We track a variety of market and macro factors to determine how the economy is progressing and signs that the cycle is shifting. One important factor in determining regime shifts is cross asset class volatility.
We look at volatility across various geographies and assets classes to determine if there is a broad-based increase or decrease in investor risk positioning or if there are key divergences. This helps inform the expected economic environment investors are discounting into different regions and asset classes. At the current moment, investors look to be discounting a positive environment in the U.S. and in emerging markets.
Starting with equity volatility, trends have been improving for board U.S. markets (S&P 500, NASDAQ, and Russell 2000) as represented by VIX, VXN, RVX. The emerging market equity index has also been experiencing declining volatility. Each of these volatility indexes are at the lowest levels since February.
Source: Koyfin.
Source: Koyfin.
The rolling one-month volatility of European equities is still high but has started to decline significantly in the month of November.
Source: Koyfin.
In fixed income, high yield option adjusted spreads (OAS) have continued to decline, and the overall index level ended November at the lowest level since February. Within high yield, CCC-rated credits ended November with the lowest OAS since May of 2019.
Source: Koyfin.
Source: Koyfin.
On the commodity side, oil index volatility has been declining during the month of November and is close to the lowest level since mid-September.
Source: Koyfin.
The volatility of the broad commodity index ETF and the agriculture commodity ETF have also been declining.
Source: Koyfin.
Source: Koyfin.
The volatility of the global currency index has been declining, as has some of the key U.S. Dollar exchange pairs.
Source: Koyfin.
Source: Koyfin.
On the defensive side, gold volatility has started to increase but is still low on an absolute basis. Treasury volatility (MOVE) is still near the lowest level in 2020 and implied volatility on Treasury options declined in November.
Source: Koyfin.
Source: Bloomberg.
Across regions and asset classes, there are several indicators suggesting that the economic environment will likely improve in 2021 and volatility will likely decline. This may not lead to dramatically higher Treasury rates or lower gold prices, as the absolute trend level of growth and inflation may remain low, but risk assets should outperform defensive ones in an environment of improving economic activity and declining market volatility.
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.
Senior Vice President, Investment Strategy
Boyd Watterson Asset Management, LLC
