Tension between Ukraine and Russia is escalating. The U.S. bull market has gone for on a year longer than average. Federal Reserve policy makers are scaling back its bond buying. Investors don’t care.
A risk measure that that uses options to forecast fluctuations in equities, currencies, commodities and bonds fell to its lowest level in almost seven years last week. Calm is blanketing investors after the MSCI All-Country World Index more than doubled from March 2009, 10-year Treasury yields climbed from an all-time low of 1.39 percent reached in 2012, and the euro traded in the narrowest range ever last week.
Though some corners have seen volatility creep back, for most global markets the absence of catastrophes such as the 2008 financial crisis has been enough to create a sense of relative peace. Concern valuations are stretched in U.S. technology shares or that Russia will invade Ukraine have done limited damage to broader measures of price.
“The market has fallen into a noticeable lull,” Ned Rumpeltin, the head of Group of 10 currency strategy at Standard Chartered Bank, said in an interview from London. “We’ve had a series of very strong themes in the past few years, but we’re not in that situation anymore,” he said. “There is a certain degree of complacency.”
Bank of America Corp.’s Market Risk Index dropped 4.9 percent last week and closed at minus 1.10 on April 24, the lowest level since June 2007.
Optimism the global economy is improving has buoyed some of the world’s riskiest assets this year. Debt for Greece, which sold bonds this month for the first time since its international bailout, and Portugal have led an advance in euro-region securities in 2014, while Spanish, Italian and Irish yields have fallen to record lows amid signs the region’s sovereign-debt crisis is receding.
The yield on U.S. 10-year Treasuries is at 2.70 percent, up five basis points from the end of February, while the dollar traded at 102.49 yen at 5:50 p.m. in New York, compared with its six-month average of 102.33. The Swiss franc, which tends to strengthen during periods of turmoil, traded at 1.2193 per euro, down from a more than one-year intraday high of 1.2104 in March.
However calm other assets have been, American Internet shares have seen their wildest swings in two years as traders dumped the biggest winners of the bull market. The Nasdaq 100 Index, which tracks the largest U.S. technology companies, lost 7.5 percent from its 13-year high in March through this month’s low. The gauge traded at 22 times its members’ reported earnings before the drop, the highest multiple since 2010.
And while it rebounded yesterday, the Micex Index dropped every day last week as the seizure of international inspectors by pro-Russian separatists raised tensions after Russia began military exercises on Ukraine’s border. The White House has imposed sanctions on seven Russian officials and 17 companies linked to Russian President Vladimir Putin’s inner circle.
“The geopolitical factor can’t be ignored,” Howard Ward, chief investment officer for growth equity at Rye, New York-based Gamco Investors Inc., said in a television interview on “Bloomberg Surveillance.” His firm oversees about $47 billion. “It’s a very pressing matter for the market. You have to look at the macro situation, whether it’s geopolitical, what’s going on in China, what’s going on in Japan. All of these factors influence the global market.”
The five-year rally in U.S. stocks has surpassed the average length of bull markets by about 13 months, according to data compiled by Bloomberg and Birinyi Associates Inc. since the end of World War II. Nine of the last 12 bull markets have ended in five years or less.
Even as stocks such as Facebook Inc. and Netflix Inc. have fallen 20 percent or more, the broader U.S. market remains calm. The average difference between the S&P 500 high and low price each day has been 0.95 percent in 2014, according to Howard Silverblatt, an index analyst at S&P Dow Jones Indices LLC. While that’s more than the year before, it compares with swings of 1.07 percent in 2012, 1.64 percent in 2010 and the 50-year average of 1.47 percent, according to data compiled by S&P.
“I keep hearing that volatility has returned to the market,” Silverblatt wrote in a note to clients yesterday. “Maybe, if you just started trading.”
Investor expectations for price moves remain low across asset classes and regions. The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options prices known as the VIX (VIX), fell 35 percent from its high in February through yesterday. It gained 0.8 percent to 14.08 at 10:16 a.m. in New York today, while Europe’s VStoxx Index lost 5.7 percent to 17.4. In Hong Kong, the HSI Volatility Index closed at 14.14 on April 24, the lowest since January.
Bank of America Merrill Lynch’s MOVE Index, which measures volatility based on prices of over-the-counter options on Treasuries maturing in two to 30 years, closed at 59.1 yesterday, near its lowest level in almost a year.
JPMorgan Chase & Co.’s Group-of-Seven Volatility Index closed at 6.2 on April 25, while a broader, global index that tracks options on currencies of major and developing nations dropped to 6.53, the lowest levels since 2007.
The euro traded between $1.3785 and $1.3855 last week, a range of 0.7 U.S. cents that was the narrowest since the currency started in 1999, according to data compiled by Bloomberg. The range of 0.74 cents the previous week is the second smallest, the data show.
“Buying protection across all asset classes has been painful,” Kokou Agbo-Bloua, head of equity and derivative strategy for Europe at BNP Paribas SA, said by phone from London on April 25. “Some long-volatility funds suffered big losses, and now we’re left with investors who either don’t believe in a meltdown or are complacent. Sometimes the best hedge is to sell what you own rather than buy protection.”
The cost of insuring corporate debt around the world has fallen to the lowest levels in years. The Markit CDX North America Investment-Grade Index of credit-default swaps on 125 companies now costs 66 basis points, near the lowest since 2007 and down from 279 basis points at the peak of the financial crisis in 2008. The Markit iTraxx Europe Index now costs 72 basis points, compared with 208 basis points in 2011.
“Markets can fully digest risks very quickly,” said Michael Woischneck, who helps oversee about 1 billion euros at Lampe Asset Management in Dusseldorf. “Ukraine can disturb the market from time to time but the investors are getting used to it. We can have a sell-off on Friday and then have a completely different, bullish focus on Monday. We aren’t too concerned.”
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