A Month After Market Mayhem, Here’s How Gauges of Stress Look


The whirlwinds that swept through global markets like a powerful nor’easter from late January have dissipated. But what do the weather gauges now signal?

Measures of stress in stocks, bonds and currencies suggest that traders are settling in to newfound ranges. Equities are experiencing fewer price swings, and valuations are now closer to five-year averages. Emerging-market currency volatility is back to levels seen at the beginning of the year and Treasuries have calmed since 10-year yields stopped climbing.

There’s still plenty to worry about, from a possible trade war to an ever-changing U.S. administration to a scaling back of unprecedented central bank stimulus. And the Cboe Volatility index remains above its five-year average. For now, money managers can take heart from these five charts as the quarter that shattered their serenity draws to a close:

Calmer Volatility

After February’s volatility storm, the message from the derivatives markets is that things are calming down. The VVIX index, which measures the expected volatility of the Cboe VIX Index, is back at levels seen towards the end of January.

Lower Valuations

The price being paid by global stock investors for future profits has fallen back in line with the average over the last five years. The MSCI All-Country World Index, a measure of equities across developed and emerging markets, now trades at about 15.5 times forecast earnings, down from about 18 times at the start of this year.

Valuations Reset

MSCI All-Country World Index price-earnings ratio now just above five-year average

Source: Bloomberg, MSCI Inc.

Emerging Lull

Swings in emerging-market currencies have subsided. The 10-day volatility of the MSCI Emerging Markets Currency Index is back below the average of the last year.

Bonds Becalmed

The $14.7 trillion Treasuries market is also settling down, derivatives pricing shows. The MOVE index, a gauge of price swings in U.S. government bonds, has fallen close to the average of the last 12 months.

Range Trading

As for Treasuries themselves, they have settled into a new trading range after an almost 1 percentage point increase in the 10-year yield from September to late February. That stability has kept it from retesting the 3 percent level for now, a move above which is seen as a risk to many markets.

— With assistance by Andrew Janes, and Joanna Ossinger

2018-03-14 09:16:19

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