Volatility is not something usually associated with bricks and mortar, observes Lex. But since late February when investors woke up to the problems in the US subprime mortgage market, Vix (a measure of implied stock market volatility) has risen from its eerily low levels of late last year. Having remained largely below 12 for that period, it bounced briefly to about 20 and is still above recent lows.
Part of that is heightened concerns about the risk of contagion. These surged again on Monday following a stark profit warning from American Home Mortgage Investment Corp.
Some investors fear that subprime problems could leak through to the rest of the housing market and the US economy more generally. That impact still appears manageable, in spite of American Home Mortgage’s acknowledgement that the better credit quality mortgage market is also being affected.
The other knock-on effect has been the impact on market psychology. Investors have been reminded that different assets really do involve different levels of risk. And that prices can move aggressively when bad news turns from speculation to reality. Subprime credit spreads, for example, have ballooned in recent months.
The increased jitters hardly signal panic. The Vix index remains well below historic levels. On the debt side, high-yield spreads remain tight. Despite heightened macro-economic uncertainty, it is not just fear affecting the market. Witness Dow Chemical’s volatility on the back of vague buy-out rumours – with traders taking the view that anything is possible in today’s private equity boom.
Overall, investors remain remarkably relaxed about the big risks hanging over the markets – be it Middle East instability or US inflation. But, finally, they at least appear to be acknowledging that these exist.