Risk assets still wobbly amid elevated volatility

Risk assets stayed jittery on Thursday with the local market unable to sustain much of a bounce. Picture: AFP

Risk assets stayed jittery on Thursday with the local market unable to sustain much of a bounce despite strong rebounds on Wall Street, although a late fade in the “hour of power” was indicative of ongoing US jitters.

With the S&P 500 surging 2.8 per cent overnight, Australia’s S&P/ASX 200 index opened up 1.3 per cent but only managed to close up 0.5 per cent as US futures turned down.

Share prices of a range of major Australian companies came off significantly from their intraday gains and the four major banks, Fortescue Metals and a number of property trusts closed in the red. S&P 500 futures tumbled 0.6 per cent in early European trade and the main European bourses traded lower before the outcome of the European Central Bank meeting, where the latest thinking — based on reports that ECB officials were more confident in their recent economic forecasts — was that the central bank wouldn’t add more quantitative easing.

Crude oil prices were still looking shaky, with WTI futures down 1.2 per cent in European trading after Tuesday’s 7.6 per cent dive, and London Metal Exchange copper futures fell 2.2 per cent.

With the VIX index of S&P 500 futures volatility remaining at elevated levels around 30 per cent, after falling from 85 per cent in March to almost 20 per cent by August, risk assets could well be hit by further position adjustments by risk parity investors reacting to the higher volatility in the short term.

As well as geopolitical risks from rising tensions with China, worrisome second waves of coronavirus in European and developing nations — with Jakarta now returning to lockdown — and some doubt about coronavirus vaccine safety coming on top of Victoria’s extended lockdowns, there’s a high degree of political uncertainty before the US election and doubts about whether next week’s Federal Reserve meeting will offer any new stimulus to backstop asset prices amid disappointing delays on the much needed third round of US fiscal stimulus.

But it won’t be long before the reality of effectively zero or negative interest rates will force investors — particularly those who have been underweight since February — to start buying equities again.

Bell Potter’s head of institutional sales and trading Richard Coppleson notes that when the Australian sharemarket rises at least 16 per cent in a quarter — as it did in the June quarter with a gain of 17.5 per cent — it tends to keep rising in the following two quarters.

Looking back over time he found the All Ords has risen at least that much in 10 quarters in the past.

In nine of 10 of the next quarters it went on to rise by an average of 5.8 per cent.

Excluding the quarter following the 1987 crash, when it fell 41 per cent after an exceptionally strong rise of 27.5 per cent in the preceding quarter, the average gain the next quarter was 11 per cent.

And two quarters on from a quarterly gain of at least 16 per cent, the index also rose 90 per cent of the time, by an average of 3.8 per cent. So far this quarter it’s up just 1.5 per cent.

While there’s “no need to rush in just yet”, Coppleson says the historical pattern indicates that very strong quarterly gains have, almost every time, precipitated another strong quarter.

“When the bulls dominate, they tend to keep winning for a while before the steam runs out,” he says. “You get pullbacks but they merely become buy points for the bulls to go again.

“In these situations many have cashed up and are missing out, so any decent pullback will be quickly bought and the market will resume its upward trajectory, albeit at a much slower pace.

“Despite all the negative noise after a big rally, the market tends to go on with it for six months after the initial powerful surge.”

But for now, Coppleson says institutional investors are likely to stay sidelined. “Most know that this is not over yet.”