Hong Kong - The
world's most famous measure of volatility in financial markets is flashing a
sign akin to boredom — languishing around levels that prevailed before the global
crisis.
Problem is, the
VIX is tied to the US S&P 500 index. Take a step back to look at the global
picture, and the early days of 2017 are showing elevated jumpiness similar
to that seen in the past two years.
Emerging-market
currencies lead the pack, illustrating both the dangers and potential returns
from investing in assets ranging from Egypt's pound to China's yuan. An
investigation into price fluctuations across financial markets over the past
two decades by Bloomberg shows how the beginnings of the past two years have
had the biggest volatility since 2009, when the world was reeling from the
Lehman shock and the money-market breakdown it unleashed. Volatility is
likely to trend higher through the course of the year as markets
react to a range of unknowns, not least the impact of US President Donald
Trump's agenda, observers say. Economic policy structures are being reshaped in
ways unseen perhaps since before World War II, JPMorgan Chase & Co
strategists said in putting a premium on liquidity in new US stock portfolios.
"I don't
think investors have really felt like volatility is falling relative to the
last couple of years," Stuart Rumble, investment director with the
multi-asset team at Fidelity International, said in a phone interview from Hong
Kong. "We've seen such a dominant trend over the last couple of months in
markets, as investors have been positioning for economic growth and higher
inflation following the US election."Looking at 250 assets across market
classes that include equities, sovereign bonds and commodities, eight
currencies were volatility outliers based on their year-to-date price
swings, or Z-scores, according to data compiled by Bloomberg as of Jan. 20. A
Z-score is a normalized measure based on price standard deviation, which gauges
a security's moves compared with a longer-term average (1997 to 2017).
For all the
disruptions Trump has brought to longstanding US policies and practices
— from trade to regulation — this month is still somewhat less
volatile than the past two Januaries. Markets were roiled by confusion over
China's currency tactics and stock slide at the start of 2016 and by
Switzerland's surprise removal of a cap on the franc in early 2015. Three
weeks into 2016, there were 19 outliers: 16 currencies and three benchmark
equity indexes. At the same stage in 2015, there were 10. That followed a
five-year period of relative calm preceded by an eye-popping 53 outliers
at the start of 2009. The Egyptian pound shows up as the most volatile
asset in the study's universe so far this year. With a Z-score of 4.15, it has
been more than twice as volatile as the digital currency bitcoin and six times
more jumpy than the Bloomberg Dollar Index. To be classified as an outlier in
this study, an asset needs an absolute Z-score of 2.575 or more, which means
its movements have less than a 1 percent chance of happening. The greater the
score, the greater the volatility.
Looking just at
the commodity sphere, lean hog futures posted a Z-score of 1.86, making them
the most volatile in that group. Hogs also led the commodity herd in early 2013
and 2015. Argentina's Merval Index, which hit a record high this week, is the
most volatile of equity indices for the second year in a row. It had a z-score
of 1.84 this year and 3.62 in the first three weeks of 2016, shortly
after new president Mauricio Macri let the peso float freely. While
a global selloff in bonds since Trump's presidential election victory
spurred some to call the end of a three-decade bull run in debt, sovereign
securities don't stand out as volatile based on their Z-score
calculations.
On the policy
front, one danger for investors to be aware of is that, unlike in past years,
central banks may not be the security blanket during times of volatility that
they have been. "Investors can no longer anticipate that automatic
response of additional monetary policy when economies or markets take a
downturn," Rumble said. "That's really what's different going forward
over the next several years, and it means when we see those key risk events, we
could see some shock and volatility."