Outsize Swings Spread to Other Asset Classes

Charts, Commentary, News, Stocks

By Gunjan Banerji, markets reporter

Swings across asset classes have mounted in recent days, flashing a warning sign for the stock market.

Swings in oil, bond and currency markets have jumped this month amid trade tensions between the U.S. and China and fears of slowing economic growth. U.S. stocks stabilized in recent days after a bumpy start to the week, but investors are bracing for continued turbulence across markets.

The Merrill Lynch Move Index, which measures volatility in government bonds, has jumped about 42% this month, FactSet data through Thursday show.

Measures of currency volatility and oil-market swings through the Cboe/CME FX Yen Volatility Index and Cboe Crude Oil ETF Volatility Index also have risen in August. The currency volatility gauge hit the highest level since early January.

The volatility across other asset classes has led some analysts to warn that it could surge even further in stocks.

The jump in currency and bond volatility can be a harbinger for stock volatility, said Stuart Kaiser, head of equity derivatives research at UBS. “That becomes a risk that equity volatility is going to move even further.”

Expected swings in the Chinese yuan and U.S. dollar currency pair also jumped recently, reminiscent of the August 2015 swoon in equities and serving as a warning sign for stock prices, according to Credit Suisse.

For example, the last time expected swings jumped this high for the Chinese yuan and U.S. dollar currency pair was Aug. 11, 2015, wrote Mandy Xu, an equity derivatives strategist at Credit Suisse, in a recent note. Fears that China’s economy was slowing fueled selling in stocks around the world that month.

“We think risks going forward are tilted to the downside,” Ms. Xu wrote.

This was partly on display last week. The yuan’s recent depreciation preceded the biggest fall for equities in months on Monday, while government bond moves stoked fluctuations in stocks Wednesday.

In another sign that investors are bracing for big swings in markets over the next month, near-dated futures contracts tracking the Cboe Volatility Index, or VIX, jumped above ones expiring later in time.

Generally, investors account for higher volatility later because of greater uncertainty further out, making the inversion unusual for the derivatives markets.

“The biggest driver of financial markets right now is the trade tensions,” said Brian McMahon, chief investment officer of Thornburg Investment Management. “People aren’t sure which way to turn.”


To read a longer version of this story online, click here.


How have you changed your portfolio to account for recent market swings? Let the author know your thoughts at gunjan.banerji@wsj.com. Emailed comments may be edited before publication in future newsletters, and please make sure to include your name and location.

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