ASX and Wall Street fall: investors should start to worry when volatility seems low

Lee Smales, Curtin University

Rewind to last week and the volatility index, or VIX, actually predicted low levels of volatility in the share market over the coming 30 days. But the subsequent falls in the Australian and United States share markets should serve as a reminder of the risk of being complacent.

Prolonged periods of low volatility provide ample opportunity for investors to become complacent about risk, and increase the prospect of sharp market corrections. This is certainly what my research has discovered. I found buying stocks when investor fear is highest, and selling when it is lowest, can be a profitable trading strategy.

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Read more:
Explainer: why stock market panic can signal a good time to buy

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Now the US S&P 500 index has fallen by over 6% since Thursday (wiping over US$1 trillion from stock values), the VIX index has more than doubled and now sits at 37.32. While this is the highest level since August 2015, it’s still well below the high of 80.06 we saw during the global financial crisis.

The trigger for this surge in investor fear in the US was Friday’s release of employment data there. Typically, this stronger than expected data would be good for stocks. However, this news follows indications from the Federal Reserve that further rate hikes are likely.

The market has taken strong wage growth as a signal of inflationary pressure, which may lead to more dramatic policy tightening. This is consistent with prior research that suggests the market response to economic news depends on the business cycle.

Unfortunately, owing to reliance on exports to fuel its economy, the Australian market is not immune to what happens in the US. The All-Ordinaries has fallen by 4% (equivalent to nearly A$90 billion of value) and the A-XVI (an Australian fear gauge) has jumped by 60% in two sessions.

Due for a correction

As of the end of January, the US S&P 500 were 320% higher than at the peak of the 2008 financial crisis, having increased 25% in the past year. While the Australian market has lagged, following the end of the commodity boom, the All-Ordinaries is still 98% higher than in 2008 and 8% higher than at this time last year.

Over the same time, the VIX index has been able to shrug off the affects of a rising geopolitical risk – such as President Trump’s tiff with North Korea.

Over the past year, VIX has averaged just 11.06. This indicates that in the next 30 days the market expects prices to rise or fall by 6.3% (on approximately 95 days out of 100). This is lower than the average of 14.9 for the prior year, and 18.8 over the past 15 years.

https://datawrapper.dwcdn.net/qsGbk/1/

While the VIX has continued to predict low levels of volatility in the near-term (it ended Thursday at 13.47), researchers at the New York Federal Reserve pointed out that the term structure of implied volatility suggested volatility will not remain low forever. The term structure shows how implied volatility varies for different time periods, and prior to Thursday this was upward sloping – indicating volatility would rise over time.

It’s difficult to predict when the current market sell-off will end, and after the large increase in values over the past few years it could be said that the market is due a correction. While the futures market is predicting further falls in stock prices (and VIX increases) in the near-term, the term structure (which is now downward sloping) is not predicting a lengthy period of volatility.

One risk could be that ongoing gridlock within US Congress leads to another US government shutdown, and associated geopolitical risk finally starts to feed into investor fear.

The lesson remains: investors should be wary when investor fear is low.

Lee Smales, Associate Professor, Finance, Curtin Graduate School of Business, Curtin University

This article was originally published on The Conversation. Read the original article.

Shorten promises $1 billion fund to finance manufacturing enterprises

Michelle Grattan, University of Canberra

Bill Shorten is promising that a Labor government would set up a A$1 billion fund to assist “advanced manufacturing”.

Modelled on the Clean Energy Finance Corporation (CEFC), which was established by Labor, the Australian Manufacturing Future Fund “will support innovative Australian manufacturing firms who want to grow their businesses and create jobs, but who might find it difficult to obtain private sources of finance”.

Shorten will make the announcement on Saturday in Adelaide. It comes as South Australia is hit by the shutdown of Holden’s car production plant there on October 20, with a loss of about 950 jobs. It also highlights the more interventionist policy approach being seen from both sides of politics.

A state where manufacturing struggles, SA faces an election early next year in which jobs and business opportunities will be issues. Last week’s announcement that Nick Xenophon will leave the Senate to lead a team of state candidate has thrown a wildcard into the poll.

Shorten and Shadow Industry Minister Kim Carr said in a statement that the proposed fund would help local manufacturers innovate and diversify. This could mean:

• auto component manufacturers re-tooling or diversifying into other industries;

• food manufacturers investing in new equipment for new products to export to Asia; and

• metals fabricators expanding into pre-fabricated housing.

They said that an ALP government would ask the fund to give priority to considering “transformative investments in the automative manufacturing and food manufacturing sectors”.

