Week End Blog – Volatility, back with a Vengeance!

At the beginning of the week The Wall Street Journal sent this graph out into the world. It showed that in recent years the number of days that the S&P 500 index closed up or down by 2% or more has been pretty low. Looking back on this week, we added just one of these days, but it sure felt like there were more. Volatility returned with a vengeance.

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In equity markets volatility doubled compared to early September. As always the market which experiences the biggest spike, is hit hardest. Fading economic growth and the ‘rebirth’ of peripheral risk pushed European stocks down, hard.

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At one point European stocks were down roughly 15% since the beginning of September. Other indices fared better, but also experienced a serious sell off.

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And who would have thought that this chart would haunt markets, once more? A ‘plan’ (if it fits that description), laid out by the Greece government, to make an early exit from its bailout program backfired completely, sending the 10-year bond yield to 9%, briefly. Meanwhile early elections could prove to be a risky exercise with a possible win by the Syriza party. Expect more fireworks from Greece if that happens.

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The return of volatility was widespread. Just take a look at the MOVE index. Government bond volatility has spiked as well.

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Last Wednesday is a day to remember. Within one hour the yield on the 10-year Treasury bond collapsed from 2.15% to 1.87% as investors piled in to bonds. I watched it live…it was pretty intense. We’re back to 2.15% now. To read more about what is going on in the US bond market click here.

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As the previous chart showed, the German bond yield took a dive as well. Meanwhile, the comparison with Japan gets a little bit awkward. In fact the German 10-year yield fell at a faster pace than that of Japan in the nineties.

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So what caused all this anxiety? I guess it was a cocktail of negative news items. After the IMF confessed the economic outlook remains pretty gloomy and some US data disappointed last week, the German government decided to join the ‘party’. It slashed GDP growth forecasts for this and next year.

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Then, the UK CPI numbers gave the deflation-story another impulse. UK inflation came in at the lowest level in five years.

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Not much later industrial production in the Eurozone also disappointed. But things got really going when US retail sales were weak across the board. A 1.87% bond yield was the result.

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But the darkest hour is (almost always) just before the dawn. US initial jobless claims fell to the lowest in 14 years, yes 14 years, in a sign the labor market is still steadily improving.

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Not much later industrial production numbers beat expectations as well. Production rose 1.0% in September, against 0.4% expected, and capacity utilization rose to another new high. The American economy proved to be resilient, once more. Don’t push that first rate hike out that much, yet.

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However, the positive end to the week could, of course, not prevent some serious losses for investors. But to put things in perspective, and to end on a positive note, if you still have USD 3650 of wealth lying around somewhere, you remain in the top half of the world’s most wealthy people.

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That rounds up this Week End Blog. Enjoy your weekend!

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