Markets: The calm before the calm? - Westpac

All looks good in global equity markets as The MSCI Asia Pacific Index today broke its 2007 high to set a record as Japan’s Nikkei 225 reached levels last seen in 1992, according o Sean Callow, Research Analyst at Westpac.

Key Quotes

“The major US and Germany indexes have printed many record highs this year. Even the much-maligned ASX 200 punched through 6000 this week for the first time since Jan 2008.”

“Moreover, much of the global stock rally has occurred in a very orderly fashion. According to CNBC, the S&P 500 has now avoided a daily close of -0.5% or more for 45 consecutive trading sessions, the longest such streak since 1968. But investors are not content to simply buy equities. Some are also counting on sustained low volatility by buying the XIV exchange-traded note whose price is driven by the inverse of S&P 500 volatility benchmark VIX.”

“Other markets are also notably calm. One month EUR/USD implied volatility is well below 6%, reaching lows since 2014, having collapsed from this year’s highs above 13% in April when markets were anxious about the French presidential election (remember Marine Le Pen?!). The MOVE index (Merrill Lynch) of Treasury volatility is at record lows after the 10 year T-note’s surge above 2.40% in late October fizzled out.”

“Of course, central bankers and finance ministers often worry publicly about volatility – see for example the G20 statement in March: “excess volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability.” So we won’t hold our breath for official concern about tight trading ranges.”

“Some of the market calm seems warranted by the predictability of central bank policy, including the ECB mapping its exact plans to Sep 2018, the BoJ seemingly not changing its stance for a long time yet, the BoE and BOC cautious in their mild “tightening” and the RBA firmly on hold. And a Fed hike in Dec is 92% priced. Certainly political turmoil in e.g. the UK, US and Australia is having very limited visible market impact. But what is happening beneath the market surface?”