Perhaps the most remarkable aspect of what has been a bumpy ride for
world financial markets this year is how stubbornly low volatility is.
It’s as if investors have given up on hedging, which is exactly what
appears to be happening.
Benchmark measures of implied volatility across major stocks, bonds
and currency markets are historically low, despite the ECB preparing to
join the Fed in tightening policy, Italy’s bond market in turmoil and
surging global trade war fears.
If that wasn’t enough, the G7 pantomime at the weekend shows that the rules-based international order that has provided the political and economic framework for financial markets over the last 40 years is facing an existential crisis.
But almost all the recent bursts of volatility, in Turkey, Argentina as well as Italy, have remained localised and the spillover to broader markets has been negligible. Even the S&P 500’s “volmageddon” episode in February was short-lived.
This is partly because, at the macro level, the world economy continues to hum along quite nicely. Global growth is north of 3 percent and there’s little sign of it slowing to any significant degree.
The latest Commodity Futures Trading Commission data show that hedge funds and speculators maintained a short position in VIX futures contracts, essentially betting on lower volatility in the S&P 500 over the coming month.
The net short position was trimmed a bit to 36,189 contracts from 44,380 the week before, but these are figures for the week to Tuesday, June 5. The VIX has since fallen further, trading with an 11 percent handle for the first time since late January.
The VIX index is now at 12.5, below its median over the last five years of 14.6. Only four months ago it had its biggest rise in history on fears that accelerating U.S. wage growth would force the Fed to jack up interest rates far more aggressively than investors had bargained for.
If that wasn’t enough, the G7 pantomime at the weekend shows that the rules-based international order that has provided the political and economic framework for financial markets over the last 40 years is facing an existential crisis.
But almost all the recent bursts of volatility, in Turkey, Argentina as well as Italy, have remained localised and the spillover to broader markets has been negligible. Even the S&P 500’s “volmageddon” episode in February was short-lived.
This is partly because, at the macro level, the world economy continues to hum along quite nicely. Global growth is north of 3 percent and there’s little sign of it slowing to any significant degree.
The latest Commodity Futures Trading Commission data show that hedge funds and speculators maintained a short position in VIX futures contracts, essentially betting on lower volatility in the S&P 500 over the coming month.
The net short position was trimmed a bit to 36,189 contracts from 44,380 the week before, but these are figures for the week to Tuesday, June 5. The VIX has since fallen further, trading with an 11 percent handle for the first time since late January.
The VIX index is now at 12.5, below its median over the last five years of 14.6. Only four months ago it had its biggest rise in history on fears that accelerating U.S. wage growth would force the Fed to jack up interest rates far more aggressively than investors had bargained for.
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