Market volatility is rising, hinges on economic deceleration

Volatility on global share markets, including the ASX, has been on the rise in June.

This is despite markets heading up since mid-March, and still being in the green this month.

Volatility Indexes are measures of the market’s expectation of volatility, measured by options prices.

The ASX200 Volatility Index rose 342 per cent between February 19 and March 18.

While it fell over the next few months, it has risen 17 per cent in the last fortnight.

A bumpy road ahead

Investment bank Stifel warned the road ahead wouldn’t be smooth for some time.

“We believe stock market volatility will continue until signs emerge that the outbreak has been successfully contained, massive widespread testing is available, or a medical resolution via a treatment or vaccine is near,” the bank said in a client note.

Stifel said the fall overnight could be attributed to investor concern about COVID-19 cases in some US states rising as restrictions were lifted — a similar situation to that seen in Victoria.

However, it believes lawmakers will give a higher consideration to the economy than they did last time.

“We believe the hurdle for reinstating lockdowns at this stage is higher, and officials will likely resort first to measures such as more strictly enforcing social distancing and slowing the pace of reopening,” Stifel said.

The bank said July would be a pivotal month which would hinge on economic data and earnings.

“Investors will focus on whether the increase in cases has the potential to overwhelm the healthcare system and whether consumer confidence is impacted and how this affects the economic recovery,” Stifel said.

“If economic data starts to decelerate again and earnings disappoint, this will lead to continued volatility.”