Markets are off again overnight with the Dow currently down more than 160 points before its midday rally after more carnage in Europe where continental bourses fell close to 3% in Italy and Germany and around 2.5% in France and Spain.
Crude Oil is off again, down another 2.14% to $56.57 a barrel, USDJPY is back below 118 and the Chicago Board Options Exchange S&P Volatility Index, the VIX, is up 2.7% to 21.65 – close to the highest levels for a year.
It’s an unexpected market funk for many who were getting ready for a Santa rally but according to the ANZ’s Head of Market Research Richard Yetsenga it is something we’ll need to get used to as the Fed moves toward normalising interest rates.
Yetsenga said that, “The price action in some markets currently — such as currencies and emerging market fixed income — harks back to 2013’s taper tantrums.” But he adds that the “taper tamtrums”, when the Fed first hinted it would end its QE program, occurred against a backdrop of positive global growth expectations. Given that the globe is facing a very different economic future presently with China slowing, Europe moribund and equities falling for the past two weeks Yetsenga says that “the price action being sent at present is more worrying than during the taper tantrums.”
His conclusion is that volatility is rising and he says:
As a consequence, we would rather err on the side of caution and suggest that volatile market moves should be expected going forward, with markets likely to have a risk-off tone. The upshot of all this is to expect:
- at very least a period of heightening volatility in financial markets to persist in the near-term, not least because of reduction in liquidity as year-end approaches;
- the USD to stay strong, except perhaps against the JPY and where short positioning dominates (the EUR might also receive an initial benefit here, particularly given its large current account surplus);
- bond yields in advanced economies (outside peripheral Europe) to remain under downward pressure; and
- emerging market currencies to remain weak and bond yields under upward pressure.