March witnessed a dramatic fall in equity market volatility compared to the first two months of 2016.
However, don’t expect the lower levels of volatility to continue says George Lucas, managing director Instreet Investment.
“The US earnings season begins in earnest next week, which is why I don’t think volatility will remain low. Earnings have already been revised significantly lower and priced into the market in late January and early February. However, markets could still respond negatively,” he added.
“The slight drop in volatility was driven by a number of factors including expectations the US Federal Reserve will be slower to cut rates than was originally thought in December 2015.
“Also coming into play were announcements from the European Central Bank, the weaker US Dollar and stabilisation of the Renminbi.
“Stability in the Renminbi has reduced fears that China may devalue. Capital flows out of China have also eased as foreign investors are pulling money out of Chinese securities and Renminbi deposits at a slower pace. Hopefully this indicates that foreign investors are less bearish on China.
“We also need to remember that Chinese firms paying down offshore debt were responsible for a lot of the outflows during the past year, which is not necessarily a bad thing.
“The US Dollar, whilst weaker overall, did experience a rally to recoup some ground against the Euro, Yen and Renminbi.
“The rally has put pressure on commodities prices again, bringing an end to the recent rally in oil, for example.
There is a lot of data due out of the US this week, which will be closely watched to see if it supports the Fed’s recently dovish stance.
One of the key pieces of data is the March employment figures for which we are anticipating a more modest 180,000 gain in payroll employment and a 0.4% m/m snap back in average hourly earnings. Average earnings will be closely watched not only as a sign of strength in the labour market but also its inflationary impact.
The unexpectedly strong rebound in the regional manufacturing surveys indicates that the ISM manufacturing index in the US probably climbed back above the 50 mark this month. Looking across the data, we expect US Q1 GDP growth to be between 2.0% and 2.5% annualised.
Global PMIs will also be out this week.
Flash PMIs for major advanced economies suggest that manufacturing growth remained weak in March – with a slight rise for the euro-zone and US, and a fall in Japan.
