Last week, the Australian stock market managed to bounce back from February 10 lows and make a 286pt gain. That’s a very welcome 6% increase. But it got me thinking about the extreme volatility we’ve been experiencing in the markets and what’s helped create this pause in the selling madness.
As Taylor Swift was rather persistently asking me on my evening drive home, “Are we out of the woods, yet?”.
In the last few weeks we’ve seen immense selling from “macro” traders. People who take a “top down” (or helicopter view) of things, and who appeared to believe the world was coming to an end. One major brokerage recommended clients “sell everything”. And guess what, they did.
The thing was, we’ve had above average volumes on the Australian market over the last 2 weeks, with around $5.5b of share value trading hands each day, up from the usual $4.5b. This is solid buying. It looks like local investors or “real money” have stepped up, and like the look of 11% dividend yields from some of the main blue chip companies in Australia. But are share investors exhibiting irrational exuberance?
In her song, Taylor Swift suggested that last December, is when we were built to fall apart. Turns out in investment market terms at least, she was right. The US Federal Reserve boldly lifted interest rates last December, and suggested a further four increases in 2016. This interest rate prediction from the Fed, lifted the US dollar higher, and pushed commodity prices lower. Oil fell from a $40 level, to sub $30… exposing a number of oil market related vulnerabilities along the way. This brought us to our market lows on February 10.
If we check in now with bond markets, US 10 yr bond yields have lifted from their 1.53% lows, to 1.75%. Bond markets have liked recent comments from Federal Reserve Chair Yellen which suggested a more gradual path to lifting rates. Australian rates have had a similar reaction, with a lift from 2.35% to 2.5%.
Renewed confidence in bond markets has seen interest rate curves “normalise”. Normal curves suggest a more logical world economy; where longer bond maturities are subject to more risk, and investors want to be compensated for that. Hence the higher longer term rates.
We are moving through reporting season with gusto. Australian companies are not just logging profit increases (which have historically come from better cost control); rather we are seeing signs of real revenue growth. This could be viewed as confirmation that economic and business conditions are far better than previously feared. Could the lower Australian dollar finally be helping? Perhaps low interest rates and a low oil price are leaving more cash in the consumer’s pocket, leaving them with more money to spend?
Australian stocks are finally getting some mostly positive volatility. With better than expected results, especially from companies linked to the domestic economy via housing or consumer sectors – the real economy is showing resilience. As Taylor finally sums up, we might be finally “in the clear ”. Good.
