Will market volatility rise in September?

Volatility

Should we expect a potential rise in market volatility in autumn? History suggests yes. Meanwhile, numerous UK large-caps are battered into multi-month lows.

Key Events:

  • US Unemployment Rate
  • ECB Meeting next week

Viewpoint

Autumn has always proved to be a turbulent period for CFD traders and the markets. Many crashes flared up in September and October. A quick look at FTSE 100’s historical monthly returns justifies this view. The two calendar months that exhibited negative returns are June and September, with the percentage of positive monthly returns (‘Hit Rate’) in the forties. Based on this chart we can expect market volatility to rise in the next few weeks.

With that in mind, it is not surprising to see the FTSE 100 struggles to maintain its post-March rally. Perhaps investors are already anticipating the September Effect? The large-cap index is encountering selling pressure near 6,400 and each reaction low seems to be progressively lower. A rebound off that psychological 6,000 is needed to reaffirm the overall recovery pattern.

Why is the FTSE 100 weak?

To answer that I flick through the FTSE 100 constituents – and the answer appears to be the fact that the index is dragged by a number of heavyweights such as GlaxoSmithKline (GSK).

In a pandemic the healthcare sector should – theoretically – show at least some outperformance. Not so. Glaxo’s rebound ran out of steam in early May at 1,700p and has been trending lower even since. The week past saw this decline accelerated into the March lows (see below).

Meanwhile, HSBC (HSBA), Vodafone (VOD), Standard Chartered (STAN), Lloyds (LLOY), BP (BP/) and Royal Dutch Shell (RDSB) are heading persistently lower. It seems the bulls have deserted these large caps in droves.  Only the commodity sector is holding up the FTSE.

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UK House Price Up!

News have come through this morning (2 Sep) that UK house prices are rising at the fastest clip in history and that the average house price is £224,123 – the highest level ever. This is somewhat surprising, to be in mildly. With mounting job losses, the natural instinct is to expect lower house prices. In defying this expectation, the housebuilder sector have soared today, as investors scramble to reassess their prior negative assumption

Barratt Development (BDEV) jumped 8%; Persimmon (PSN), Redrow (RDW), Berkeley (BKG) all rebounded 4%.  These rallies reaffirm the sector’s recovery rally, although surpassing their 12-month highs may need more sustainable positive news.

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Cable near 52-week highs

Lastly, Pound Sterling is making headlines for forex trading this week as cable reaches the highest level in months. The rate’s post-lockdown recovery has caught many by surprise. Why? This is because the UK economy has suffered more than other countries during the pandemic. Bad economic performance = weaker currency.

However, what the Sterling bears failed to anticipate was the massive US QE during March-June (see last week’s article). This resulted in a sharp depreciation of the USD. At this rate of quantitative easing, cable may even challenge the 2018 highs, although I have to say its current rally is overbought and vulnerable to corrections.

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