Market volatility takes a holiday in August

21 September 2016

Market volatility takes a holiday in August

August is a holiday month in much of the northern hemisphere, and it looked like it on the US equity markets. Trading went on as usual, but the markets dozed, at least in terms of volatility. The S&P 500 Index did not record a move of 1 per cent (in either direction) on any day in August - as indeed it did not for much of July – marking the longest stretch of low-volatility since the summer of 2014.

Quiet month on markets

Late in the month, Bloomberg reported that if you went back 30 trading days, the S&P 500 had traded in a range of 1.5 per cent, the smallest range since 1965. At an average of 12.29, the Chicago Volatility Index (VIX) was trading lower than any August since 1994.

Behind the tranquil exterior, bullishness is building. Net long positions in futures contracts linked to the S&P 500, Nasdaq 100 Index and Dow Jones Industrial Average reached in August their highest level since 1986, according to Commodities Futures Trading Commission (CFTC) data compiled by Sundial Capital Research Inc. That appears to be driven by the pension-fund side of the institutional investor population – as opposed to the hedge funds.

If history is any guide, the calm of August will not last. September is historically the worst month for US stocks: the only month in which the median return for the S&P500 is negative, on data going back to 1928, according to Bank of America Merrill Lynch.

US interest rate outlook continues to confuse

Markets were again fixated in August on the US interest rate outlook. Late in the month, Fed Chair Janet Yellen delivered a hawkish statement at the central bank’s annual retreat, saying the case for an increase in the US federal funds rate had strengthened in recent months, "in light of the continued solid performance of the labour market and the central bank's outlook for economic activity and inflation."

For the second straight month, US jobs growth was impressive, with a rise in non-farm payroll jobs of 255,000, according to the July Department of Labour Employment Report. June and July delivered a total of 547,000 new jobs, representing the highest two-month total of 2016. June’s revised total of 292,000 jobs was the best month for jobs growth since October 2015. 

Not surprisingly, US consumer confidence rose to an 11-month high in August, on the back of a more upbeat feel to the labour market. With that and other data – new home sales were up 12.4

per cent in July, to a nine-year high – sentiment firmed in August around the prospect of a US rate rise in September, but the August jobs report, released September 2, disappointed, and pushed the timetable for a rate rise out to December at the earliest.

Where else but shares?

In the meantime, investors digested the sobering news that there was now about US$13.5 trillion of global bonds offering negative yields, according to Bank of America Merrill Lynch. That compared to US$11 trillion before the Brexit vote in June, and barely any with a negative yield in mid-2014. Apart from gold, the stock market still looked to many investors like the only place for cash.

The US markets did little on the index front in August, with the Dow Jones Industrial Average (DJIA) eking out a 0.3 per cent gain, the S&P 500 even underwhelming that with a 0.1 per cent rise, while the technology-heavy Nasdaq Composite index managing at least to muster a 1.2 per cent fillip, including its first new record close in more than a year.

In Europe, where both economic growth and inflation remain torpid – and forecasts for growth were trimmed again – the Euro Stoxx 600 index managed a 0.5 per cent lift for the month, driven mostly by Germany’s DAX Index, which gained 2.5 per cent. In Paris the CAC-40 in Paris was virtually steady, while the MIB Index in Italy gained 0.6 per cent, despite the gloomy headlines of Italy’s ongoing banking crisis.

In the UK, the FTse-100 index added 0.9 per cent after the Bank of England cut interest rates and announced an aggressive plan to buy bonds to bolster the economy after the Brexit vote. UK manufacturing PMI data recorded its biggest monthly increase in a quarter of a century for August, as production and new orders rebounded sharply.

In Asia, Hong Kong and China saw the biggest advances, with the Hang Seng gaining 5.2 per cent for the month and the Shanghai Composite index up 4.1 per cent. Japan’s Nikkei benefited from expectations of more central bank activity and rose by 2 per cent. The Bank of Japan will announce the results of its comprehensive review of its monetary policy on September 21 – the same day as the Fed rates decision.

In Australia the S&P/ASX 200 Index shed 1.3 per cent over the month, hampered by lacklustre growth in earnings and dividends over the Australian reporting season, and mostly conservative outlook statements from companies.


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