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September volatility about to be reheated

Are we seeing the market putting the August-September macro conditions back in the microwave and hitting reheat?

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Source: Bloomberg

It certainly feels that way. In October over A$18 billion was returned to Aussie shareholders from dividends paid at the full year numbers. This accounts for the seasonal bounce October gets every year, with these monies now reinvested (or withdrawn), other factors are taking over again.

These include:

  • Fed interest rate rises
  • China’s rapid slow down
  • European deflation
  • The commodity complex crunch
  • Emerging market outflows
  • Global growth risks

The VIX has popped up 14% since October, credit default spreads have blown out and G10 risk currencies/emerging market currencies are being dumped on the expected changes coming in December. The “buyers’ strike” in the equity market is on as the S&P heads back into negative territory for the year.

Looking at things from an Australian perspective, the reaction to the job numbers yesterday also adds a layer of convolution. We could point to the month-on-month numbers being statistically abnormal, a back of the envelop calculation on the ABS job numbers compared to the non-farm payrolls (NFP), for example, suggests that the States would need to print an NFP increase of 742,000 to match the 58,600 added in October.

However, there is no denying the longer-term averages in the Australian employment market. On a 12-month average basis, jobs growth is the strongest it’s been since November 2010 at 2.7%. The unemployment rate is the lowest it’s been since the raw March release (revised up to 6% from 5.9%) and the trend suggests it is going to remain sub-6% into the first quarter of 2016.

The data is so strong that some of the most bearish of economists have changed their Australian rate calls completely. Both UBS and Goldman Sachs suggest there is such strength in the jobs numbers that we have now reached the cycle low in the cash rate. Both were pricing in a further 50 basis points of cuts in 2016, suggesting now that this is the bottom of the cycle. Ignore the jobs at your peril – this is a ‘positive’ for the AUD.

It’s not a full picture from an equity perspective though. The commodities complex/China story is only just beginning to wreak havoc on equities. Four of Australia’s largest exported commodities are in bear markets, all of which are part of BHP’s four-pillar strategy.

I continue to believe BHP is a trap and with BHP’s ADR suggesting the Big Australian will open at $19.80 today, it will be in the teens for the first time since November 2008 when the low was $18.99. The shares were quickly bid up in the teens in 2008, however, overlaying my macro view around copper, iron ore and oil (and even coal), there is still little reason to buy – be very wary here. The Samarco headlines coupled with China slowdowns do not bode well for BHP in the short term.

The ASX is facing a huge dilemma with the material space contracting further still (materials made up 27% of the ASX in 2011 and is now just 18%), the housing-led recovery in the banks flat lining (financials make up over 42% of the ASX), and now the prospect that rates are at cyclical lows. This means retail rates are at the mercy of the banks which could quash confidence further hitting earnings.

These thematics will breed one thing – volatility, meaning the VIX is likely to be reheated over the coming months.

Ahead of the Australian Open  

There is a very strong leading indicator developing between the ASX vs the Toronto stock exchange right now. Overnight, the TSX lost 1.4%. It’s down 3.5% in the past seven days and is on track for eight consecutive trading day losses as oil is belted and US rate rise hit Canada’s equity plays. TSX seems to be acting as a leading indicator for ASX and we are currently calling the local market down 1.3% to 5062 (which is the almost on the September inflection point of 5050).

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CFDs are a leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.