Interference by the central banks of U.S. and Japan and possible measures being considered by officials in China are making global financial markets more uncertain and less predictable, according to the Axioma Insight Quarterly Risk Review.
“All of these worries are leading to increased volatility in the markets, but the impact has been surprisingly muted,” said Melissa Brown, senior director of applied research and co-author of the review.
In the U.S., markets have been jumpy after signals by the Federal Reserve that it might consider reducing its securities purchase program and raise the federal funds rate if economic indicators improve. In Japan, the central bank had a currency intervention earlier this year.
“The markets' reaction to the U.S. Fed perhaps turning off the liquidity spigot has had a much bigger impact outside the U.S. than inside. It certainly seems that the impact from the U.S. Fed or the economic slowdown in China from a return perspective seems to be hammering the emerging markets, and it's not doing great things for the developed markets,” said Ms. Brown.
While a year ago much of the focus was on Europe, now “the discussion seems to have really shifted to Asia,” she said. Based on Axioma data, “what really jumps out at me is this continued risk in Asia, particularly in Japan.”
Japan has now become one of the most volatile countries. “You had a huge surge in the market earlier this year, when investors were optimistic that the (central bank) policies would work. Of late, that has turned into much more pessimism. It's that kind of big up and down that's driving the prospects of volatility going forward,” said Ms. Brown.
She noted that Japan is second behind Greece in predicted volatility. “The gap is pretty big, but it's still on the list. It is a big change.”
While the talk about Greece has quieted down, it remains the highest risk among all developed countries, and some index providers are moving it to their emerging market indexes. Still, she said, “it's interesting that Greece has seen an increase in risk, but it hasn't become dramatically volatile.”
Concerns about an economic slowdown are being raised around the world, including Russia, where predicted risk numbers increased 2.4 percentage points over last quarter, while China's fell 1.4 percentage points.
“We continue to see that the riskiest industries are those tied to global economic slowdown, and it's something we've seen across the globe,” said Ms. Brown.
