A curious couple of trends are underway on the global stage. Global economic policy uncertainty appears to have peaked at an all time high earlier this year, while at the same time average implied volatility across global equities looks to have bottomed, after putting in 12-year low in August. These two trends combined look set to ensure the “closing of the gap” between policy uncertainty and volatility.
Yet, it's easy to make a case for an ongoing baseline of policy uncertainty as central banks embark on the journey toward policy normalization, political risk remains a reality, and geopolitics are front of mind. Equally, the all time low in global equity volatility in July 2005 took place well before the financial crisis showed up - illustrating the point that the forming of a bottom in volatility can be a very gradual process. So yes, the gap looks to be closing, but rather than being a prediction of doom the closing of the gap may well be a relatively benign and beautifully boring one for those invested in global equities...
Global economic policy uncertainty has peaked after putting in an all time high in January 2017.
While global economic policy uncertainty looks to have peaked, global equity implied volatility looks to have bottomed after making a 12-year low in August.
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Article by Callum Thomas, Top Down Charts