The Trade Week Ahead – Bring Out Your Volatility

Want to look at something slightly different this week – trading opportunities from volatility.

Last week was again dominated by the macro environment as a dramatic week (and weekend) in geo-politics filtered into equity markets.

The DOW moved through a 1% plus range every single trading day last week, including a 2% range on Monday and Tuesday. The Nasdaq tracked Mr Zuckerberg’s 2-day testimony and oil tracked the President’s twitter handle and any comments coming from John Bolton (the new National Security Adviser to the President).

What is even more telling was the horrible events in Syria 9 days ago have now seen a response from the West. The targeted bombing in Syria over the weekend is already spilling over into the diplomatic arena with the West putting huge amounts of pressure on Russia.

How and when will Russia respond? Will the US-lead West now hit Russia economically? Certainly, one or both or even more of these are likely to occur. Oil is telling us so and is one market that is on a geo-political tear since John Bolton took over form HR McMaster and started to talk hard on Syria, Russia and Iran.

However, this is not the only reason for the higher volatility and I have, over the past few weeks, being outlining the risks driving markets.

More hawkish monetary policy, changing policy from the White House, the US-China trade war which has fluctuated between all out retaliation to conciliatory to status-quo from a week ago et. al. All in all, these events are risk which means volatility.

I want to illustrate where the volatility is actually presenting. This chart shows the 3-month blended implied volatility of global indices versus the risk arising from exposure to general global market movements (the Beta coefficient).

The ASX has the lowest level of volatility versus its global peers, interestingly the indices from traditionally volatile indices such as the MIB and Nifty are less volatile than the likes of the DOW and S&P due to the reasons above.

The US has started its quarterly earnings season with a positive bang – The valuation fears I think are going decline as the reporting season progresses as P/E ratios should narrow on earnings justifying the price. This may lead to a reduction in the intraday movements on the DOW and S&P over the next 4 weeks.

However, the single largest threat to markets remains a White House ‘reacting’ to geo-politics. Whether that be trade war rhetoric, Middle-East tensions or internal politics (watch for the former FBI director James Comey’s book launch on Tuesday and then the President’s response) this all will filter into indices.

Volatility is here to stay meaning there are opportunities out there so do your research and make sure stops are in place. Have a happy trading week.

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