Originally published by IG Markets
Market volatility is extremely low across global equities and commodities markets. It’s now becoming a talking point in its own right. The adage that low volatility leads to high volatility is on everyone’s watch lists as major markets sit at potential tipping points. This type of market is something traders would have normally have referred to as consolidation levels.
Market volatility, as measured by theCBOE Volatility Index (VIX), is continuing to record historic lows. This has had more than a few market strategists working to define the next major move for equities and commodities.
While the VIX volatility index may be recording record lows, the longer dated costs of the protective PUT options has reached six times the historical average. We have not seen this type of high level skew since the Brexit vote and this only suggests that the market is attempting to define a large future event. The PUT option offers traders and investors a method of protecting portfolio’s against large market moves. However, they have a limited life by way of an expiry date and this skew towards longer dated positions clearly suggests the market is unsure of the longer-term path.
Recent volatility events like Brexit and the election of Donald Trump have seen markets melt up into higher levels. Traders are concerned the next ‘event’ may not be so well supported by money managers and traders. Along with the recent volatility event in oil, we saw the commodity fall below the key $50 level for the first time in 2017.
Oil futures fell again overnight on the news that Libya is set to resume shipments. Drilling activity in the US has increased for the ninth straight week, both events seem to be undermining the efforts of Organization of the Petroleum Exporting Countries (OPEC) to bring the surplus back to the five-year average. Overnight net long positions were reduced, which brought the May settlement price back to $48.91. Traders reducing the net long positions signal the market may be vulnerable to further weakness in the short-term. This is something the OPEC ministers will be very concerned about going into the next meeting scheduled for 25 May in Vienna.
For our market today, the futures suggest a flat to weaker open with the futures index down ten points following a flat session in the US. Our market has found resistance again below the 5800 point level and traders are looking for a catalyst to move the market higher. Our market is trading on very light volume flow in our own low volatility equities space. This is showing a lack of commitment in the short-term. It’s quite surprising that the AUD/USD is now trading at 0.7732 and it seems determined to hold above the key 77 cent level. This level has been a place of consistent resistance since March 2016.
A solid breakout over these levels will place pressure on companies with overseas earnings, which adds to the uncertainty of our S&P/ASX 200 and its ability to cross the key 5800 level. The American depository receipt (ADR) for BHP Billiton Ltd (AX:BHP) also suggests a flat open, along with the ADR for Commonwealth Bank Of Australia. (AX:CBA) looks to have CBA at yesterday’s trading level of $84.34.
In our commodities space we may see the oilers come under some selling pressure today. Gold stocks find further support with gold trading $4.80 higher at $1234.11.