Data Matters: Vanishing volatility, crumbling correlations – HSBC

The relentless growth of data makes it increasingly important to identify what really matters for markets and after diving into the data it seems that cross-asset volatility is near all-time lows and correlations have fallen sharply, helping to support risk assets, according to analysts at HSBC.

Key Quotes

A life raft for the data ocean

Data is becoming an increasingly important part of the investment process. But the deluge of data flooding the market can be daunting. It is easy to feel like there is too much information to analyse; like one is drowning in data.”

Benign market backdrop

  • The HSBC Cross Asset Volatility Indicator (CRAVIN), which provides an aggregate measure of realised vol. for total returns across rates, FX, credit, equity, and commodity markets, is near historical lows. Developed-market equity vol. in particular stands out, with the latest reading the lowest since at least 2006. Strikingly, DM equities volatility is also currently lower than DM rates vol., something that has only happened once over the past 12 years (in late 2016 when US Treasury yields jumped following the US presidential election). Low volatility has provided support for risk assets, and emerging markets in particular.
  • At the same time, correlations have fallen sharply across several asset classes. The HSBC RORO Indicator, which measures the level of cross-asset correlations, is near its lowest level since the global financial crisis. And the fall has been even more marked within equity markets, with both country correlations and global sector correlations near 16-year lows. This combination of low volatility and low correlations has helped to suppress volatility in multi-asset portfolios. Indeed, there is currently little difference in volatility between a global equity/bond portfolio with 20% allocated to equities and 80% to bonds, and one with 80% in equities and 20% in bonds.”

Deep dive in the data

Our performance summary shows that EM equities have been the top performer for five out of nine months so far this year, while commodities continue to struggle.”

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