Risk Sinks to Pre-Crisis Levels

In time for Halloween, an "eerie calm" has settled over financial markets, despite looming concerns over major economies.

(October 31, 2012) — Risk in developed markets has fallen to levels not seen since before the collapse of Lehman Brothers, despite ongoing concerns about hurdles for the United States and the Eurozone, as well as a slowing Chinese economy. 

A review of global markets by risk analysis firm Axioma, showed short-term risk in the major developed markets had fallen back to levels not seen since 2007. 

Axioma said medium-term risk was also in line to fall over the coming months, leading to a sustained period of tranquillity on global markets. The VIX, an index that tracks volatility in markets, has likewise fallen from record high levels in the third quarter of last year to pre-financial crisis levels.

“The macro issues we are seeing in the headlines could already be baked into stock prices, and for that reason volatility has remained subdued,” said Melissa Brown, senior director in Applied Research at Axioma and co-author of the report. “Or, the extreme uncertainty in current markets may have simply paralyzed investors, which would also have had a dampening effect on volatility. More ominously, this could also be the calm before the storm.” 

Investors and other market participants have been criticised by some for failing to take into account the potential problems on the horizon, such as the US fiscal cliff and still-unresolved problems in the Eurozone. 

Almost three-quarters of respondents to a monthly fund manager survey conducted by Bank of America Merrill Lynch this month said they did not believe that the fiscal cliff was sufficiently priced into global equities and macroeconomic data. 

A month earlier, this same regular survey said investors had stopped being overly concerned about the problems in the Eurozone, despite Spain and Greece still looking shaky. 

Major exchanges in the US have been closed until this morning due to the impact of Hurricane Sandy on trading hubs in the country.