War fears lift asset price volatility to multi-month highs

Volatility soared across markets on Monday, with a gauge of potential swings in the euro-dollar exchange rate at the highest since November 2020 and a key measure of equity swings rising to the highest in more than two weeks.

Markets took fright late on Friday after a U.S. warning that a Russian invasion of Ukraine could come “any day”. On Sunday the United States said Russia might create a surprise pretext for an attack.

Stock markets fell heavily on Monday and Wall Street was tipped for a weaker start, while oil prices headed towards $100 a barrel. Assets such as government bonds and the Swiss franc caught a bid.

The VIX equity volatility measure — often known as Wall Street’s ‘fear gauge’ — rose to the highest since Jan. 28 at 32 points, having fallen below 20 points last week. Its European counterpart hit its highest since Jan. 24 to trade above 33 points.

A one-month volatility gauge for Germany’s DAX index, particularly vulnerable to an escalation in the conflict due to its constituent companies’ reliance on Russian gas, rose above 39 points for the first time since November 2020. It was last up 16 points on the day at 38.2.

The volatility surge enveloped currency and bond markets too, with euro-dollar one-month implied volatility at 7.6%. It had been below 6% at the end of January.

As the euro fell against the safe-haven Swiss franc, euro-franc one-month implied volatility jumped to 5.7%, the highest since May 2020.

A Deutsche Bank index of G10 currency volatility rose to 7.5%, the highest since February 2021 , while BofA’s gauge of bond market volatility closed Friday at a multi-year high of 94 points.

Aside from the threat of a war that squeezes oil supply and hits economic growth, central bank policy has been an added source of volatility for markets. Inflation at record- or multi-year highs is fanning speculation the U.S. Federal Reserve could opt for an aggressive front-loaded rate-hike cycle and that the European Central Bank could also raise interest rates this year.

Market swings had been on the rise since the start of the year, while COVID-19 concerns had ebbed. Volatility remains elevated as a result of repeated upward surprises in U.S. inflation data and growing concerns in Eastern Europe.

Subscribe to our newsletter

Don't miss new updates on your email