(Bloomberg) – The collapse in volatility across all asset classes following Friday’s US labor market report suggests a favorable environment in which some strategists believe risk assets may rise.
The Cboe volatility index fell 9% on Friday, near pre-pandemic levels, while the ICE BofA MOVE index – a measure of the volatility of government bonds – plummeted 8%. Similar metrics for currency markets and junk bonds also declined, continuing a trend that resulted in the four cross-asset volatility gauges falling between 10% and 30% so far this quarter.
In particular, a lower volatility of government bonds “should reinforce the argument that the risk premiums for stocks will not be overstretched and thereby keep stock volatility lower and the stock market higher in the coming weeks,” wrote Michael Purves, Chief Executive Officer of Tallbacken Capital Advisors LLC in a Note Sunday. “All in all, the prerequisites have been created so that the willingness to take risks remains in the coming meetings.”
Friday’s data showed that US employment growth picked up in May, but not enough to compound worries over rising inflation, which is driving bond yields higher, a concern that has messed stocks this year Has. US stocks got on the news, the S&P 500 Index climbed a hair’s breadth to its all-time high, while benchmark government bond yields fell.
S&P rises after labor market shows progress but needs support
At the same time, incoming data on price pressure could mess up the calm a bit. For example, a surprise in U.S. inflationary pressures coming Thursday could rock bond yields, the dollar, and gold and technology stocks, according to Chris Weston, chief research officer at Pepperstone Financial Pty.
“It will likely be the event to watch this week,” he wrote in a note.
The persistent lack of price volatility in the equity markets suggests that volatility meters – based on expected movements – could continue to decline, said Stuart Kaiser, strategist at UBS Group AG.
“We see the VIX index about 2 points too high because the realized volatility has decreased so much,” he wrote in e-mail comments.
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