Markets ride getting bumpier

ASX200 volatility index over the past 12 months.Stock market volatility has been on the rise over the past six weeks, but there is no reason to panic, analysts say.
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The ASX200 Volatility Index is hovering around its highest levels in nearly 12 months, at 19.78, but it is well off the levels seen during the global financial crisis, which saw volatility peak at 66.72 points.

Since May 14, this year’s stock market peak, the volatility index has jumped 52.1 per cent.

“Yes, you’ve seen volatility rise, but it’s nowhere near the extent to where you’d consider it at crisis levels,” said Macquarie Private Wealth division director Martin Lakos.

Mr Lakos said the index was a measure of perceived volatility which followed markets, so it was no surprised to see a jump over the last month, with the ASX200 falling 9.5 per cent and the Australian dollar slipping to 33-month lows.

Over the past five years, volatility has spiked a number of times, including during the European debt crisis and the Japanese earthquake and tsunami, but overall it has been trending downwards.

“What is interesting is that through the last year or so, through the US election, through the budgetary process in the US, volatility has been coming off, these things are either being factored into the market or the market is becoming more comfortable with these issues,” said Mr Lakos.

Credit Suisse analyst Damien Boey said the slight increase in volatility was a sign that the market was unsure if central banks could cope with another crisis.

“Volatility came down because central banks were able to, through their quantitative easing policy, drive down to risk premium. But now that Japan is showing signs of ineffective quantitative easing and the Fed is talking about potentially ending it, volatility is starting to return,” said Mr Boey.

Australia’s volatility index is now at similar levels to the US, with the Chicago Volatility Index at 17.1, well off its peak of 80.9 in 2008.

While the US index has been a little more erratic than its Australian counterpart, Mr Boey said he was unsurprised by the indexes’ correlating.

“Both economies are facing downside growth risk, the US economy is experiencing quite extreme fiscal austerity, that is affecting the growth outlook and that’s why the most recent data points have been a bit negative.”

“In Australia, we know the story is about mining capex and how it’s not rolling over,” he said.

The original release of this article first appeared on the website of Shanghai Night Net.

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