Felix Stephen, Advance Manager Strategy & Research, said during periods of heightened market risk Australian assets do not perform well because our assets are perceived to be "high risk" assets by global investors. This is why the Australian dollar suffers during periods of heightened risk aversion and tends to be strong during periods of risk taking.
Global investors turn to the US dollar because they believe that the US government will do whatever it has to do to keep its economy viable and repaying its debts.
What happened overnight?
US stocks plummeted overnight in a global sell off as fears of a global economic slowdown increased. The S&P500 fell 37.2 points or 3.9% to 1129, in Europe, the FTSE fell 4.7%.
Gold is also down to $1741.70 an ounce. Earlier this month it was selling at around $1800.
The Australian stock market was down 2.6% yesterday, reaching its lowest level in more than two years. The All Ords was down 2.6%. This was its weakest close in more than two years breaking below the 4000 threshold to 3964.9.
Reasons for the volatility
The factors causing heightened market volatility and turmoil remain the same. These high levels of uncertainly and turmoil are having a negative impact on global growth. Policy makers around the world are responding to the subdued growth outlook as best as they can but financial markets are impatient and want more decisive and forceful action to be implemented soon.
The trigger for the selloff overnight was the grim economic outlook from the US Federal Reserve and signs of slowing growth in China and Germany.
While we expect market volatility to remain elevated for some time it is likely that volatility will subside from these heightened levels. There is evidence of possible concerted and coordinated policy initiatives being implemented as financial markets force policy makers into pursuing and implementing more bold and forceful initiatives - first to contain the current situation from developing into a full blown crisis and second to guide global growth towards a higher trajectory.
Is there any good news?
A lot of negative news is already priced into risky assets. The catalyst for a more positive outlook can be either when risky assets reach levels of maximum negativity and rebound sharply or bold initiatives being implemented by policy makers or even these two factors coinciding to generate a better environment for risky assets.
Earlier this week the International Monetary Fund (IMF) announced that global growth was slowing and risks were rising. The IMF has lowered its growth forecasts for the global economy to four per cent for 2011 and 2012, saying activity has "weakened significantly", but warned of a return to recession if Western leaders fail to get their economies back on track.
The IMF expected Australia’s economy to expand just 1.8% in 2011 and predicted a pick up in the growth rate to 3.3% in 2012.
The current volatility is not unexpected. We have said previously we expect markets to remain volatile in the short-term for the following reasons.
- US debt and economic management not clear
- The European debt situation remaining unresolved
- Geopolitical tensions around the world, particularly the MiddleEast and Africa, and
- Slowing of global growth