August was characterised by unusually low volatility in the stock market
For most of August the volatility index (VIX) for S&P500 moved in a range between 11 and 13. Normally, this figure is between 13 and 18. The interest market was also marked by low volatility, where it was possible to observe almost unchanged long interest in Europe and the USA.
This was due to the fact that the economic data for Europe and the USA was generally as expected throughout August. Even though Nonfarm Payrolls disappointed in the USA at the start of September, the market has not regarded this as significant because the figures for the previous month were relatively strong.
Nevertheless, there are many reasons why this could be the calm before the storm. Firstly, we have the American presidential election, which in itself can cause greater volatility for American stocks and interest rates in particular. Secondly, the American data looks like it will improve greatly over the coming months, which can cause higher interest expectations and therefore greater volatility for the stock market. Thirdly, our models show that the leading indicators are on their way up in the USA, Europe and Japan. This will be a much-needed change from the past many years, where leading indicators have been slow but continuously falling. Fourthly, energy prices – as discussed in several previous monthly reports – will bring about a greater positive net contribution to overall inflation figures in the space of just a few months (culminating in early 2017), giving rise to concern that the bond markets will be exposed to a greater shock at a time when very low inflation is priced into the long-term rates.
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