War fears push asset price volatility to multi-month highs

Volatility soared across markets on Monday, with a gauge of possible swings in the euro-dollar exchange rate at a high since November 2020 and a measure of equity volatility at a two-week high.

Markets spooked late on Friday after the US warned that a Russian invasion of Ukraine could come “at any moment”. On Sunday, Washington said Moscow could create a surprise pretext for an attack.

Stock markets fell sharply on Monday and Wall Street was set to open lower, while oil prices headed towards $100 a barrel. Assets such as public debt and the Swiss franc benefited.

The VIX equity volatility index – often known as Wall Street’s “fear gauge” – rose to its highest level since January 28, at 32 points, after dipping below 20 last week. Its European pair reached its maximum since January 24, surpassing 33 points.

The increase in volatility also reached the currency and bond markets, with the one-month implied euro-dollar volatility at 7.6%. At the end of January it was below 6%.

A Deutsche Bank index of G10 currency volatility rose to 7.5%, the highest point since February 2021, while BofA’s gauge of bond market volatility closed Friday at a multi-year high of 94 points.

Apart from the threat of a war that would hamper oil supplies and hit economic growth, central bank policy has been an added source of volatility.

Inflation, at record or multi-year highs, is fueling speculation that the US Federal Reserve could opt for an aggressive cycle of rate hikes, and that the European Central Bank could also raise interest rates this year.

UBS Global Wealth Management noted that market swings had increased since the beginning of the year, while concerns over COVID-19 had subsided.

“Volatility remains elevated on the back of repeated surprises to the upside in US inflation data and growing concerns in Eastern Europe,” he said.