​​Markets Recover Is That It?

(MENAFN- DailyFX (IG)) ​​​Stocks rebound on Trump comments

​It looks like the genesis of the recovery in stock markets comes from Trump's comments about the US escorting ships through the Straits of Hormuz, and that the US would provide insurance for shipping companies.

​The potential closure of Hormuz has been the big fear for markets, given the amount of oil and other goods that moves through this key geographical chokepoint. It appeared yesterday that Iran would attempt to close them officially, though the drastic fall in the amount of shipping moving through had essentially meant the waterway was closed anyway.

​Of course, the war goes on. Screens worldwide are filled with images of airstrikes, and there is no sign that either side is prepared to begin negotiations.

​Volatility is here to stay

​The bounce in stocks has not been accompanied by any drop in volatility. While the Volatility Index (VIX) has failed to hold the highs seen yesterday, we have yet to see a reversal. While the VIX continues to climb, it is unlikely that any stock market bounce can be sustained.

​It will be important to watch the VIX in coming days to see whether it can stage a meaningful reversal.

​Oil prices keep climbing

​Oil prices are higher too, spelling trouble for inflation forecasts around the globe. Declining inflation had meant that central banks could look forward to cutting rates. Now they have to consider the need to leave rates unchanged. A longer period of higher oil prices, even if they hold near current levels, means that inflation could start to rise again, and might even see talk of rate hikes return.

​This is likely to spell trouble for equity markets, at least in the short-term, and particularly for US markets, where higher valuations continue to leave stocks vulnerable.

​Selloff unlikely to stop soon

​Despite JPMorgan call for investors to buy the dip, it is too soon to suggest that stocks have bottomed. We are only some 1700 points from a record high in the Dow Jones, so this pullback is only modest by historical standards.

​Unless the war ends soon, and if anything a more intense of the conflict seems more likely, markets will struggle. Volatility remains elevated, which means we should expect plenty of two-way price action, but a continued decline for the moment seems likely, even with short-term bounces along the way.

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