WHAT WILL MAKE THE LOW VOLATILITY TREND CHANGE AND WHICH STRAWS IN THE WIND SHOULD INVESTORS BE WATCHING?
The VIX index has recently hit all-time lows: a conundrum for investors who see gathering signs of cracks appearing in the US edifice, such as poor economic data, a sliding US dollar, political logjams hurting prospects for healthcare and tax reform, high stock market valuations and a US Fed seemingly committed to reverse QE and raise rates.
Our friends at CrossBorder Capital have written a report looking at how the various volatility indices covering bonds, equities, and currency interact with each other, in an attempt to understand what might break the current low volatility trend, and what investors should watch. They argue that volatility moves between extended periods of high and low risk, and that bond volatility indices such as the Merrill Option Volatility Estimate (MOVE) index exhibit a causal relationship with forex and currency - ie. investors should watch them first and foremost.
What might change the trend? According to CrossBorder’s analysis, traditional liquidity factors such as Linchpin use, and the Federal Reserve’s ‘Forward Guidance’ statements on the path of policy rates are more powerful predictors of MOVE than term premia or the level of quantitative easing or moderating. Of course, there are also known and unknown political factors, such as the spat with North Korea, which may well turn out to be the catalyst for a change in the volatility trend. In the absence of these, it’s yet another argument for keeping a close eye on liquidity, as we do at Linchpin.
If you would like to purchase the CrossBorder article, please email us on firstname.lastname@example.org or find out more through the liquidity page on this website.