Volatility tumbles as markets shrug off Middle East risks

{"text":[[{"start":9.3,"text":"Measures of volatility in stocks and currencies have tumbled this summer — in some cases close to their lowest levels in years — sparking warnings that investors have become complacent over the threat of renewed disruption from the unresolved conflict in the Middle East."}],[{"start":24.75,"text":"The Vix index, a barometer of implied stock market volatility known as Wall Street’s “fear gauge”, sank below 15 this week, far below its long-term average and a level last seen before the US-Iran war began in late February. Similar measures of expected volatility in major currency pairs, such as euro-dollar, have sunk near to multiyear lows, according to indices provided by derivatives giant CME Group."}],[{"start":50.65,"text":"The low cost of volatility suggests investors see little chance of a flare-up in market tensions, even as hopes fade of a swift reopening of the Strait of Hormuz, driving oil prices back to nearly $90 a barrel and government borrowing costs in some big economies within touching distance of their highest in years."}],[{"start":69.35,"text":"“Markets are showing a degree of complacency . . . assuming that de-escalation and cooler heads in this [Middle East] conflict will prevail,” said Raphaël Thuin, head of capital markets strategies at Tikehau Capital."}],[{"start":null,"text":"

"}],[{"start":82.5,"text":"The Vix climbed as high as 30 during the early stages of the conflict, and saw a smaller spike during last month’s heavy sell-off in global chip stocks."}],[{"start":92.05,"text":"But it quickly fell back as global equity markets resumed their march higher this month. Institutional investors were “selling volatility” as an additional way to profit from the rally, said Matt Rowe, a senior portfolio manager at Man Group. "}],[{"start":106.14999999999999,"text":"With the Federal Reserve expected to raise interest rates just once or twice over the next year, traders say the cautious reaction of central banks to big swings in crude has also helped to calm markets and suppress currency volatility. "}],[{"start":119.49999999999999,"text":"Traders “have been learning to live with developments in the Gulf”, said Chris Turner, head of global markets at ING, adding they were taking the view that interest rate changes by central banks “will be modest rather than the start of major new tightening cycles”. "}],[{"start":134.04999999999998,"text":"Tikehau’s Thuin said higher oil prices and rising government bond yields were “among the most important threats to the market” at the moment, but said investors had been reassured by the “remarkable” ability of the global economy to absorb the energy shock. "}],[{"start":149.74999999999997,"text":"But this could go wrong if a sustained period of higher energy prices — for example, through manufacturing input costs — starts to weigh more meaningfully on growth just as they stoke inflation. Investors are also worried that declining oil inventories will provide less of a counterweight to higher crude prices."}],[{"start":169.09999999999997,"text":"“You have got a powder keg, the longer this [conflict] goes on,” said April LaRusse, head of fixed-income specialists at Insight Investment, saying benign volatility measures were underplaying the threat from higher energy prices to the broader global economy."}],[{"start":184.59999999999997,"text":"Some investors also point out that low volatility in stock indices has been masking much bigger churn beneath the surface. Unusually low correlation between single stocks meant the moves were cancelling each other out, investors said, partly a symptom of big bets being made on AI winners and losers. "}],[{"start":202.49999999999997,"text":"“Single stock volatility [has been] crazy, and index volatility is just where it has always been,” said Gerry Fowler, a derivatives strategist at UBS. “Correlation is very low, which keeps index volatility very low.” "}],[{"start":216.99999999999997,"text":"Investors have warned this sets the market up to jolt lower if a piece of bad news — such as an escalation of the conflict, or a disappointing earnings report from one of the AI behemoths — prompts stocks to suddenly move in the same direction."}],[{"start":233.09999999999997,"text":"Neil Birrell, chief investment officer at Premier Miton, said “the level of single-stock volatility in comparison to market-level volatility [is] at extremes that have never been seen”."}],[{"start":251.74999999999997,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1786505392_3140.mp3"}