More volatile times for the sharemarket?
Financial market issues
• Over the long term, the benchmark S&P/ASX 200 index has risen by around 0.6 per cent a month. But that broader uptrend hides a raft of small ‘up’ and ‘down’ movements that occur in the index on a daily basis.
• Daily moves in the index of 1 per cent or more are relatively rare – up and down – so this metric is one of the best ways to quickly gauge market volatility. An increase in volatility generally reflects a lift in the number of newsworthy events.
• As would be expected, traders love volatility – there is great scope to make money. Investors are less endeared to volatility, so a lift in the number of big daily moves on the market tends to send investors to the sidelines.
• So where do we stand currently? Over the year to September there were only 47 ‘high volatility’ days – the lowest result in 19 months and below the long-term average of 60 daily moves a year, or 5 moves a month.
• In September there were 5 high volatility days for the Aussie sharemarket, the most in four months and after notching up just 1 ‘high-vol’ day in both July and August. In fact, in the last eight trading days there have been 5 ‘high-vol’ days. Understandably that reflects the daily news flow which has had almost everything.
Oil prices near 7-year highs
Winding back of stimulus by global central banks
Sector rotation in the US in response to reopening economies
The European energy crisis
The Chinese energy crisis
The Chinese property crisis
Risk of US government shutdown
The debt ceiling debate in the US
Potential for reopening of the NSW economy
Falling iron ore prices
Supply chain disruptions and labour shortages
• Now while it’s not hard to line up the news flow with sharemarket volatility, actually trying to predict whether the volatility will continue is more difficult.
• As we’ve seen, the government shutdown was averted in the US. However policymakers have only kicked the can down the road – agreement on budget measures is still required by December.
• Again, it appears the same result will occur with the US debt ceiling – we’ll all be back in December to see whether the ceiling will be lifted or scrapped.
• The energy crises can be dealt with by greater gas production. And indeed Russia is offering to lift output and export more gas to Western Europe.
• And if oil prices stay high or lift further, there will be pressure on the OPEC+ group to lift production.
• The Chinese property crisis may linger a little longer, as there are more fundamental imbalances. But it depends on how quickly and effectively the ‘bad’ property groups can be ring-fenced from the ‘good’ groups. And also how effectively the ‘bad’ companies can be ring-fenced to prevent spill-over effects to the broader economy.
• Reopening of economies is a theme that will continue to play out for a number of months. The things to watch are vaccination rates as well as any signs of new variants emerging.
• There was a spike in the S&P/ASX Volatility index (VIX) during the initial Covid-19 outbreak in March 2020. In March there were also 19 ‘high vol’ days – a record for the series back to 1994.
• Overall though – and up to the last fortnight – it’s important to know that sharemarket volatility has been historically low. That low volatility coincided with 11 straight months of sharemarket gains through to August – the longest winning streak in almost 80 years.
Published by Craig James, Chief Economist, CommSec