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June 9, 2014 5:08 pm
Global markets are less volatile than at any time in almost a decade as central bank intervention has sent share prices to record highs and interest rates to historic lows.
Gauges of market volatility for currencies, equities, bonds and oil have all plummeted, with analysts attributing the falls to the widespread view that official interest rates will remain exceptionally low for a long time.
Global stocks hit a fresh all-time high on Monday, with the FTSE All-World index up 0.2 per cent in late London trading to 281.48, while government borrowing costs for some European countries fell to levels not seen for centuries. The yield on Spanish 10-year debt fell below that of the US for the first time since 2010.
But some analysts see echoes of the period of calm before the last financial crisis. George Magnus, economic adviser to UBS, said there was a resemblance to the so-called “Great Moderation” period leading up to 2007. “The previous Great Moderation ended in great volatility; this one may well do so too,” he warned in a note.
The Vix index – Wall Street’s “fear gauge” – which measures expected US stock volatility on Monday stayed near Friday’s seven-year low. A similar index for global currency volatility has hit the lowest since records began in 2001. Oil volatility is the lowest since at least 2007.
“The Vix tells you investors are very complacent and not worried about exogenous shock or geopolitical risk,” said Russ Koesterich, global chief investment strategist at BlackRock.
While policy makers are still catching their breath after the post-2007 financial crises, the lack of volatility has hit banks’ trading revenues. “Eventually there will be a storm, but the Vix does not tell you anything about the timing of that storm,” said Mr Koesterich.
Matt Cobon, fund manager at Threadneedle Investments, said: “The market seems to have bought into this, hook, line and sinker, that rates will remain low forever ... It feels as if we’re a few data points away from testing some of these underlying expectations.”
Last week, the European Central Bank loosened its interest rate policy further and unveiled fresh measures to inject liquidity into banks. “Every time volatility picks up, central banks extinguish it,” said Jack Ablin, chief investment officer at Harris Private Bank.
By cutting interest rates, central bankers argue they averted catastrophe. Advanced world countries have returned to growth and economic news has become more predictable.
Citigroup said the volatility of its “economic surprises” index for the world’s largest economies had recently hit a record low.
As well as central bank action, volatility has fallen as a result of tougher bank regulations, which have increased the cost of trading, and because of an increased reluctance by hedge funds to take strong positions. Stephen Jen, head of the hedge fund SLJ Macro Partners, says: “I do feel people are more jittery. They have smaller positions and are quicker to flatten their books and change their minds.”
Additional reporting by Gavin Jackson, Philip Stafford and Delphine Strauss
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