Aussie equity markets surged yesterday on the back of a smaller-than-expected interest rate hike by the RBA. Coming in at 25 basis points and lifting the official cash rate target to 2.6%, it was half the 50 basis point hike that was widely forecast by economists and already priced in by markets.

All the ASX indexes moved up in what was the biggest single-day rally for the XJO since 16th June 2020 – finishing up 3.75%. XJR was up 4.64%, XEC was up 3.66% and the XTX was up 4.84%.

In a welcome move for Australia, where resources account for 70% of our exports and our main index (XJO) took 11.5 years to recover from the GFC compared with the US S&P 500’s five years, the Bloomberg Commodity Index has moved up 3.79% since Friday last week.

US manufacturing data grew at its slowest pace in the past 2.5 years, with the thought of economic weakness being able to slow inflation breathing life into the S&P 500, which has stacked on a 5.73% gain since last week, as well as the Nasdaq surging 5.68%.

In an attempt to tame the bond market meltdown they helped create, the UK government has made a last-minute decision to back down from the tax cuts for the rich that they had no way of funding. This also provided some much-needed relief to the British pound, which was and still is under pressure.

Just three days after the mini budget was announced on 23rd September, the pound hit a record low against the US dollar, and two days after that, the Bank of England stepped in to temporarily buy an unlimited amount of government bonds in order to prevent disorderly trading from destabilising the British economy.

An extraordinary spike in yields and plunge in the pound wreaked havoc through the bond markets and flowed on to pension funds, who were forced to liquidate positions after some bonds even lost half of their value in a matter of days.

This reverberated to Australian mortgage bonds, as UK investors started selling some of their best assets to cover their British derivative exposure. In total, more than $900 million of Australian asset-backed securities have been auctioned off in the past two weeks, most of which are class A ranking bonds that carry low interest rate risk.

The XJO has rallied over 3.7% due to the RBA pivoting to slow the pace of rate hikes and ease recession anxiety. The index was testing support at 6405, just two points below 52-week lows, to bounce off and trade between support and resistance.

The market had been hit trading through a lot of global bad news and data and looked ready for a bear market bounce rally. If the current oversold rally is to continue, we expect short-term resistance at 6894 and further short-term support at 6405.

Implied volatility has fallen with this recent rally and is now at 19.56% with an IV rank of 55.

With a continued rally, we could see volatility fall further, which would indicate now to be a good time to sell volatility. However, if the rally runs out of steam and the market rolls back over, we could see a further increase in volatility as the market retests support.

One fund manager who, over his 20 years of investing experience, has found ways to sail through the markets’ best phases and navigate its worst is Andrew Chapman, MD at Merchant Funds Management.

Andrew will be joining us this Friday, 7th October at 12pm (AEDT), for The Insider: Meet the Fund Manager webcast, where he will provide insights into how he identifies undervalued, early-stage winners in stormy markets. He’ll also discuss his three favourite stocks, Merchant’s ASX-outperforming investment strategy and global megatrends he thinks hold good investment potential. To join us for this session, click here.