Where is the fear? Markets wave off global risks
Reuters
Published Mar 16, 2018 04:26AM ET
Where is the fear? Markets wave off global risks
By Swati Pandey
SYDNEY (Reuters) - Simmering fears of a global trade war. An embarrassing political scandal in Japan. Rapid job-turnover inside the White House and the threat of faster interest rate hikes in the United States.
In any other era, this concoction would be a perfect recipe for heightened market volatility. But in recent months, markets have brushed aside risks and recurring bad news on geopolitics to stay focused on positive macro-economic cues.
And Guy Debelle, the Australian central banker who oversaw a review of global foreign exchange standards, says it doesn't make sense.
On Friday, the Reserve Bank of Australia deputy governor said in Sydney he finds it "puzzling that measures of volatility do not seem to embody much uncertainty".
"I have expected that volatility would move higher structurally in the past and this has turned out to be wrong," Debelle said. "But I think there is a higher probability of being proven correct this time."
For Paul Dales, Sydney-based chief economist at Capital Economics, markets are "taking all of this in their stride as the global economy is fairly strong and is expected to stay strong both this year and next... it is probably right that the recent events shouldn't derail that."
Investors got a taste of what the spike in volatility might look like when in early February fears of faster U.S. rate hikes hammered world shares.
That sell-off was short-lived, though, and equity prices are now not too far from their February highs.
A gauge of market volatility (VIX) is near all-time lows, while most estimates of the term premium for 10-year Treasuries (US10YT=RR) are around zero, or even negative, despite projections of multiple rate rises by the U.S. Federal Reserve this year and next.
This comes at a time the world is seeing the first synchronized global growth since 2007, with strong corporate earnings and blistering job-creation.
Higher rates could all but dampen the optimism, and that is just one of the many risks.
(GRAPHIC: Equities rally as volatility hits all-time low - http://reut.rs/2HFgLe9)
TRADE WAR
The danger of a global trade war looms after U.S. President Donald Trump slapped duties on imported steel and aluminum and has threatened further tariffs on Chinese goods.
In Japan, a cronyism scandal has engulfed Prime Minister Shinzo Abe and Finance Minister Taro Aso, causing uncertainty around political stability.
Yet the market response so far: stay calm and look away.
Despite shock events like Britain's vote to leave Europe, the threat of a euro-zone break up and the potential for a nuclear war with North Korea, market volatility spiked only temporarily.
Get The News You Want
In fact, equity returns last year were among the highest since the 2008 global financial crisis. Emerging markets did well too, and the Australian dollar AUD=D4 , considered a barometer for global risk, jumped 8.7 percent in 2017, its best performance in seven years.
For Shane Oliver, Sydney-based head of investment strategy at AMP Capital, risks can create chances to buy.
"It's hard to quantify geopolitical risks," he said. "It often makes more sense for investors to focus on the opportunities they throw up, rather than taking long-term shelter from them in low returning cash."
Written By: Reuters
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.