Chart of the Week - The Calm
Volatility is dead, long live...
US high yield credit spreads have dropped down to the bottom end of the range, and likewise equity volatility has been lulled into slumber.
And fair enough, the macro backdrop has improved, financial conditions have eased, and sentiment has been overwhelmingly bullish as stocks move up to the right.
It echoes what I recently noted in emerging markets, where the composite risk pricing indicator (EM credit spreads, sovereign CDS pricing, equity volatility, and FX volatility) was approaching a record low.
There is definitely an upside from this: it can form a self-reinforcing feedback loop where lower volatility enables confidence effects; a more bullish mood, which plays out in higher asset prices, cheaper and more freely available funding.
BUT
It also means complacency.
With the exception of the great moderation in 2004-07, volatility and credit spreads rarely spend long at the lows.
Indeed, you might wonder given upside risks to inflation, heightened and lingering (geo)political risk, expensive valuations and excessive bullish sentiment… is it all just a little “too calm“?
Key point: All is calm…
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Aside from the chart above, we looked at several other charts, and dug into some intriguing global macro & asset allocation issues on our radar:
Global Markets Update: checking in on equities, frontier markets, rates, FX
Risky Risk Pricing: digging into the dearth of risk premium
Macro Radar: key macro/market events to keep tabs on
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Callum Thomas
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