Continuous small gains in the US drive volatility to pre-August-2015 lows, ASX futures up 11 points

When anticipating its potential length and depth, my favourite comparison period for the 2015 market volatility that we're recovering from was always the 2011 European debt crisis, mostly involving the inability of Greece, Portugal, Ireland and Spain to pay their debts, which precipitated big falls on European stock markets, as well as desperate attempts to save companies with short-selling bans etc. It was also the year that the US credit rating was cut from AAA to AA+, which it had held since 1941. This was a significant patch of uncertainty, because we saw a genuine liquidity crisis emerge in Europe alongside some big moves in currency and precious metals markets. Fast forward to 2015 and, while dynamics like the strength of the US dollar, Chinese currency intervention and continued falls in commodities are easy negatives to identify, there was an absence of the brand of systemic risk that usually throws the world into a tailspin. But while the two sell-offs were predicated on different factors, the market volatility that they threw up were quite similar.

In today's first chart you can see the medium-term period of volatility that we've just descended from, which lasted from about mid August 2015 until mid March 2015, a period of seven months. In the second chart you can see the 2011 patch of volatility circled first, which lasted from June 2011 to March 2012, slightly longer than what we've just endured. You'll also see, however, another little spike in mid-2012 before a period of smooth sailing was sustained for the next three years. This spike was a practical little hangover from the peak of the European debt crisis, so it's not as though anyone should expect history to repeat itself when we're dealing with a different set of circumstances. But if I were to guess what might bring back a little 2016 volatility hangover from last year, I'd guess it would be more currency wars between the US and China.

Recent comments from the boss of the People's Bank of China, Li Keqiang, suggest that China is done with surprise currency devaluations, and will use other means to support exports. I would imagine that this will only stand up while the US dollar keeps a lid on its strength; on the other hand if the US dollar begins to trend higher once again, the yuan will be dragged with it and I would imagine that China will use than as an excuse to revisit the fix rate that it has on the USD. China knows that its unpredictable moves with its currency will fuel capital outflows from the country and knows that this is bad for domestic investor confidence, so it won't want to have to shock markets with further devaluations if it doesn't absolutely have to. Probably the biggest threat to this is US political outcomes in a general election year.

Like me you might find US political commentary from an Australian observer a little superfluous, but I'll throw in my two cents' worth and say that even if Trump managed to win the general election, his baseless campaigning on import tariffs as a threat against Chinese currency intervention and 'bring jobs back to America' etc. would result in a level of price inflation that would starve America's economy. I'm not sure why any of his political opponents haven't asked him what the cost of a US-made LCD TV is or whether Apple has jumped at the chance to endorse his views so it can stop using cheap Chinese labour, but these things will come to the fore when the primary election is over, and if Trump is still in the race at that time he will probably then tone down his fantasy economic policies. So to conclude, if Trump ever gets a chance to work with the economic modelling staff at the US Department of the Treasury, he's not going to be able to pick the kinds of economic fights with China that might prove disastrous with regard to currency wars. 

To summarise last night, the three major US indices were up less than half a percent, Europe was marginally lower, iron ore looking good at US$58.82 per tonne (up 2.3%) and we've got UK CPI out tonight at 8:30pm Sydney time. 

Source: Rivkin, Saxo Bank

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This article was written by Scott Schuberg, CEO - Rivkin Securities Pty Ltd. Enquiries can be made via or by phoning +612 8302 3600.

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