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Volatility reigns as markets take off

A bounce in stocks highlights volatility, yet the worst may not be over.

Petrol pump
Source: Bloomberg
  • Mario Draghi hints at further QE, yet what would it take?
  • Oil spikes as stocks fall once more
  • Volkswagen crisis not over despite price rise

Volatility is the name of the game in financial markets, perfectly personified today by the FTSE 100, which is trading within a near 200-point range for the second consecutive day. The uncertainty regarding whether global markets have enough juice left in the tank is more relevant than ever, with recent months seeing both European and US indices suffering the biggest selloff since 2011.

Yes, today has provided a welcome reprieve from yesterday's manic selling, but the question remains as to what factors will bring the bulls back to the fore given the continued Chinese slowdown and impending monetary tightening.

The issue of monetary policy returned today, with Mr Draghi declaring a willingness and ability to increase the scale and scope of asset purchases should it be necessary. Today's rebound in eurozone PMIs showed that the region is picking up, which could be in part attributed to the ECB's QE programme. However, with French Q3 GDP projected at 0.1% and German Q3 expected at 0.4% it is clear that despite improvement, the eurozone recovery is far from inspiring.

A slow eurozone recovery is just one of many fears at the ECB which could force its hand to up QE in the future, with disinflation seen as one of the biggest issues that could require a more accommodative mindset for all the major central banks.

US crude inventories fell for the second consecutive week, helping raise US light crude back above $47/barrel. Within a wider context, US shale producers are finding their credit lines shrinking as banks revalue their decreasing reserves, which have been hit by falling investment amid tumbling prices. While the issue of low prices could be around for some time yet, the price war finally appears to be having an impact upon the ability of US shale producers to do business. This, in turn, is pushing oil prices towards a tentative short-term recovery.

The Volkswagen scandal continues to rumble on, despite the firm regaining almost 4% in trading today. The question marks remain over how far this issue reaches, with the possibility that it could have become standard industry practice hanging over the sector.

On a day which saw German manufacturing growth falter, any slowdown in the industry would be a big blow to the economy. In isolation Volkswagen would be a single issue, yet should it be a wider matter this will be both a PR and financial nightmare for both company and nation.

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