13th June 2014 by The Harried House Hunter
Tedious Shocker for Financial Boredom
In the markets this week…
Bored, bored, bored! So very bored in fact, we wasted 5 minutes here at BullionVault the other morning looking at just how often gold prices have ever been this boring before.
More often than you might guess. Which is boring. London’s AM Gold Fix moved as little as it did Friday through Wednesday – less than 0.12% – just more than 3% of the time since 1968.
If you think that’s boring, Chinese finance site Hexun is so bored with all markets right now, it wasted a whole article seeing how gold and the US Dollar moved during the last football World Cup.
The answer? South Africa 2010 was very boring indeed. But not quite as boring for financial markets as June 2014 so far.
Volatility in the S&P500, for instance, has been this tedious only 19 weeks in the last 520 (rolling 1-month basis). But “it is in foreign exchange that low volatility really stands out,” as Steven Barrow at Standard Bank notes. “The bottom-scraping foreign exchange market outdoes other assets…daily trading ranges, especially in the majors, are absolutely tiny, and trading volumes seem to have collapsed.”
Take the Euro (and with Sterling at 2-year highs this summer, no doubt you will). We have to dig out a pork pie hat and Mod target parka to find daily volatility versus the Dollar this low (figured via the Deutsche Mark’s irrevocable exchange rate), way down at 1980 levels.
The cause? Cheap cash flooding out from central banks looks likely. So does broader (and closely related) market complacency, aka the search for yield. Like everyone else handling retained capital, currency traders are now drowning in liquidity, but find the returns from trying to turn a profit by selling options next to nil. Because options’ main component “is implied volatility,” as Barrow notes. So around they go again, nickel and diming whatever small moves they can, arbitraging everything flat.
FX does look uniquely dull however, Mark Carney’s nudging and winking aside. Standard Bank thinks “it’s down to the raft of allegations of FX manipulation…centred around the daily fixes.” Because if people “are now scared to trade around fixings, or pass on information around these times, it would certainly help explain why daily trading ranges – and daily traded volumes – have collapsed.”
Perhaps. But reversing out of that logic, we’d have to guess that gold and silver fiddling has been much smaller and less commonplace than in FX. Because while precious metals’ volatilities are crushingly dull, silver prices were last this boring only in 2007, just ahead of that summer’s fanfare for the financial crisis. The same is true of US Treasury yields, whose benchmark is the simple (and as yet unscandalized) daily close. Both in precious metals and bonds, such boring volatility was in fact commonplace before things got shaken up seven years ago. Which sounds boring. But it might signal just how different the new normal is from what the finance industry has come to expect.
One further alternative. “The collapse in volatility in financial markets,” reckons ex-UBS now Llewellyn Consulting economist George Magnus, starts with “the sharp decline in [macro] economic volatility.” On his data, sourced from the Council of Economic Advisers’ Jason Furman, volatility in US output is falling to the pre-crisis level known as the Great Moderation – that same moderation which central bankers everywhere took to mean they were doing such a fine job, they needn’t raise interest rates to prevent investors’ search for yield turning high-risk speculation instead.
The upshot? For Magnus, things might stop being so boring. That might seem a horribly dull conclusion, but it might also be worth heeding. Because stability is destabilizing as the financial crisis proved (and proved so decisively that Hyman Minsky is now mainstream).
So enjoy the financial boredom, and the distraction of the World Cup, while it lasts. Or get ready for a real shocker surprise, with lots more boredom to come.