Global risk mispriced? - Westpac

According to Richard Franulovich, Research Analyst at Westpac, a notable divergence is opening once again between market based prices of “risk” and more objective long term fundamental drivers such the level of policy uncertainty, growth in global liquidity and the strength of the global data.

Key Quotes

“The VIX has settled back down in recent weeks after a bumpy ride in Feb-April. Admittedly the Move index, CVIX and Baa spreads have been drifting higher lately but they remain well shy of the peaks hit earlier this year. Altogether a composite index of these market based risk prices remains stuck close to multi-year lows.”

“Yet global policy uncertainty, as measured by Baker Bloom and Davis, has been drifting higher in recent weeks, led by uncertainty on the global trade front.”

“Growth in central bank balance sheets, a loose proxy for liquidity and accommodation has slowed to a crawl too.”

“The growth rate in the G4 central bank balance sheet is as slow as it has even been in the post-crisis era. The rundown in the Fed’s balance sheet is slowly gathering steam and the focus is now of course on any potential announcements this week from the ECB.”

“Global growth momentum, as measured by global activity data surprises has cooled considerably too.”

“Altogether the upward drift in global policy uncertainty, an easing in the pace of central bank accommodation and a relatively uninspiring global data surprise index all suggest that market based measures of “risk” are mispriced. That pressure will likely intensify going forward.”