We should not be frightened of a return to volatility in the markets – provided it can be managed

Economic View: Good news comes in a gradual stream while bad news comes in chunks

It's quiet – too quiet. You know the classic movie scene where the hero observes how quiet things are just a moment before all hell breaks loose? It's a bit like that on the financial markets just now. Whether there is some shock about to hit us is anyone's guess, but the lack of volatility in the markets is quite remarkable. Shares in the developed world are pretty flat, currencies are pretty flat, bonds are pretty flat and most commodities are pretty flat too.

For anyone who makes money out of volatility, such as the shareholders of IG Index, the UK's largest spread-betting firm, this is already bad news. It noted a couple of weeks ago, when it produced its results, how subdued trading had been. It was also a key part of a recent speech at the LSE by Charlie Bean, a deputy governor of the Bank of England, on the future of monetary policy – how we get back to normal. He showed one of those spider's web graphs, reproduced here. This demonstrates that volatility in a number of different markets was much higher during the financial crisis (the red ring) than it was beforehand (the blue ring), as you would expect. But since the February Inflation Report it has been even lower than it was before the crisis (the black ring).

"Taken in isolation," he observed, "this is eerily reminiscent of what happened in the run-up to the crisis."

Another measure of volatility is the Vix, the so-called "fear gauge". This is the Chicago Board Options Exchange Volatility Index and it reflects a market estimate of future volatility based on the weighted average of the implied volatilities of a number of different markets. This is currently the lowest it has been for a year, and as you can see from the second graph, it has fallen further since February.

Why so quiet? There are two broad explanations and the answer will encompass some mix of them both.

One is investors can see that the world economy is in the early stages of a cyclical recovery. Although different countries are moving at different speeds – the UK, US and Germany well into it, France, Italy and Spain well behind – the recovery has a long way to run. Growth will enable countries/markets/companies to work through any difficulties they might face. This combination – an awareness that a lot needs to be fixed but also a confidence that it can be fixed – explains the calm in the markets. Both the good news and the bad are, so to speak, "in the market".

The other explanation, cited by Mr Bean in his speech, is that there is "a sense of complacency and an underestimation of market risk by investors". He continued: "It is inevitable that at some stage market perceptions of uncertainty will revert to more normal levels. That is likely to be associated with falls in risky asset prices and could be prompted by developments in Ukraine, the fault lines in the Chinese financial sector, monetary policy exit in the advanced economies, or something else. But it will surely come at some point."

It is implicit in that statement that the shock will be a negative one and given present level of asset prices this is probably right. Louise Cooper, the independent analyst, put out a post yesterday drawing attention to the way American investors were seeking protection against a fall in share prices: the ratio of "puts" relative to "calls" was at its highest level since 1955. Many more people were betting that the market would fall rather than rise.

That is certainly the balance of probability. But we should not exclude the possibility that the surprises will be positive ones: that the breakout will be on the upside, not the down. It is harder to make this case, largely because the world being what it is, good news comes in a gradual stream while bad news comes in chunks. It will be interesting to see today's statement by the European Central Bank, both for what it proposes and the market reaction to it. Expectations are very high and that itself must be a concern; but the ECB president, Mario Draghi, is not someone you want to bet against. If the negative surprises that might break this period of low volatility are the usual suspects noted by Mr Bean, the positive surprises must include better-than-expected performance from the eurozone.

For the US, the main positive surprise would be for employment to pick up. The rate of hiring has been unusually slow, given the OK economic performance. If that were to happen it would underpin rising consumption and spread the benefits of the recovery more widely.

And here in the UK? Well, all the data are very positive, particularly the prospects for employment growth (the CBI survey yesterday was strong) and the monetary indicators. Narrow money is pointing to good growth for the rest of this year. The question really is not about the economy, but about how much of the positive stuff is in the market already, and how seriously political risk is weighing on sentiment – political risk including the Scottish referendum as well as the general election next year.

One final thought. There is an implicit assumption that volatility in financial markets is bad and stability is good.

On the face of it that is true: you absolutely don't want the level of volatility associated with the financial crisis. But a return to more bumpy markets would create opportunities for companies as well as investors. We certainly should not be frightened of it, which is a good thing because that is what we shall surely get.

Start your day with The Independent, sign up for daily news emails
Property
pets
Arts and Entertainment
tvThe C-Word, TV review
Arts and Entertainment
The Ridiculous Six has been produced by Adam Sandler, who also stars in it
filmNew controversy after nine Native American actors walked off set
Sport
Danny Jones was in the Wales squad for the 2013 World Cup
rugby leagueKeighley Cougars half-back was taken off after just four minutes
Life and Style
The original ZX Spectrum was simple to plug into your TV and get playing on
techThirty years on, the ZX Spectrum is back, after a fashion
News
Tiger Woods and Lindsey Vonn are breaking up after nearly three years together
peopleFormer couple announce separation in posts on their websites
Sport
football
Life and Style
Google celebrates Bartolomeo Cristofori's 360th birthday
techGoogle Doodle to the rescue
Arts and Entertainment
Haunted looks: Matthew Macfadyen and Timothy Spall star in ‘The Enfield Haunting’
tvThe Enfield Haunting, TV review
News
news
News
The Mattehorn stands reflected in Leisee lake near Sunnegga station on June 30, 2013 near Zermatt, Switzerland
news
ebooks
ebooksA celebration of British elections
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Claims Administrator

£16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...

Recruitment Genius: Senior SEO Executive

£24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...

Recruitment Genius: Online Customer Service Administrator

£16000 - £18000 per annum: Recruitment Genius: An Online customer Service Admi...

Recruitment Genius: Digital Marketing Executive

£18000 - £22000 per annum: Recruitment Genius: This global, industry leading, ...

Day In a Page

Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

Fishing is on Nigel Farage's mind

Ukip leader casts a line to the disaffected
Who is bombing whom in the Middle East? It's amazing they don't all hit each other

Who is bombing whom in the Middle East?

Robert Fisk untangles the countries and factions
China's influence on fashion: At the top of the game both creatively and commercially

China's influence on fashion

At the top of the game both creatively and commercially
Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

The man known as GOD has a reputation for getting the job done

Lord O'Donnell's three principles of rule
Rainbow shades: It's all bright on the night

Rainbow shades

It's all bright on the night
'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power
Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

The price to be paid for challenging the rule of extremists

A revolution now 'consuming its own children'
Welcome to the world of Megagames

Welcome to the world of Megagames

300 players take part in Watch the Skies! board game in London
'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

Charlotte Gainsbourg on 'Nymphomaniac'

Starring in one of the most explicit films ever
Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

Robert Fisk in Abu Dhabi

The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

Vince Cable exclusive interview

Charging fees for employment tribunals was 'a very bad move'
Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

Iwan Rheon is returning to his Welsh roots

Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
Russell Brand's interview with Ed Miliband has got everyone talking about The Trews

Everyone is talking about The Trews

Russell Brand's 'true news' videos attract millions of viewers. But today's 'Milibrand' interview introduced his resolutely amateurish style to a whole new crowd
Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

It's time for my close-up

Meet the man who films great whites for a living