Wealth Management

Morgan Stanley sees two big reasons low volatility will not last

Views of Manhattan/Bloomberg

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Price swings in currencies, bonds and other asset classes have slumped amid a dovish shift from global central banks, increased economic stimulus from China, and easing trade tensions.

Monday 15, April 2019

(Bloomberg) -- Morgan Stanley said that a combination of low liquidity and high complacency mean cross-asset volatility will not stay at historic lows for much longer.

Andrew Sheets, Morgan Stanley’s Cross-Asset strategist, said, “There are still two things that argue against the current levels of volatility being correct or sustainable.”

“The first is that market liquidity is still not great, the second I am not sure that the market in its newfound optimism has taken the story to the logical conclusion about where asset prices are headed,” Sheets said.

The Cboe Volatility Index has fallen over 50 per cent this year and Bank of America’s MOVE Index, a gauge of volatility in Treasuries, is heading back toward its record low.

A disconnect between the growth in financial market size over the past decade and the capacity of banks to take on risk, which has not kept pace, could exacerbate any selloffs, added Sheets.

According to Sheets, complacent market participants who equate a Federal Reserve on hold with low volatility is also an issue, and big price moves could soon surprise.

“If the Fed stays dovish and the data weaken, volatility will go higher, if the data pick up and central banks are effectively saying we are not going to tighten in the face of improving data, would not that generate a lot more risk-taking behaviour? And that would be volatile too,” said Sheets.

A number of strategists have also voiced concern over the impact of low liquidity. Goldman Sachs Group’s John Marshall and Rocky Fishman warned in December about the risks of falling volumes and market depth.

Additionally, JPMorgan Chase’s Marko Kolanovic expressed concern this month about the negative feedback loop between volatility and liquidity.

Investors may have gotten into the habit of selling volatility, which could be keeping some measures of it lower, according to Sheets. The strategist views 2007 as a cautionary tale for anyone who sees the world of low price swings as a time for complacency, that year too you had a very flat yield curve and low implied volatility.


TAGS : Morgan Stanley, volatility, low liquidity, high complacency, currencies, bonds, assets

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