The numbers for 2017 are nearly in and volatility looks like it cruising to multi-decade lows. Unless there’s a huge equity market upset in the dying trading days of mid-late December, new data from Hamish Preston, senior associate, at S&P Dow Jones Indices suggests that US equities haven’t been this calm since the 1970s, while European equities are also at a decade low.
According to Preston, the average observed 1-month volatility in the S&P 500 in 2017 is” lower than in any other year since 1970. Market participants have also seemed intensely relaxed about the expected impact of anticipated news-flow on S&P 500 constituents; 47 of the lowest 56 closing VIX levels since January 1990 have been observed in 2017, as well as two new all-time low closing levels. This environment helped the S&P 500 VIX Short-Term Futures Inverse Daily Index to a 175.63% year-to-date total return.” And what’s true for US is also true for Europe according to S&P Dow Jones Preston – he observes that “Risk was the dog that didn’t bite this year” in Europe as victories for the favourite candidates in Dutch, French, German and Japanese elections did not provide the unexpected results typical of 2016. “Without such surprises, and supported by ultra-low stock-to-stock correlations, the average monthly volatility in the S&P Europe 350 has been lower in 2017 than in any other year in the past decade”.
The chart below fleshes out this story in a very graphical form.
I also think it’s worth making another observation – on credit default swaps. I watch this market very carefully, not least as an indicator for worries about the health of the major investment banks. Again, we’ve seen some remarkable changes in this market over the last year. Put simply pricing for these options has collapsed, as investors have stopped worrying.
Structured product provider Meteor collates the latest numbers every month and you can see the latest December stats here – https://www.meteoram.com/advisers/credit-default-swap-rates1/credit-default-swap-rates2. What they tell is that rates on credit default swaps continued their recent gentle declines last month although some prices for credit default swaps for HSBC Bank did marginally increase over the month – from very low levels it must be said. What’s also striking is that over the last 12 months credit default swap rates have declined markedly for all banks in the list, with most experiencing a 50-70% decline. One notable recovery story – Deutsche Bank. Though its credit default swaps are a little more expensive than its peers, the previous risk premium has almost completely disappeared after a 65% decline in the cost of insuring against default on its bonds. One very final observation – the cost of insuring against a bond default by UBS – over the next five years – is now less than the cost for insuring UK government gilts.