The one constant in the short-term behaviour of markets is their ability to surprise. Few would have expected the markets to like the news that Jerome Powell had conceded that the maybe inflation pressures were more persistent than the Fed had presumed as Fed credibility has been seen as a cornerstone of the recent bull market.

He even went so far as to banish the often repeated and emphasised word ‘transitory’ from the Fed’s lexicon. After all of that rates didn’t rise and, at first at least, markets rocketed higher by more than 2% in one day. Market pundits then spent the rest of the week furiously retrofitting a plausible explanation. These ranged from covering of hedged or short-positions put on by those that had been worried by this possibility (probably the most likely but still a bit of a mind-bender) and relief reflecting increased certainty that Fed was was ‘on the case’ (and so feared inflation is now less likely).

The fact that markets gave up those gains over the next two days supports the former technical explanation while the fact that interest rate sensitive stocks like utilities and real estate trusts performed well throughout the week supports the latter, more fundamental thesis. We’ll see, but either way tech stocks were especially volatile but this time it was the large household name FAANG stocks (plus Tesla) that were the lightning rod rather than the smaller profitless NASDAQ stocks that have been under pressure in the past few months. Looked at through that lens maybe option fuelled retail flows is a factor in all of this as well.

In the domestic market we saw a different type of volatility and one which is perhaps quite typical of our relatively concentrated market where individual names can have a big impact. On the face of it Healthcare, IT and Consumer Staples weighed on the market but it was really the largely stock specific woes of CSL, AfterPay and Woolworths that had the biggest impact. CSL fell 10% after raising $6.3bn (the second largest public equity raising ever seen in Australia) in order to diversify into kidney disease.

Afterpay fell another 15% after the US regulator started investigating it other Buy Now Pay Later companies and whether they might be encouraging excessive borrowing while avoiding the usual controls that credit card issuers are subject to. Afterpay is now 50% of it’s January highs and 30% below when Square (now Block) offered to buy the company with it’s own shares (which have suffered a very similar plight).

Lastly, Wooolworths' trading update pointed to higher than expected COVID costs and less than expected sales. Coles swiftly followed suit. The large banks and miners along with those interest rate sensitive sectors (Real Estate Trusts and Utilities) held up well but, by the end of the week, the local market was down just over 1%.

Given that the Chair Powell and, by extension, interest rate markets were the proximate cause for much of the volatility overseas it was again perhaps surprising that bond markets were so calm. Credit spreads still show no signs of any corporate distress. Again there are a myriad explanations for this that are doing the rounds but perhaps the most compelling one is that bond markets sense that there is simply too much debt around for rates to rise much or for long. Debt tends to dampen future growth so maybe bond markets fell things are not as rosy as equity markets would have us believe.