(Kitco News) - With Federal Reserve policy seemingly on autopilot, options volatility in several markets is lower than usual, market watchers said.
Options volatility in gold, silver, some currencies and U.S. Treasurys are low. The Chicago Board Options Exchange volatility exchange index, known as the VIX, shows equities volatility is near record low levels, too.
Low volatility usually means that traders don’t see much risk in the near-term future for a market. Some markets have a naturally high volatility because they may be prone to price swings or are considered riskier trades. For instance, silver usually has a higher volatility than gold because of its tendency to have greater price movements.
Frank Lesh, broker and futures analyst with FuturePath Trading, said the near record low volatility in the foreign exchange markets is having a ripple effect in other sectors.
“That’s certainly one of the problems. FX markets move the world around; it’s money. A lot of it is Fed policy, but also the stock market is taking capital from anywhere and anyhow,” Lesh said.
Alex Manzara, vice president, RJ O’Brien, agreed.
“I think a lot has to do with the zero interest rate policy we have just about everywhere. We’ve got it in Japan, in the Eurozone, we have it here. It tends to really dampen the volatility across currencies and certainly interest rates,” he said.
In addition to accommodative monetary policy in most developed nations, Sterling Smith, futures specialist at Citibank Institutional Client Group, said the Fed policy is also very consistent, even though it’s removing its stimulus by trimming back its asset-purchase program, known as quantitative easing.
The VIX is also at low levels, suggesting the stock market seems to be at ease with current conditions, the analysts said, even though the Standard & Poor’s 500 stock index is at record highs and hasn’t had even a 10% correction in nearly two years.
“We don’t have booming economic growth, but we don’t have any serious problems. We have rather warm growth as it were; that is keeping the stock market from having any serious corrective problems,” Smith said, noting that the only two futures markets that have experienced any high volatility this year have been coffee and wheat.
There are some potential problems bubbling under on the horizon, but even those have done little to push up volatility. Lesh said the tensions between Russia and Ukraine have not had nearly the same impact on options volatility now as they did earlier in the year.
For gold, the market has held into a price band of around $1,315 an ounce on the high end and about $1,275 on the low end. Even the geopolitical tensions have not pushed gold out of its range.
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Traders Too Complacent?
Both Smith and Lesh said periods of low volatility don’t last, so be on guard.
“The low volatility suggests that no one cares, and that’s of course means we’re going to have a correction,” Lesh said.
Manzara agreed there’s too much complacency in the market and said several other traders have mentioned the low volatility across many markets could catch many people off-guard when it changes.
Yet, he admitted trying to be a contrarian on low volatility has only led to heartache.
“The thing is, every time you try to fight against it, (what happens is) what they call the Japanese bond market: the widow maker. Every time someone tries to short it they get killed. That’s kind of how this is,” he said.
Smith concurred traders may be feeling complacent, but he said he’s not sure what’s out there to shake things up and create much higher volatility.
“We could be setting ourselves up for a melancholy summer,” he said.
And for gold, that could mean particularly quiet trading as summer normally has low volume as it’s far ahead of major gift-giving seasons in the West and India.
Yet Lesh said part of the low volatility may come from a lack of trading and not necessarily complacency.
People may be “too frustrated and nervous about things. The uncertainty just keeps people sidelined too and that’s a problem for the volatility as well. When in doubt, a lot of people stay out,” he said.
He also said part of the problem is that many markets are holding in a range and that doesn’t make for profitable trading.
“You get into these trades and they don’t go anywhere. Whether it’s a short or a long, they don’t go anywhere, with the exception Treasury or equities…. I’m seeing that in gold right now, also in crude and a lot of different commodities at the moment,” Lesh said.
By Debbie
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