Embracing some Vol
• Traders rejoice as volume and risk off hit markets – US markets were due for some repricing as the outlook for 2019 across the bond and equity markets were under-pricing the economics and overpricing ‘lower for longer’. The repricing suggests that both markets see: higher borrowing rates, a slightly slower growth profile, material inflation in the US and full employment. This is economically positive which should be a USD positive however it’s an equity market negative as the ‘free capital’ of the GFC era tightening and thus the flows will go with it.
• Volatility is back and returning to normal from the abnormal – The volatility of the past week should actually describe as ‘normal’ as it has seen volatility indices returning to their historical averages – ignore the rhetoric vol is a natural part of markets. The point is, the lo vol market trends of the past 18 months is actually abnormal, take the Australian VIX (XVI) for example, last week saw it hit its highest level since February of 26 (compare that to events in 2015 when Vol averaged 24 all year) before quickly falling back below its 10 year moving average of 18.6 trading – 16.7. The past 18 months was actually market complacency, something that should now filter out and show give traders some room.
• Price and earnings – US earnings season will likely stem the sell-off over the coming month. Market forecasts are for year-on-year earnings per share (EPS) growth of 20%, which is solid after the ‘tax cut’ stimulated Q2 earnings that saw over 26% EPS growth year-on-year. Expecting the S&P beat the ‘Street’ however, I suspect guidance statements will be the biggest driver this earnings season. If earnings outlooks are downgraded, the market will be a downgrade with it.
• Australian Employment mind the jump (AUD) – Thursday sees the September release of Australian employment figures, all leading indicators for the release point to another strong month in employment. However what is likely to drive the AUD is employment slack – all the indicators in the GDP, business confidence and PMI data that suggests that the employment slack is finally starting to be absorbed. Traders, therefore, should look to ‘hours worked’ and ‘underutilisation’ figures, if both continue to improve as they have in the previous three months it will confirm the trend is becoming structural, so mind the jump in the AUD if this is confirmed.
• Chinese Industrial Production (IP) – Forget the GDP read (although it will get the most amount of attention) IP is the best gauge of Chinese momentum and overall economic performance. The release encapsulates new orders, new exports, industrial output, and industrial coatings. However, since the White House proposed placing tariffs on Chinese exports IP has been decline. This decline has begun to accelerate as the proposal moved towards being implemented, this Thursday will be the first reading of IP since the tariffs came into full effect, IP was already at a 25 year low – will it make a new low? And will it mean all gains from Thursday in the AUD will be lost come Friday?