Equity markets bounce back

US equity markets rebounded on Tuesday, partially erasing the heavy falls from Monday night. By the close of trading on Tuesday, the Dow Jones Industrials had gained 567.02 points (+2.33%), while the broader S&P500 was 46.20 points higher (1.74%), closing at 2695.14. We should expect the Australian market to follow suit during today's trading session, with the ASX SPI200 futures gaining 99 points in overnight trading, to be currently at 5863. The local share market closed at 5833.34 on Monday, down 3.2%. This was the largest fall for the ASX200 in percentage terms since late September 2015. With the ASX200 closing at a 4-month low, rebounds from current levels will now encounter chart resistance just above current levels, between 5950 and 6000.

An interesting narrative over the past weeks has been how the sell off in US equities was the result of positive economic news, specifically an improving employment outlook. This sounds counter intuitive, in that one would expect equities prices to rally on positive news. Part of this is the relationship with inflation and thus interest rates. If indeed the US employment market is tightening, and economic growth outlook is improving, then inflation expectations start to rise. And with rising inflation expectation comes rising bond yields.

The chart below shows the yield on US 10 yr. bonds. As shown, yields have rallied strongly over the 3-4 months from a low or around 2.05% to current levels at around 2.84%. Looking slightly longer-term yields have now doubled since July 2016. Higher interest rates flow back to equities as many US companies post the GFC have fuelled growth by utilising debt at low rates. If rates start to rise, their interest costs will also rise, and potentially to a point where it becomes problematic for debt servicing.

Volatility levels have also been a major talking point over the past week, and with good reason. Following a multiyear period of very low levels, equity market volatility has made a resounding comeback over the past couple of trading sessions. As the below chart shows, the VIX index, has spiked from levels around 10 to above 30, before settling in Tuesday at 29.88, the highest level since 2015. 

The VIX index indicates the level of implied volatility across a range of S&P500 options. When put options are in high demand, in order to hedge downside risks, options premiums rise, and thus so does the VIX.

Complex product warning

This article contains information about foreign exchange contracts, which are considered complex financial products. Please click here to read ASIC's foreign exchange trading article before considering an investment in foreign exchange contracts. 

This article contains information about CFDs, which are considered complex financial products. Please click here to read ASIC's "Thinking of trading contracts for difference?" document before considering an investment in CFDs.
comments powered by Disqus

DISCLAIMER: Rivkin aims to provide clear and simple information to those visiting our website. If any part of this disclaimer does not make sense, please phone Rivkin and ask to speak with a member of our Dealing and Relationship Management Team. Rivkin provides general advice and dealing services on securities, derivatives and superannuation (SMSF). Rivkin also provide SMSF administration and accounting services. Rivkin does not provide advice that takes into account your, or anybody else's, investment objectives, financial situation or needs. We strongly suggest that you consult an independent, licenced financial advisor before acting upon any information contained on this website. Investing in and trading securities (such as shares listed on the ASX) and/or derivatives (such as Contracts for Difference or 'CFDs') carry financial risks. CFDs carry with them various additional risks that differ from more simple securities such as fully-paid company shares. Some of these risks include not owning the underlying instrument from which a price is being derived, settling trades 'over the counter' with a financial institution rather than on a stock exchange, and using leverage to gain access to trades that may have a higher face value than your initial deposit. This risk of leverage means that it is possible to lose more than your initial investment. Our aim is to create more life choices for our clients, which means improving the wealth of clients throughout many market cycles by nurturing a relationship spanning many years. If you are not comfortable with your understanding of the risks involved before using a Rivkin product and service, please contact our office to seek further information or a Product Disclosure Statement, or make an appointment to sit with one of our friendly financial experts. It is in our interest for your Rivkin experience to be a rewarding and comfortable one. Rivkin is a trading name of Rivkin Securities ABN 87123290602, which holds Australian Financial Services Licence No. 332 802.