2017 is shaping up as volatile year

In this photo, traders work on the Mizuho Americas trading floor in New York. AP Photo/Mark Lennihan

In this photo, traders work on the Mizuho Americas trading floor in New York. AP Photo/Mark Lennihan

Published Jan 27, 2017

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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."

BLOOMBERG

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