Why This ‘Double Bounce’ May Not Last…

The last six months saw the double crash on the market.

Now there is a double bounce.

The double crash lasted longer than most people expected.

The question now is whether the double bounce will last so long too, or whether this is just a blip before the double accident resumes…

From the end of April right through to late September, the Aussie S&P/ASX 200 index fell from 5,982 points to 4,918.

Over exactly the same timeframe, the Aussie buck fell from 80 All of us cents to 69.Nine cents.

Since then, both have bounced. The stock index expires 7.4%, and the Aussie dollar is up 4.8%.

The good times are back, right?

Not so fast. It’s not so much because of something good that’s happened to the Aussie economic climate, it’s because of something that hasn’t happened to the US economy.

What performs this ‘double bounce’ mean?

Here’s a chart showing how the index and the forex have performed over the past 6 months.

Source: Bloomberg

You can see the slump and also the rebound.

There’s no difficulty knowing why. One of the biggest reasons is that for most of this year, marketplaces have assumed that the All of us Federal Reserve would raise rates of interest.

That put downward pressure on the Aussie dollar. That’s because the eye rate differential between the Aussie buck and the US dollar would have shrunk.

As for the stock market, slipping commodity prices and the anxiety about a recession pushed the Aussie market lower.

But since the finish of September, the Aussie market and Aussie dollar have reversed course. Both are up.

After worse-than-expected job numbers in the US, the markets started to downplay the chances of a US Federal Reserve interest rate rise this year.

For instance, bond futures markets now just factor in a 10% chance of the actual Fed raising rates this month. As recently as August, the markets had listed in a 50% chance.

As for the Fed’s December meeting, the chance of a rate rise has fallen to Thirty eight.8%. That’s down from a close to 50% chance as recently as July.

So, does this mean a US rate increase is off the credit cards?

Not so fast…

Do it!

As this statement from Bloomberg notes:

‘Federal Reserve Vice Chairman Stanley Fischer said the U.S. economy may be sufficiently strong to merit an interest-rate increase by year end, while cautioning that policy makers tend to be monitoring slower domestic job growth and international developments in deciding the precise time of liftoff.‘

What does that mean?

It means the actual Fed is ready (almost) to raise interest rates…perhaps!

And that’s simply it isn’t it?

Regardless of the scenario, whether the market is feeling bullish or bearish, confusion continues.

As Joyce Alter, global head of study at JPMorgan Chase & Co informed Bloomberg, the Fed ‘should get it more than with‘.

She’s right. But it goes to show just how nervous the Fed would be to do anything. It wants a lower market, so it has the reason to restart its bond-buying as well as money-printing program.

However, after witnessing the crashing markets over the past couple weeks, the Fed may now be less eager to engineer an accident. If that move was the market’s reaction without an rate of interest rise, what could the marketplace do if the Fed increases rates?

The Fed wants a lower market, but it doesn’t want it to go too low.

As for what this means for the Aussie market, well, it’s anyone’s guess. We’re certainly not about to give up on the ‘crash protection’ strategy.

In fact, with doubt and instability set to carry on through to at least the end of the year, now is exactly the time when you think clearly about protecting your investment portfolio.

The Aussie market offers bounced nicely. It would be great if it continued higher. But some thing tells us that investors should not get too excited about a brand new bull market yet.

Bottom line: stay invested, but stay cautious.

Cheers,

Kris.

PS: You can find out the details of our ‘crash protection’ strategy here.