Markets remain blinded by the light

Vix Index

While global headlines focus on continuing unrest in Iraq and worrying geopolitical developments in Syria and Ukraine, the mood among investors in global capital markets remains remarkably benign.  Global market volatility remains unusually low by historic standards. In June, investors saw global stock markets reach record highs while the US Vix index – viewed by many as the key benchmark for expected US stock volatility – hit a new seven year low.

While these becalmed market conditions have offered welcome relief for some institutions – with government borrowing rates at or near historic lows – they are not good news for everybody. Low volatility can affect trading revenues, narrowing opportunities for investment banks to profit on trades. Nevertheless, the current environment appears to present a remarkably stable backdrop for wider economic recovery. A range of factors may influence volatility but in our view one central answer lies in the extraordinary financial policy stimulus adopted by various central banks – including the US Federal Reserve (Fed) – since the financial crisis. The unconventional monetary policies implemented in order to bring down interest rates faced by companies and households and spur growth have, in fact, boosted risk taking and total debt in the global economy.

Aron Pataki, Newton Real Return team

Source: Bloomberg

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