Investment update 7 May 2018

Last week in the markets

Over the past week Australian shares were up 1.8% with small company shares moving up 2.9%. Shares in developed countries fell 0.3% with the US market down 0.2%. Shares in emerging markets were 1.7% lower. The Australian dollar fell 0.6% to 75.39 US cents. The Australian 10-year bond yield fell to 2.77% while the US 10-year bond yield was down slightly to 2.95%. The oil price rose 2.4% to 69.72 US dollars per barrel.

Low volatility, despite the news headlines

Despite the news headlines, volatility in share markets is reasonably low. Volatility is a measure of how much markets move up and down over a period of time. When we say ‘low volatility’ we mean markets have been relatively stable.

The chart below, produced by the Reserve Bank, is one measure of volatility^. It charts volatility over the past 10 years or so.

Graphs sourced from the Reserve Bank of Australia, Statement on Monetary Policy (May 2018).

When we look at the chart for equities (shares) we can see the episode of high volatility which broke out early this year, driven by concerns around increasing interest rates, trade wars, and aggressive talk between the USA and North Korea.

This has now largely subsided and the volatility in share markets is back below its long-term average (the dotted line). The other major asset classes, bonds, currencies and commodities, were barely affected and are all below their long-term averages.

So are markets currently complacent? While things look to have settled down recently in North Korea, there remains many other concerns such as increasing interest rates, trade policy, debt levels and a range of geopolitical risks. It wouldn’t surprise us at all if there were some further episodes of high volatility over the next year or two.

Signing off

David Bell | Chief Investment Officer

^ Volatility of different asset classes using movements in the price of derivatives. It can be thought of as a measure of the “price of risk”.

Past performance isn't necessarily an indicator of future performance.

Data sourced from Bloomberg and the Reserve Bank of Australia. Graphs sourced from the Reserve Bank of Australia, Statement on Monetary Policy (May 2018).