25 April 2018, 15:58 GMT
Source: Bloomberg, Fidelity International, April 2018.
Source: Thomson Reuters, Datastream, Fidelity International, April 2018. Performance shown in USD.
Signs of nervousness
Some odd-looking intraday moves recently have called into question the integrity of the CBOE’s settlement auction process. More broadly, there is a large disconnect between implied equity and currency market volatility as measured by their respective options markets (and for that matter, even implied volatility in the rates market).
A quick historical analysis suggests that while the current ratio of implied equity volatility to currency market volatility is high, it is not completely out of line with previous episodes, particularly those following a risk-off period. The average ratio of equity to currency market volatility during risk-off and risk-on period tends to be 2.3 and 1.7 respectively*. At its peak in the beginning of April, the ratio was near 3.
It’s also worth noting that these measures of volatility have been moving in the same direction. The correlation of moves between the VIX and measures of implied currency market volatility is at 0.7. This confirms there is a genuine elevated level of nervousness among investors across markets, which could be positive for equities as and when it calms.
Source: Bloomberg, April 2018.
Other indicators are broadly supportive
But investors should never rely solely on one indicator, especially one with occasionally erratic behaviour driven by the technical way in which it is valued.
Our multi asset models remain overweight equities but have turned less bullish on the back of weaker momentum and a rollover in leading economic indicators for global growth. While the trend in the latter looks primed for further downside, momentum could strengthen if equity price action stabilises from here. Other sentiment indicators, such as indicators of financial stress and investor positioning, continue to signal a buying opportunity in equities.
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