Market analysis: volatility is here to stay

Amid all the market volatility experienced last month, several key market trends began to take shape. This month heightened levels of volatility will continue, with several of these market trends maturing over the course of November.

Perhaps one of the key developments emerged out of Europe during the most recent European Central Bank (ECB) policy meeting. Although there were no changes in lending rates, it was the rather dovish comments from the president Mario Draghi which resulted in euro crosses dropping across the board. Noting the potential for future downside risks as a result of the slowdown in emerging markets and commodity markets, Mr Draghi left the door wide open for future monetary accommodation for the euro zone. Now the markets can fully expect some form of accommodation to be introduced during their next meeting in December. The economic data out of Europe remains extremely fragile, with several key indicators showing no signs of upward traction. Euro-zone inflation returned to zero per cent (from a previous reading of -0.1 per cent), unemployment remains elevated at 10.8 per cent and growth in the second quarter was a meagre 0.4 per cent. The release of the third quarter GDP reading on November 13 will be the final piece of the puzzle before Mr Draghi has all he needs to unleash another round of quantitative easing measures when the ECB next convenes on December 3.

During this next policy meeting we expect the ECB to increase the current €60 billion a month asset purchase programme or extend the current programme, which is set to expire in September 2016. A third policy option, which includes cutting European lending rates remains a possibility, albeit unlikely.

Despite the rather bearish sentiment weighing down euro crosses, we do not expect any further major downward moves through the month ahead and expect the euro to consolidate at its current levels. Following Mr Draghi’s announcement the euro sold off more than 200 points against the US dollar and has since found a support at 1.090 levels. Next month’s announcement is priced into EUR-USD, and therefore expect good support coming in at 1.081 levels in the month ahead with upsides capped at 1.14.

Across the pond, it is another key month for the US data docket before the federal open market committee (FOMC) convenes for the respective rate meeting on December 16. We saw the Fed hold rates during its last policy meeting in September, and since then expectations for a hike next month have increased to 50 per cent. Any improvement in US data during this month will continue to build this expectation.

We maintain our stance that the first hike will materialise in the early part of next year and December still is too early – especially considering the slower than expected numbers from the US last month.

September’s payrolls were disastrous and third-quarter US GDP came in lower than expected at 1.5 per cent (1.6 per cent expected/3.9 per cent previous). A closer look at this number shows the drop as a result of a combination of factors – personal spending and consumption decreased during last month and a large liquidation of US inventories (which affects business expenditure, a key component of GDP) also weighed the number down.

Because of the uncertainty surrounding future Fed action, any improvements in US data will involve weakness in the greenback and vice versa. November’s payrolls data, due out on Friday, will lend weight to this. Expectations are for a gain of 180,000 new jobs during the month – and despite the improvement over September’s report – it is important to note that the figure falls well below the monthly 2015 average of 197,000.

Along with the labour force participation rate, we will closely monitor any revisions to September’s figure to see if there is any true traction in the US labour market.

Besides the monthly payrolls, inflation data on November 17 will be key in driving market volatility and determining the likelihood of a rate hike this year.

Gaurav Kashyap is the head of futures at AxiTrader ME DMCC.

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