Equities continue to tumble; Volatility set to rise

15 September, 2016

Equities continue to tumble; Volatility set to rise

The global equity selloff resumed on Thursday with most Asian indices declining for the sixth consecutive day. Europe also opened in red as dropping oil prices and uncertainty over central banks policies kept investors on edge.

Concerns that the Fed will soon tighten monetary policy has been an excuse to keep cash off the table as investors want to get past the meeting on September 21st to adjust their portfolios. If we assume that the Fed will not hike rates next week, which we believe so, this could be interpreted as good news for riskier assets, but the focus will turn again to the Fed’s December meeting and this never ending debate will keep going on and on. The real question which should be asked is, what have the years of unconventional easy monetary policies by central banks done to the global economy? And the answer is simple, very little. U.S. economic growth is tracking at a 1% rate in 2016, the Eurozone is barely growing and Japan’s economy continues to struggle. This is likely to raise doubts on the effectiveness of future central bank actions, which is a major reason for volatility to resume in the months ahead.

It’s a busy day for the U.K. with Bank of England’s monetary policy decision and retail sales scheduled to be released today. Back in August the BoE cut its key interest rates by 25 basis points and increased asset purchases by 60 billion pounds with a new initiative to buy 10 billion of corporate bonds. Economic data since then has showed resilience with all PMIs nudging higher, retail sales increased rapidly (due to the pound slump) and unemployment remained unchanged at 4.9%. This would lead BoE to remain pat at today’s meeting, but sterling traders would need to know if the vote is going to be unanimous, and whether the statement is dovish enough to pull sterling lower.

Later today, traders focus will turn to U.S. retail sales after a very quiet week on the data front. Expectations are set for a slight improvement of 0.4% in retail control, a measure that excludes volatile items such as gasoline and auto sales. This won’t be enough to shift markets expectations on a rate move, but an upside surprise is likely to push the U.S. dollar higher.


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