Investors bought the dip overnight, but many are still asking the question if the volatility is over. The Tech rally that saw US markets rise this far has lost its steam. So, to achieve a healthy move higher in the US we would like to see further rallies in other sectors. Short term though it is likely we will see the US market whipsaw around here coming into the elections.
10-year bond yields rose as money came out of bonds and flowed back into equities. The USD rose as did Gold and Silver. Crude rebounded and other base metals were mainly higher. Iron Ore fell back a little to $126 US. These movements across all markets reconfirm a positive sentiment towards equities.
Locally Australia’s relationship with China is still very uncertain as we see a Chinese firm walk away from a deal with Lendlease. This is a flow-on effect from tensions created by calls for an independent inquiry into the handling of the Coronavirus. The damage here will only fully be realised when the economy reopens. If this continues we may see other industries affected including tourism and universities. But with borders still closed, that is something to worry about next year.
Australian Outlook
With strong leads from both the U.S trading last night and their futures this morning, our market is set to have a strong rally, opening near the 5950 level.
Yesterday we managed to just hold the key support around 5900. It could appear that we are creating a very short term, very shallow downtrend. This is characterised with lower consecutive peaks and troughs with the break of the broader uptrend line. With the hold of key support though, it is more likely that the broader channel is holding and in fact the dominant pattern.
In addition, world markets have been mainly moving on the back of U.S moves. The initial fall in our market was due to a correction in the tech sector. It flowed through to all other sectors and resulted in a sharp sell off. Equally, the expected recovery today is largely a reflection of the U.S last night.
With volatility returning to markets, traders should be malleable on their broader view. This could be the early signs of a changing market from sidewards to trending, or it could just be a volatility event that fails to shift us from the broad channel. The coming week should provide further insight.
US Markets
US shares rebounded overnight, with the tech heavy NASDAQ index enjoying its strongest day since April. The major S&P 500 index also enjoyed some significant gains, but it is worth keeping in mind that implied volatility as measured by the VIX index remains elevated.
US markets now look towards some pretty important data releases, with jobless claims tonight followed by inflation numbers tomorrow. Overnight every major sector division rose, with tech and basic materials stocks the strongest. Telecoms and oil & gas stocks were the weakest performers, but still finished ahead on the night.
Tim Michaelides is the Head Trader at Emerald Financial Group.
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