So what are mere and easily confused mortals to think?
Here are two headlines from Tuesday’s FT and their accompanying lead paragraphs:
Fears for financial system cut risk appetite:
Risk appetite suffered a sharp deterioration on Monday as fresh uncertainty about the global economy and the financial system prompted investors to shift away from equities, commodities and emerging market assets into the perceived safety of government bonds and the dollar… Equity markets suffered across the board on Monday, with the mining and commodity sectors leading the retreat. In New York, the S&P 500 closed down 2.4 per cent, while the pan-European FTSE Eurofirst 300 fell 2.5 per cent. The Vix volatility index, often called Wall Street’s “fear gauge”, saw its biggest rise for eight weeks as it rose back above the 30 level.
Risk-hungry investors shun US debt:
Foreign governments and private investors dramatically reduced their purchases of US assets such as Treasuries in April, choosing instead to make riskier investments elsewhere. Investors rushed to buy US government debt this year as the global economy teetered and they sought a safe place to park their money. That drove down Treasury yields which in turn reduced the interest rate on mortgages and helped stabilise the country’s housing market. But as conditions have started to improve, the appetite for risk has risen, spurring governments and other investors to move their money into higher-yielding assets outside the US.
Beyond the blurry lines dividing reality and perception, there are indeed signs of improvement in some markets – and worrying indications of more turbulence ahead in others. As Pimco’s CEO and co-chief investment officer Mohamed El-Erian suggests in a column in Tuesday’s FT:
Last year’s shocks have given way to a greater sense of stability in financial markets. Yet it would be wrong to conclude that we are returning to “business as usual.” The next few quarters will be about the aftershocks, driven not by a financial system in disarray but by the lagged reactions of the real economy, the political system, and the financial services industry itself.
Investor sentiment, however, is a powerful force and perhaps, as the FT suggests in the first report above, the latest rise of the Vix, the Chicago Board Options Exchange Volatility Index – otherwise known as Wall Street’s “fear index” – speaks most eloquently about the rising levels of anxiety out there.
As the Washington Post’s Ticker column points out:
Traders like the VIX to be below 30. Back when we last checked in with the VIX, it had dipped below 30 for the first time since Lehman Brothers collapsed in September. During the November market free fall, the VIX spiked in the 80s, as the markets were swinging wildly. [On Monday], the VIX climbed back above 30 for the first time since June 4.
At least one trader [on Monday] placed a nearly $1 million bet that the VIX will rise above 45 by July, buying several thousand option calls. That trader won’t make money unless the VIX increases by 50 percent in a month, which would make for a volatile, and probably diving, market.
Okay, so there’s at least one person out there who is anything but confused. But, as the Pragmatic Capitalist observes, “we’re wondering what this guy knows that no one else does”.
Related links:
Greed, fear, interest rates and bond yields – FT Alphaville
Stock market ‘fear index’ rises – The Ticker, Washington Post
US bond yields – is the glass half-full? – FT Alphaville
US bonds – Lex
Citi’s Levkovich: Not in a new bull market – Reuters