Investors are no longer serenely sailing from crisis to crisis as politics divides the U.S. at home and isolates it abroad. Volatility is on the rise, bearish options are multiplying and small-cap stocks are tumbling.
Across the equity, bond and currency markets, price fluctuations are climbing. The JPMorgan Global FX Volatility index, the Chicago Board Options Exchange’s VIX Index and the Merrill Lynch Option Volatility Estimate are all trending higher, having hit low points in June, July and August respectively.
Trading of bearish options on the S&P 500 Index jumped to a three-month peak last week, and the ratio of outstanding puts to calls climbed to its highest level since January 2016. Back then, equity losses were accelerating toward a two-year low.
Stocks off record highs and volatility off its lows suggests investors are waking up to market risks, though not necessarily worried about a crash. The Chicago Board Options Exchange’s SKEW Index, which tracks the cost of protection against large price swings, is trending higher though it remains off the highs seen earlier this year.
The Russell 2000 has fallen for four weeks in a row, and has declined about 7 percent since touching a high in July. Societe Generale SA recommended investors watch this barometer closely for signs of a wider pullback.
However, not all risk indicators are on the rise. The Markit CDX North American High Yield Index, a credit-default swaps benchmark used to hedge against corporate credit losses remains at just over half the level it reached early last year. Back then, oil falling below $30 a barrel and a slowdown in emerging markets added to investors’ concerns about the state of global economy.
— With assistance by Cecile Vannucci
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