Shorten and Carr quoted the Australian Industry Group saying that financial institutions were “downgrading manufacturing industries and making access to finance more difficult and expensive”.

“Labor won’t let the big banks hold Australian advanced manufacturing back,” they said.

The fund, which would not be financing large-scale enterprises, would partner with private finance to reduce the perceived risk in innovative projects. It would “apply commercial rigour” when investing and would offer financing in the forms of equity, concessional loans and loan guarantees. It would not make cash grants.

It might partner with the CEFC to invest in energy efficient projects and equipment to help with a business’ energy costs, or with the Export Finance and Insurance Corporation to access new export markets with new products.

The fund would be off-budget. It would be expected to be financially self- sufficient and achieve a benchmark rate of return across its portfolio.

Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.

China’s Financial Power Play

Article: The Life & Times of Nathan Tinkler

The link below is to an article concerning Australia’s once billionaire Nathan Tinkler and the financial trouble he now finds himself in.

For more visit:
http://www.afr.com/p/business/companies/inside_story_tinkler_and_bastardry_m2Ood2SGVn9ul4Bn27FiSO

56 RELIGIOUS ORGANISATIONS OFFICIALLY SCHEDULED FOR LIQUIDATION IN RUSSIA

On 15 October, a declaration unexpectedly appeared on the webpage of the Russian Ministry of Justice listing 56 religious organisations scheduled for liquidation. These stem from a number of major world faiths and included Buddhists, Jews, Muslims, the Catholic “Caritas” as well as small, dissident Orthodox groups and one organisation belonging to the Kiev Orthodox Patriarchate, reports William Yoder, Russian Union of Evangelical Christians-Baptists. Yet at least 35 of the 56 listed qualify as Protestant organizations. These include the humanitarian “World Vision” and “Youth with a Mission”. At least six Baptist organizations are listed. These include one established by the Russian branch of the “Billy Graham Evangelistic Association” and three regional districts of the “Russian Union of Evangelical Christians-Baptists” (RUECB). Apparently; several entire churches are up for liquidation, including the “Union of Churches of Presbyterian Christians” and the “Assemblies of God”. Even the 26-congregation-strong “Union of Churches of Evangelical Christians” is scheduled for elimination. Its Bishop, businessman Alexander Semchenko, remains a member of the presti gious “Council for Cooperation with Religious Organisations at the Seat of the Russian President”.

Pastor Vitaly Vlasenko, the RUECB’s Director for External Church Relations, warns against undue alarm, for the declaration states only that the Justice Department “plans to file liquidation claims” against the 56. “This is a wake-up call,” the Pastor adds. “This is certainly not the last word on the matter.” He reports that thousands of religious organisa tions were registered during the 1990s, and that a number of them are now virtually defunct. Many have failed to submit the annual reports on activities and finance demanded by Russian law. In some cases, registered and factual activities no longer match. In one instance, a Baptist organization registered in Moscow is active only in Siberia.

Attorney Anatoly Pchelintsev from Moscow’s „Slavic Centre for Law and Justice” (SCLC) sees serious injustice in the fact that the Russian Orthodox Church Moscow Patriarchate is absent from the list. Due to its overpowering size, the law of averages would demand that a least a few of its organisations find their way onto the list. Yet Protestants, who speak for less than 1% of the Russian population, make up 62% of the total list. He sees no regard for the appropriateness of means, describing liquidation as akin to meting out the death penalty to persons found guilty of jaywalking. “Such actions fly in the face of official Russian state policy on the freedom of worship and creed.” Pchelin tsev, a seasoned legal veteran, believes the responsible officials are hardly aware of the complicated international ramifications of their own decree and cites the possibility of “chaos and destabilisation in church-state relations”.

In June, the highly-active SCLJ succeeded in getting a decision requiring the liquidation of a 30-member Methodist congregation in Smolensk overturned. Two years ago, it won a Euro pean Court ruling in Strasbourg sentencing the Russian Federation to a fine for having forbidden the work of the Salvation Army. The SCLJ was initially formed in 1993 and took on its present name when it became an affiliate of the Washington/DC-based “American Center for Law and Justice” (ACLJ) in 1998. The head of ACLJ is Jay Sekulow, America’s leading attorney on religious affairs. ACLJ was founded in 1990 by the controver sial Pat Robertson, a Southern Baptist and charismatic. He is probably America’s most prominent television preacher.

The RUECB, Russia’s largest, unified Protestant church, represents approximately 80.000 adult members in 1.750 congregations and groups. Its President is Yuri Sipko.

Report from the Christian Telegraph