The View | Opinion: Improving fundamentals justifies market confidence – but exceptionally low levels of volatility also fuelling asset bubbles
Current commentary and analysis focus on the dangerous disconnect between somnolent markets and a plethora of risks confronting international investors and traders
Another week, another flurry of news articles and investment research reports warning of the risks posed by historically low levels of volatility in financial markets.
Since the end of April, the Vix index, Wall Street’s so-called “fear gauge” that measures the expected volatility in US equity markets, has remained below 11 points and currently stands close to a 23-year low. Global stocks, meanwhile, have surged to record highs while spreads on emerging-market corporate bonds are at their tightest levels since the 2008 financial crisis.
Most of the commentary and analysis focuses on the dangerous disconnect between somnolent markets and the plethora of risks confronting international investors and traders.
Corporate and economic fundamentals, notably in the US and Europe, have improved markedly, providing a more solid underpinning to market
These include the escalation in geopolitical tensions, the fallout from China’s efforts to rein in its shadow banking sector, the persistent threat of populism in Europe and, most recently, the threat of a full-blown political and constitutional crisis in the US following President Donald Trump’s decision to fire the head of Federal Bureau of Investigation, just as the agency was probing his dealings with Russia.
Yet there is another narrative, which is just as compelling and which suggests investors are not as complacent as it might appear: corporate and economic fundamentals, notably in the US and Europe, have improved markedly, providing a more solid underpinning to markets.
In the US, the best corporate earnings season in five years has supplanted the so-called “Trump trade” – a repositioning of investors’ portfolios based on expectations of hefty tax cuts, deregulation and infrastructure spending under the Trump administration – as the main driver of equity markets.
According to FactSet, a financial data provider, earnings growth for the benchmark S&P 500 Index in the first quarter of this year is expected to have reached 13.5 per cent – the highest rate since the third quarter of 2011.