The schools all broke up at least a couple of weeks ago and there are still another three weeks to go until the August bank holiday that signals the unofficial end of summer holiday season.
Markets have not let us down and have become predictably quiet, some say too quiet.
The VIX, often tagged the ‘fear index’ is perhaps the world's most prominent measure of market volatility. VIX is the shorthand term for the snappily-titled Chicago Board Options Exchange Market Volatility Index which measures the implied volatility of S&P 500 index options.
After a sustained period of decline and stagnation which had sent it to historic lows, the VIX jumped significantly over the past week and a half, moving 25% from around 11.5 on 24 July to 15.2 today, with a peak of 17.5 along the way on 1 August.
The increasing likelihood of an interest rate rise in the US following not long after the UK is a major driver of this sentiment after US economic growth surprised on the upside last week with a 4% year-on-year figure.
“We are now at the stage where good US data advances the cause of an earlier-than-expected rate hike,” said IG Chris Beauchamp, market analyst at IG. “Stock indices have not been keen on a UK rate increase, but the thought of a US rise leaves them almost quivering in fear,” he added.
M&G’s UK equities manager Mike Felton has felt for some time that the low level of the VIX was symptomatic of significant complacency in the market. Felton wrote that risks attached to both the near-term macroeconomic outlook and to global geopolitical instability appear ‘especially acute’ but are not being adequately reflected in valuations.
Felton pointed to the Ukraine crisis, Israel-Palestine conflict and the continued uncertainty over Fed tapering and interest rate rises as creating a level of potential global volatility not seen since the 1970’s.
The spike seen over recent days suggests that the unusually low level of the VIX as flagged by Felton and others was indeed unsustainable and ripe for a big shift. Whether a big shift in equity markets to follow the VIX will be forthcoming remains to be seen however.
To complement the movement in the VIX last week and the geopolitical tensions, this week has opened up with credit ratings agency Moody’s announcing it has downgraded its outlook for UK banks from stable to negative.
The ratings agency said new regulations on ring-fencing customer deposits to separate them from speculative activity will have significant costs which are yet to be reflected in bottom lines. It also warned that benefits to banks from the growth in the UK economy could being cancelled out by increasing exposure to fines stemming from PPI miss-selling and LIBOR or FX fixing.
The health of banks, both domestic and global, is key to the wider economy and as we have seen before, major difficulties faced by banks can be the forerunner to wider economic troubles.
While smartphones and increasingly ever-present internet connections around the world mean wealth managers and fund managers need not be physically present to oversee portfolios, there are a few warning signs to suggest there is an outside chance many may need to head back to offices in London and elsewhere sooner than planned this August.
