What’s driving this volatility? Uncertainty rising.

September 30, 2011

Australian Equities, FOREX

A better, although volatile, night’s trade after the concerns about German Chancellor Merkel holding here coalition together for the ratification of the old Greek deal evaporating in an overwhelming vote for the passage of the aid for Greece. The DAX was up 1.1%, CAC up 1.07% but the FTSE fell 0.4%. The Dow and S&P 500 gapped higher on the open before trending down for most of the session and then rallying into the last hour to finish in positive territory. The SPI futures index is up 0.5% overnight.

But have a look at the chart below – its the Dow for the last few days but focus on the right hand side. Last night the Dow opened up 2.45% then fell 2.7% before rallying back 1.72% into the close. What a day!

In commodities and currencies it was generally a tale of a stronger USD with the AUD retreating from its high around midnight of 0.9875 to sit at 0.9772 now. AUD got knocked with the NZD (see below) on a bit of reflected concern about debt and ratings I guess. Oil was up 1% in the US and Europe, Gold was flat but base metals were flat to down which also pulls AUD down.

Data in the US overnight was marginally positive with Q2 GDP being upgraded from an annualised rate of 1% to an annualised rate of 1.3%. To put this in perspective in Australian terms this is a change in the quarterly GDP growth from 0.25% to 0.325%. But such is the bad news build into sentiment and positioning at present to the extent it wasn’t worse than the last release it is good. As was the release of the jobless claims numbers which slipped back up 400k coming in at 391k versus expectations of 420k. Lower is better with this number as it means less people filing new unemployment claims

New Zealand’s Sovereign debt rating was lowered overnight by the Fitch rating agency. Fitch cited the Kiwi’s high foreign debt levels and persistent current account deficit. The NZD dropped from 0.7770 to 0.7700 currently. 

When I think about what is going on in markets at the moment it seems to me that it is simply a case of uncertainty rising again. Last night’s moves in the Dow and S&P 500, in the Australian Dollar and in other markets are not normal. Well they were normal in the second half of 2008 and we appear to be getting used to them again in the second half of 2011.

Think also about the last couple of week’s trade the Australian Dollar for example we have been up near 1.04 a couple of Friday night’s ago. We traded down to 0.9622 in Monday’s fear and loathing trade, subsequently bounced up to 0.9991 fell back to 0.9702 yesterday, bounced to 0.9870 and then dropped almost 2 cents before rallying to sit at 0.9770.

You’ll remember Gold’s massive moves from earlier in the week and copper has likewise hit the skids big time as well.

So a legitimate question is what is going on – the answer is that volatility begets volatility and ultimately leads to less volatility but for the moment more. It is very clear that what we are seeing at the moment in global trading is not just about Europe and the Sovereign crisis.

What we are seeing the next shoe to drop in what is the enduring GFC – the recognition that China and the BRIC’s more broadly cannot save the world  – same play next act.

Indeed if we look at the growth trajectory of leading indicators in these emerging economies we see a tapering off of things like the PMI’s and industrial production. Now of course this makes sense as ultimately as they are still developing their internal demand structures and the weakening growth profile of the developed world means the demand for their goods are consequently lower. Equally even in China which only a few months ago was expected to have the softest of soft landing things are hardening up – at least in terms of market expectations. Yesterday Bloomberg ran a story saying that

“Most global investors predict Chinese growth will slow to less than half the pace…Fifty nine percent of respondents said China’s gross domestic product, which rose 9.5% last quarter, will gain less than 5% annually by 2016. 12% see such a slowdown within a year…”

Now 2016 seems a long time away but the key here is that the risks around China and thus other growth assets like the Australian Dollar are being re-thought. So as traders and investors re-evaluate their positions we get the kind of volatility we are seeing at the moment.

The volatility is also driving traders to the sidelines until the outlook becomes clearer. That makes sense and then the short term traders get control of the market. That is not inherently good or bad – rather it is just a reflection of the increased uncertainty.

For the markets we know our readers follow assiduosly we thing that the Australian Dollar is in a downtrend and will gravitate toward 0.9200 eventually where the outlook on whether this is just a pullback within a much larger uptrend will be come clearer. in teh shoret term 0.9600 is clear support and the 0.9960/90 and 1.0067 region is resistance. On the ASX200 3848 remains the key. If that gives way watch out below.

BTW: Our piece yesterday on High Frequency Traders posted at MacroBusiness and here at Lighthouse was quoted in the FT Alphaville and reproduced in full on the Naked Capitalism blog.

Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. Thus, this blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

If you do need economic, investment or financial advice we are happy to help.

Please Email the team at Lighthouse at info@lighthousesecurities.com.au or Greg directly on greg@lighthousesecurities.com.au

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  1. BRICs – on the backburner but hotting up | Lighthouse Securities - September 30, 2011

    […] here and this is why I highlighted the impact on the Australian Dollar and other growth assets in this mornings piece. This is the slow burn story people are not watching while they focus all their attention on the […]

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