Seasonal trends point to higher volatility
Spotting seasonal trends can be very useful in analyzing financial markets. They can tell us what has happened over the course of many years, and what may potentially occur again over the same period of the year. The past is not necessarily a guide to future trends, but historical data can be extremely beneficial.
Empirical research shows that stock markets have a tendency to underperform through the middle part of the year. The “sell in May and go away” motto does have some validity. In turn, volatility tends to increase which means safe haven currencies like the yen and the Swiss franc generally tend to outperform. One way to measure volatility, the VIX index is often called “Wall Street’s fear gauge”. This tends to see its largest monthly rise of the year in August and remains elevated through to the Autumn months. Sure enough, the VIX has climbed by 50% to almost reach the 25 mark, while the futures contracts for US equities point to another day of declines on Wall Street at Thursday’s open.
The current state of play in markets sees competing forces battling with each other as we head into high summer. Questions are being asked as to whether we have hit “peak growth” with US expectations recently being marked down. The spread of the Delta variant, across Asia especially, has seen new social restrictions in China.
Meanwhile, speculation around the US Federal Reserve’s exit from emergency stimulus measures is heating up. The world’s most powerful central bank is edging closer to a decision on slowing its quantitative easing asset purchase program. Will that provoke another “taper tantrum”? Certainly, the narrow leadership in the recent US stock market gains makes the market more prone to a correction.
For FX markets, we have already seen strength in those two safe haven currencies over the last month. With recent Chinese regulatory actions spooking markets, we may yet see heightened market volatility in equity markets going forward. Interestingly, the yen is now at its strongest (negative) correlation with the S&P500 in over a year which suggests a possible sustained bout of appreciation if the seasonals we have highlighted play out.
Oil has been another asset which has suffered a bumpy ride recently too. Having regained its poise into the end of July, Brent oil futures have tumbled by almost 12% so far in August. The key concern for the market remains the spread of the Delta variant in China and the tougher mobility restrictions that have been imposed in some regions. Asian vaccination rates remain relatively low so how this situation evolves in the near term will have a big say on oil demand. Recent economic data out of China, the world’s largest crude importer, is also showing signs of slowing.
Earlier this month, Saudi Arabia released their official selling prices for September loadings. These were increased as widely expected and comes at a time when OPEC+ members are gradually increasing output. This does suggest that the Saudis have some confidence that demand will be present to take up this additional crude oil.