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Volatility is the new normal

The old market adage that volatility begets volatility is proving correct today.

Big moves have a habit of producing more big moves. The extent of the stock market fall in recent days will have created significant value in the eyes of some investors, warranting continued buying into higher levels. At the same time, concern will remain elevated after the recent big moves.  The next bouts of market weakness may still be significantly weaker than markets have been used to in recent months.

This morning’s rally reflects the fact that the economic outlook remains favourable and investors are looking forward to a good reporting season.  Looking through its regulatory costs, CBA unveiled a solid profit report this morning, as did Carsales.com. See further comment here

The catalyst for the recent sell-off in stock markets was improved US wage growth. Some caution is required that this may be yet another false start on the inflation front and markets may have judged that a big enough adjustment to equity valuations has been made for the time being. That said, recent increased in bond yields are also likely to mean that it will be some time before US stock indices reclaim recent highs.

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