Markets are getting bumpier. For the first time since August 2015, volatility indicators in all three main asset classes – equities, bonds and currencies – have increased by more than 10% in a month. The VIX Index of S&P 500 option volatility closed at 14.8 on 30 January, its highest level since August, and has risen by more than 30% in the last week.
But the increase should be put into context, and we currently see little cause for concern:
- Volatility has only moved up toward average levels from record lows. The MOVE Index of bond volatility and the J.P. Morgan G7 currency volatility index only regained their 200-day moving average levels last week for the first time since April and February 2017 respectively. The VIX remains well below its average level since inception of around 20.
- The uptick in equity volatility reflects the recent pullback in stocks after a strong start to the year. Since the MSCI All-Country World Index reached a record high on 26 January, it has recorded its largest one-day loss since August. Still, it’s just 1.5% below last week’s peak and remains 5.7% higher year-to-date.
- Years of central bank monetary accommodation have helped suppress asset price volatility. Looking ahead, as monetary policy starts to normalize it’s not unreasonable to expect volatility to normalize too.
While we continue to monitor volatility developments across all asset classes, we don’t yet see a significant and sustained move higher. Taking a longer-term view, the recent period of record low volatility is likely to prove the exception rather than the norm, and can’t be expected to continue indefinitely.
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