With markets as becalmed as this, it’s no wonder macro traders are worried about their bonuses.
A deep-dive examination of global financial markets shows that only seven of about 250 assets across classes including equity indexes, sovereign bonds, currencies and commodities were high-volatility outliers based on their price swings this year.
That’s the lowest annual level since 2014, and follows two straight years where there were at least 10 outliers, according to the data compiled by Bloomberg as of Dec. 21.All but one of the seven outliers were currencies, if bitcoin is classed as such. An almost 70 percent surge in Argentina’s Merval Index helped it join the group -- a testament to investor excitement about President Mauricio Macri’s reform program and chances of the country’s stocks getting reclassified for emerging-market indexes by MSCI.
The price swings shown in the Bloomberg analysis are expressed as z-scores, a measure of volatility based on price standard deviation (1997 to 2017). The study identified assets with z-scores of 2.326 or more -- with a 1 per cent probability of occurring -- as high-volatility outliers.
“You have very little news that could really produce volatility in the marketplace” this year, thanks to effective policy communication by the world’s major central banks, said Thomas Poullaouec, head of Asia-Pacific multi-asset solutions with T. Rowe Price Hong Kong.
Among the risk scenarios investors faced at the start of the year that didn’t pan out included a US-China trade war triggered by President Donald Trump’s protectionist action; conflict between the US and North Korea; and rolling election wins for separatist European political parties in the Netherlands, France, Germany and potentially Italy.
One scenario few might have seen coming was the Saudi Arabian-led move to isolate Qatar. That sent the offshore Qatari riyal tumbling, and it had a z-score of 4.354. Coming close behind was Uzbekistan’s currency, the soum, at 4.351, after the nation unveiled a devaluation in September in an effort to attract investment. The riyal and soum, like the other currencies atop the list, are relatively thinly traded.
For all of the concerns about its tulip-bubble like price surge this year, bitcoin only comes in sixth on the volatility scale among currencies. Of course, not all agree it would merit inclusion in that asset class.
With traditional fear gauges at historic lows, it’s little surprise that the z-score for the Cboe Volatility Index, tied to the S&P 500 Index, is the lowest in 20 years.
And that itself might be a concern when it comes to what could happen in 2018.
“My worry now going into the end of this year is more a relative sense of complacency, where everything seems fine,” Poullaouec said.