The traditionally quiet month of August, when all good city folk should be sunning themselves on the Riviera, exploded into action.
Now that we have high-frequency traders running the show, allegedly supplying liquidity – which must be one of the biggest jokes perpetrated on a largely unsuspecting investment community – volatility has been eye watering.
From 23 August to 28 August, the Dow Jones Industrial Average moved up and down by a total of 5,612 points!
It has been the same story in commodities – notably oil, where Brent crude started the week around $46 a barrel got down as low as $42 and then traded above $50.
Bond markets, usually the safe haven when ‘things go a bit awry’ have also been in the eye of the volatility storm. The 10-year US Treasury yield fell below 2% to 1.9% on the Monday morning, but by Friday it was as high as 2.2%.
What on earth is going on?
The explanations are legion; Chinese devaluation, Chinese economy, Chinese stock market, but not according to China. Oh no!
As far as they were concerned it was about interest rate speculation in the US and the inability of the Fed to articulate their intentions without the customary obfuscation.
Quite so, and speaking of which, we have another ‘will they, won’t they?’ day to look forward to on Thursday, when Janet Yellen and Co meet to vote on interest rates.
I’d say any move is very unlikely, and I bet they are kicking themselves for not having taken the plunge earlier this year.
The topping action of the major indices, in particular the S&P500, doesn’t bode well. The 50-day moving average has crossed below the 200-day moving average, both of which are now falling.
One swallow doesn’t make a summer (although we could do with one before September is out!) but without some more significant central bank manipulation, capitulation on interest rate rises through to more QE, the efficacy of which is very much open to question, we can, at best, expect markets to go nowhere with regular bouts of volatility to maintain the apprehension.
So, what to do with portfolios?
The old ‘balanced portfolio’ approach of mixing equities and bonds with a couple of other assets classes may not be sufficient.
The Targeted Absolute Return brigade are doing quite well though, with only one unfortunate fund manager in the IA sector underperforming the UK equity index last month.
Some funds for consideration in this sector are: Church House Tenax Absolute Return Strategies, Henderson UK Absolute Return, Old Mutual Global Equity Absolute Return, Premier Defensive Growth and Smith & Williamson Enterprise.
Clive Hale is a director of FundCalibre
