The sudden jump in market volatility late last week may signal more turbulence ahead as investors brace for uncertain U.S. midterm election outcomes, heightened fears of conflict in Iran, and questions about AI infrastructure rollout. Roula Khalaf, FT editor, highlights the author, Kokou Agbo‑Bloua, global head of research at Société Générale, noting that equity markets have remained unusually resilient this year despite wars in Ukraine and the Middle East. VIX and VSTOXX indices have stayed calm at 16.3% and 17.7% respectively, reflecting strong earnings growth fueled by massive AI capital spending and fiscal deficits paired with tax cuts and defense outlays. Central banks, having learned from the 2022 inflation mistake, are now tightening again, with the Federal Reserve, ECB, Bank of England and Bank of Japan expected to raise rates further, driving bond yields higher and debt‑servicing concerns. Yet equity index volatility stayed subdued because sector‑by‑sector performance offset each other—AI hardware vs. software, financials vs. utilities, oil firms vs. transport—creating high dispersion. In the Euro Stoxx 50, negative correlations among stock pairs have surged to an unprecedented 30%, illustrating the hidden complexity beneath the surface.
The recent calm persists even as wars in Ukraine and Iran show no quick resolution, and the risk of Strait closures in Hormuz and Bab al‑Mandeb could have spiked equity risk premia—yet it did not. Rising bond‑yield volatility and tighter credit conditions in both investment‑grade and high‑yield sectors also failed to lift equity volatility, suggesting that market sentiment may be insulated from higher rates, geopolitics and credit spreads.
Why has equity index volatility stayed low despite rising risks? The offset between outperforming and underperforming sectors, combined with strong AI‑driven earnings and central bank tightening that has been priced in, has kept overall index moves minimal. Investors are rotating heavily across sectors, creating wide return dispersion that masks underlying volatility.
Why has equity index volatility stayed low despite rising risks?
Source: Financial Times Markets · Summarized by HeadlinesBriefing