Wild swings in markets to continue
Tracking the Australian sharemarket since the beginning of last month you could be forgiven for thinking you were looking at the design of Disney World's next big rollercoaster.
The local bourse has jumped 1 per cent, or more, on six occasions, and dived just as much another six times. In several instances the moves have been more than 2 per cent. This week it has moved 1 per cent, or more, every day.
The ASX Volatility Index (VIX), a measure of implied volatility on the Australian market, has jumped more than 17 per cent in that time, to 19.1. That's hardly surprising given the events investors have had to deal with.
In mid-May, US Federal Reserve chairman Ben Bernanke hinted that the central bank may begin to wind back its $US85 billion ($93 billion) bond buying program.
Most of this money was being fed into financial markets at such a dramatic rate that, in April, Mr Bernanke took notice.
"In light of the current low interest-rate environment, we are watching closely for instances of 'reaching for yield' and other forms of excessive risk-taking, which may affect asset prices and their relationships with fundamentals," he said.
This year alone, the Dow Jones Industrial and the S&P500 gained more than 17 per cent at their peak.
This had a flow-on effect to the Australian market, which jumped more than 12 per cent before falling 7.4 per cent to its present level.
Despite the tapering of quantitative easing being a sign that the world's largest economy was on the road to recovery, financial markets have been uneasy about having the money tap turned off.
"People are still unsure what the end of quantitative easing, or the withdrawal of stimulus globally, really means," Credit Suisse analyst Damien Boey said.
"One day people think it's great because they think 'the economies can handle that, we've reached a turning point in dealing with the slowdown'. On the other hand people think, 'it's going to trigger a slowdown'."
On top of that, Australian markets have been feeling the reverberations from China's shadow banking crisis. Last month interbank lending rates surged above 20 per cent as the People's Bank of China continued to clamp down on loose lending practices. Rates have since eased, as the central bank reinforced the message it would remain the lender of last resort, but continue to weigh on investor sentiment.
"There's a general aversion to Australia now because there's an aversion to China and people believe we're highly leveraged to that, which is true," Mr Boey said.
In the first four days of this week the VIX rose 14.5 per cent, fell 7.5 per cent, jumped 12 per cent and then fell 7.3 per cent, an obvious sign that investors are jittery.
"We have seen continued selling from overseas investors, mainly institutions, who are taking a negative view on the Aussie dollar," said Macquarie Private Wealth division director Martin Lakos.
What's important to note is that despite the increase in volatility, by historical standards it remains low. At 19.3, the VIX remains well off its peak of 64 reached in November 2008 after the collapse of Lehman Brothers.
"What we also need to take into account is that volatility has risen but central banks are still in there doing their bond purchases. So we haven't even seen what will really happen if they carry through with [tapering]," Mr Boey said.
Another factor behind the massive swings in volatility and on the sharemarket this week has been lower-than-average volumes.
"The first week of the new financial year is generally pretty quiet; investors just aren't active," Mr Lakos said.
"We saw a fair amount of algorithmic trading programs in the market and because the market is thin, those programs tend to exacerbate the trading range."
While large fluctuations on the local index are likely to mirror moves in volatility, it is important to remember that since the beginning of last month the ASX200 has declined 84.87 points, or 1.7 per cent. This month is expected to be heavily focused on economic data and events, with local companies in blackout mode before the August reporting season.
These numbers will help shape the direction of the sharemarket as they will reveal just how well the mining and non-mining sectors of the economy are coping.
"We do have a slowdown coming and regardless of what policymakers do, we will experience slower growth, the question is, do we go into recession or not?" Mr Boey said.
"Having said that, we have the room to ignite our economy with aggressive enough rate cuts and through fiscal spending."
Mixed sentiment about how successful the economy will be in changing gears has been one factor keeping buyers on the backfoot, brokers said, which has left the broader market exposed to foreign investor selling. Adding to the caution has been the dollar's slide in foreign exchange trading.
That slide has weighed on the stance of foreign investors, prompting much of their selling.
For domestic institutional investors, many are hamstrung because the new financial year has only just started and, for some, asset allocations for the year ahead have yet to be determined.
As a result, volatility may continue for a little longer yet.
The annual profit reporting season kicks off in the next few weeks and that may keep buyers hugging the sidelines a little longer, amid wariness of a further slowing in the economy, quite apart from the big picture abroad over the outlook for China, the US and Europe.