tuesday but there are reasons for continued worry. CAD bounced back and was the top performer on the day while the kiwi lagged after a soft dairy auction. A handful of economic releases are due up in Asia-Pacific trading. The latest from Ashraf's Premium Insights, includes tghe addition of both English and Arabic videos, focusing on equity indices-- SPX & Dow found on 0:50 mins to 9:00 mins  -- FTSE on 9:00- 11:35 mins--and on FX, spanning from 11:35 to 26:40 mins).

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FX traded mostly in tight rages and the S&P 500 daily range was less than 14 points for the third straight day. The ebb in volatility is a good signal for risk assets, and it's helped to boost commodity currencies since the start of the month.

The main driver remains China. A five-day holiday at the beginning of the month calmed markets and that's slowly percolated. The Shanghai Composite hit a seven week high on Tuesday has now climbed 20% since the Aug 26 low.

Markets have come to terms with slower emerging market growth and middling (at best) developed economies. A return to high volatility is inevitable; here are the places, which could spark it.

1. China – Growth numbers helped to calm fears but no one is certain how the economy is performing. The data docket is light until the first days of November so that argues for a continued moderation.

2. Other emerging markets – Brazil is in near-crisis mode and frontier markets have been battered. In the ultra-connected economy a genuine crisis could easily spill over to the financial sector and beyond.

3. The fall in margin debt – Ashraf's analysis on margin debt argues that the stabilizing forces present in markets for the past 8 years are fading. That doesn't necessarily mean trouble is coming but when it comes, it means the moves will be more dramatic.

4. Oil – OPEC meets for a 'technical' meeting Wednesday with Russia, Mexico and some other non-members present. Oil inventories in the US continue to surge and a collapse in oil prices could easily spread to high yield or be the trigger for emerging market worries.

Guarding against these risks will be the theme for months and sorting through what's real or an overblown fear is the challenge.

In the shorter term, central banks are in focus, including the Bank of Canada on Wednesday. In Asia-Pacific trading, Japanese trade balance is due at 2350 GMT. Hopes for BOJ stimulus this month have faded but poor trade could rekindle the chatter. The Aussie skilled vacancies report at 0000 GMT and Japan's all-industry index at 0430 GMT are also notable.