Relief rally: too much too soon?

Relief rally: too much too soon?

The equity rebound of the past month is a classic “relief rally” where investors are relieved conditions are not as bad as they previously feared. This one has been partly predicated on hopes that China is stabilizing, which helps explain the sharp rise in commodity prices given that China is the biggest commodities consumer.
 

Unfortunately, signs of real improvement in China are scant. While the U.S. appears to be stabilizing, the Chinese economy remains challenged. The latest evidence came in the form of a 25% plunge in Chinese exports. This was the largest single-month drop since 2009.
The government is likely to try to stem the decline with some palliative measures, but a large stimulus package remains unlikely. Furthermore, the drop in Chinese exports calls into question not just the state of the Chinese economy, but the global trade picture as well.
 
Against this backdrop of continued uncertainty in the global economy, the recent rally is beginning to look a bit excessive. This is particularly evident in the sharp drop in volatility. The VIX Index, a key measure of equity market volatility, has fallen to about half of its February peak. Meanwhile, the VVIX, which measures the volatility of volatility (or, more precisely, how frequently volatility spikes occur), is back to its lowest level since last August.
 
Given the still uneven pace of global growth and tighter financial market conditions, this may too be low. This, in turn, suggests the potential for a rise in volatility — which would imply another bout of stocks selling off. March may have come in like a lamb, but the lion may be lurking.

Comment by Russ Koesterich, BlackRock’s Global Chief Investment Strategist