The strange case of market volatility

Volatility is feeding erratic trading; headlines such as ‘meltdown’, ‘rout’ and ‘collapse’ increase volatile trading and are adding to the overall trade pressure.

market volatility
Source: Bloomberg

However, volatility works both ways, and I have been acutely aware that the pressure building in the hardest-hit areas are due for a short covering rally.

The energy space in Australia has felt the full force of the oil rout and those with high capex, high multiples and low cash flow have felt it the most. However, over the past two days the steep declines of the past month have started to recover, even with Asia seeing horrible conditions over the past week.

Crude itself looks to be experiencing the same covering rally, ratcheting up 4.8% in the final half hour of the US session – snapping a three-day losing streak and registering its third uptick in the past ten sessions.

The question is whether the market sees the current decline as overdone and is now establishing a bottom or is resetting and will go again. I see the latter as the most likely scenario – the oil rout is far from over and it looks to me like a dead cat bounce.

Conversely, as I stated yesterday, be positioned for a recovery in the second half of the year as equity multiples will become attractive and macro conditions reset, adding to a positive outlook – when it comes it will be positive and violent as traders scramble to cover positions.

However, the copper trade is slightly more worrying on an interim basis. I see the rout during the Asian session as the most interesting part of the collapse yesterday. The support level of $5776 was broken very quickly and saw copper fall over 8% to as low as $5400 a tonne. It was the point at which this occurred that really drew my attention though – the opening of China trade.

We are five days from the release of China’s Q4 GDP and copper is the best barometer of growth. The rout on yesterday’s session gives me reason to believe China’s growth is not only moderating but is slowing faster than estimated. China is still the growth engine of the world and we have seen most major investment banks downgrading global growth over the past three months culminating with the World Bank finally downgrading its forecasts. If China disappoints next Thursday, brace for a real rout in commodities.

However, again I would highlight what I stated yesterday – be positioned for a recovery in the second half of the year on Chinese demand. Copper and iron ore have seen increased demand from China in the past two trade balance releases and, if infrastructure spending ramps up as expected, industrial metals will see a return to favour. It is very likely, considering China will need to grow at around 7% to maintain the status quo.

Ahead of the Australian open

The volatility for the ASX will not end today. BHP Billiton and Rio Tinto were given a bath in London and the slide in copper will see materials feeling the pinch once more. Yesterday also saw the largest one-day move to the downside in Commonwealth Bank of Australia since 22 September. However, the rally in crude at the close of US trade means futures are moderating the losses and we are therefore only calling the ASX down 18 points to 5335. Watch for a pop in the energy sector – it is due.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

Find articles by analysts

Een artikel zoeken

Form has failed to submit. Please contact IG directly.

  • Ik wens per e-mail informatie van IG Group bedrijven te ontvangen over handelsideeën en IG's producten en diensten.

Voor meer informatie over hoe wij uw gegevens mogelijk kunnen gebruiken, bekijkt u ons Privacy- en toegangsbeleid en onze privacy website.

CFD’s zijn complexe instrumenten en brengen vanwege het hefboomeffect een hoog risico mee van snel oplopende verliezen. 79% van de retailbeleggers lijdt verlies op de handel in CFD’s met deze aanbieder.
Het is belangrijk dat u goed begrijpt hoe CFD's werken en dat u nagaat of u zich het hoge risico op verlies kunt permitteren.
CFD’s zijn complexe instrumenten en brengen vanwege het hefboomeffect een hoog risico mee van snel oplopende verliezen.