Macroscope

Volatile markets? Don’t hit the panic button just yet, although pockets of concern persist

Nicholas Spiro says some volatility is good for financial markets and the current bumpy ride should not cause alarm, although caution in certain areas, such as the euro zone, would be warranted

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Stock market volatility since February has spooked some investors, although a shock to the system is not imminent. Photo: Handout

Nicholas Spiro is a partner at Lauressa Advisory, a specialist London-based real estate and macroeconomic advisory firm.

Published: 2:30pm, 12 Apr 2018Updated: 10:32pm, 12 Apr 2018

Last year, barely a day went by without a warning of the risks posed by the staggering tranquillity in financial markets.

According to data from Bloomberg, daily movements in the benchmark S&P 500 equity index in 2017 were the lowest in more than half a century. In July 2017, the VIX Index, Wall Street’s “fear gauge” which uses options-trading data to measure the implied volatility of stocks in the S&P 500, fell to its lowest level ever in intraday trading and remained subdued for the rest of the year. In the debt markets, meanwhile, the yield on 10-year US Treasury bonds traded in its narrowest range since 1965.

The fear at the start of this year was that ultra-low volatility was breeding complacency, causing asset prices to rise to unsustainably high levels and increasing the scope for a sharp and disorderly sell-off – especially in view of the withdrawal of monetary stimulus led by the US Federal Reserve. A correction, many market participants believed, was necessary to remove some of the froth and place valuations on a more secure footing.

US Federal Reserve chairman Jerome Powell appears on a television screen on the floor of the New York Stock Exchange on March 21. The Fed has signalled that it will gradually raise its benchmark interest rate to reflect the stronger US economy. Photo: AP

Fast forward three months, and the calm that characterised markets last year has been well and truly shattered.

Part of the problem is that not enough turbulence can be as bad as too much. Somnolent markets, which engender excessive risk-taking, also depress banks’ earnings

Since the beginning of this year, there have already been nearly 30 days in which the S&P 500 has moved more than 1 per cent in either direction, four times the total for the whole of 2017, according to Bloomberg. The 10-year Treasury yield, meanwhile, has shot up nearly 40 basis points, and in mid-February was close to surpassing the psychologically important 3 per cent level.