Market volatility update


Market price action reflects several factors addressed below. The danger in the short term is that negative price momentum dominates any fundamentals, leading to outsized moves in equity and credit markets that, in turn, will threaten a change in the economic outlook. Under such a scenario some response from central banks cannot be ruled out.

Drivers of market turbulence include:

  • Change in outlook on US and global economy coming from weaker data, especially softer non-farm payroll growth in the US and the rise in the unemployment rate. This has been expected for some time but the increase in the unemployment rate is now threatening to signal a potential recessionary period in the US.
  • Disappointment that the Federal Reserve has not already cut interest rates, especially given that the ECB, the Swiss National Bank and the Bank of England have already eased in response to lower inflation.
  • Political uncertainty in the US in the wake of Joe Biden’s withdrawal and narrowing of Donald Trump’s lead in opinion polls.
  • Geopolitical tensions especially in the Middle East where a fully-fledged conflict between Israel and Iran cannot be ruled out.
  • Profit taking in the equity of technology companies in the US, partly because of some disappointments over Q2 revenues and earnings, although they have generally remained strong. However, a broader economic slowdown and more cautiousness amongst corporates could hit investment spending on artificial intelligence, which has been a big driver of technology stock performance.
  • Generally, S&P 500 earnings have been solid but not spectacular, leading perhaps to some reining in of expectations for coming quarters.
  • Summer trading conditions and poor liquidity could be exacerbating market moves.
  • Recent strengthening of the yen leading to covering of short positions, perhaps triggering sales of some higher carry assets.

What would help from here?

  • Fed rate cut before the 18 September meeting or at least a strong signal about easing from Fed officials.
  • Other central bank action.
  • Reassessment of the economic data – the US is not in recession yet.
  • Easing of Middle East tensions, with a ceasefire between Israel and Hamas.

Typically, we would look to central banks to restore market calm. It is not unusual for August to see this type of volatility. The underlying fundamentals for the global economy are fine, as recently expressed by the IMF. Even the weakening of the US labour market must be put in context – job openings rose recently, payroll growth is still positive, the unemployment increase may reflect temporary jobs.

However, short-term, uncertainties will drive risk-off positioning which should be to the benefit of government bonds, high quality credit and currencies like the Swiss franc and the yen.

    Disclaimer

    This website is published by AXA Investment Managers Australia Ltd (ABN 47 107 346 841 AFSL 273320) (“AXA IM Australia”) and is intended only for professional investors, sophisticated investors and wholesale clients as defined in the Corporations Act 2001 (Cth).

    This publication is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

    Market commentary on the website has been prepared for general informational purposes by the authors, who are part of AXA Investment Managers. This market commentary reflects the views of the authors, and statements in it may differ from the views of others in AXA Investment Managers.

    Due to its simplification, this publication is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this publication is provided based on our state of knowledge at the time of creation of this publication. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.

    All investment involves risk , including the loss of capital. The value of investments and the income from them can fluctuate and investors may not get back the amount originally invested.