It's America First—in Volatility

(Bloomberg) -- As the world’s largest and deepest equity market, the U.S. tends to be the relatively steady hand among volatile peers. Not anymore.

The country is at the epicenter of global market anxieties from trade to monetary tightening and an economic slowdown. The U.S. gauge of future volatility, the VIX, has exceeded the equivalents in Europe, Hong Kong and even emerging markets a few times over the past month. This is an anomaly that’s become more commonplace since the market sell-off in February 2018.

And it’s not just a matter of expectations. In terms of historical swings, the S&P 500’s 20-day-realized volatility jumped to the highest versus the Euro Stoxx 50’s since the financial crisis, and the highest versus the Hang Seng Index in seven years.

Catalysts from across the pond “have been the drivers of this correction,” said Ankit Gheedia, a strategist at BNP Paribas SA in London. “There have been a lot of concerns about a U.S. slowdown, the U.S. tech sector, how inflation affects profitability.”

While U.S. stocks initially took trade tensions in stride to lead global gains, confidence started to buckle in October amid growing fears that rising rates will weigh on growth. Soon thereafter, other risks became more salient: the unresolved trade conflict with China, a slowing tech sector, and a partial government shutdown -- all coming from America.

Such volatility anomalies may create opportunities for traders to bet on a reversal, but BNP Paribas’s Gheedia isn’t so sure. The bank is recommending calls that expire in February and sees the VIX rising since there will be less stock support from buybacks, given blackout rules during the earnings season, he said.

In a sign of elevated near-term stress, the front-month VIX futures are trading higher than the second-month contract; in fact, the whole curve through the sixth contract is inverted, an unusual phenomenon since the market outlook generally becomes less certain for the more distant future.

With monetary conditions tightening, economic momentum slowing, and as the opposition takes the helm of the House of Representatives, concerns about U.S. political risks are rising, according to Maarten Geerdink, head of European equities at NN Investment Partners, which oversees about $277 billion in assets.

“Donald Trump seems to be playing chess on multiple boards at the same time with the Chinese, with the Democrats, with the Europeans, with the Russians and so forth,” he said. There is a bit more political risk now, compared with the past year, “simply because the economy seems to be switching one gear lower.”

To contact the reporter on this story: Justina Lee in London at jlee1489@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Monica Houston-Waesch, Celeste Perri

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