Weekly Market Recap

Volatility creates opportunity

21/09/2020

Week in review

Australian unemployment rate falls to 6.8%
U.S. implements average inflation targeting framework
NZ Real GDP contracts 12.4% y/y in 2Q.

Week ahead

Australia retail sales
U.S. PMI for services and manufacturing
European PMIs for services and manufacturing

Thought of the week

A by-product of central bank action since the global financial crisis (GFC) and the provision of liquidity to aid financial stability has been lower levels of volatility in the equity market. Volatility on the S&P 500, as measured by the VIX Index, hovered in the low teens in the years following the GFC. But earlier this year spiked to its highest levels since the GFC and remains relatively high compared the past few years. Volatility in bond and foreign exchange markets, by contrast, has fallen back. Why the divergence? There are clear event risks on the horizon, such as the U.S. presidential election and the timing around a vaccine, but other factors are also at play. The increasing share of individuals trading the market may be one. The chart below shows the sharp rise in individuals trading in the U.S. equity market this year This may be more flighty money that is moved with hearts rather than minds. However, volatility creates opportunity.

Another reason to expect more volatility in equities
Individual share of U.S. equities trading volume

Source: Bloomberg Intelligence, J.P. Morgan Asset Management, all returns in local currency unless otherwise stated.
Equity price levels and returns: Levels are prices and returns represent total returns for stated period.
Bond yields and returns: Yields are yield to maturity for government bonds and yield to worst for corporate bonds. All returns represent total returns. AusBond Comp is the AusBond Composite 0+ Yr, AusBond IG is the AusBond Credit 0+ Yr both provided by Bloomberg.
Currencies: All cross rates are against the Australian dollar. An appreciation of the foreign currency against the Australian dollar would be positive and a depreciation of the foreign currency against the Australian dollar would be negative.

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