Global Market Volatility Now a `Made in the U.S.A.' Phenomenon

(Bloomberg) -- The U.S. is home to the world's largest economy, the global reserve currency -- and now, the rebirth of market volatility.

For the first time since the financial crisis, angst emanating across asset classes has an America-centric genesis. U.S. equity volatility has awoken from a long slumber to outpace its European equivalent, fixed-income traders worldwide are grappling with a 10-year Treasury yield that just cracked a significant psychological milestone, and two-year borrowing costs have reached their highest level since 2008.

To compound the concern, U.S. President Donald Trump has a unique penchant for commenting on publicly-traded companies, not to mention a foreign policy actively aimed at redressing longstanding geopolitical hostilities and the existing norms of global commerce.

“Minds are very much on the U.S. and how to build positions for the next chapter of market worries,” wrote Alain Bokobza, Societe Generale's head of global asset allocation, in the midst of a trip to Singapore.

Stock Shocks

The implied volatility of U.S. stocks over the next month -- as judged by the Cboe Volatility Index -- has typically been running higher than that of its European counterpart (the V2X Index) ever since the market maelstrom in February which wiped out several exchange-traded products betting on enduring calm.

That's the reverse of the long-standing spread between the two geographies, but not surprising according to Barclays Plc analysts led by Maneesh Deshpande, given that markets have been grappling with a trio of U.S.-centric concerns: higher rates, the prospect of a trade war, and a sharp sell-off in technology shares.

“The volatility over the past few months has been driven by negative catalysts, primarily made in the U.S.,” said Deshpande. “Some premium is clearly justified.”

Realized volatility of the S&P 500 Index has also been at a premium to Japan's Nikkei 225 and the EuroStoxx 50 indexes since mid-April, further underscoring tensions in U.S. equity markets. Adding to the confusion is Trump's tendency to publicly levy barbs at individual firms, having a meaningful yet fleeting effect on their share price.

“Obviously, Trump has helped create some equity market vol,” said Michael Purves, chief global strategist at Weeden & Co.

Yielding to Pressure

Meanwhile, the central role the U.S. plays in interconnected financial markets means that the increase in short- and longer-term Treasury yields can become a global problem, dragging up borrowing costs elsewhere.

“The U.S. is really the front line for the change in the volatility landscape, certainly brought about by the fact that the Fed is the first central bank moving from accommodative to less accommodative and shrinking its balance sheet,” said Basil Williams, head of portfolio management at Pacific Alternative Asset Management Company.

Monetary policy normalization, a firming labor market, and rising commodity prices may test whether the market can “easily handle” the increased supply of U.S. debt linked to late-cycle fiscal stimulus, as Treasury Secretary Steven Mnuchin claimed this week.

Given this backdrop, the relatively subdued level of rates volatility “is the anomaly,” added Williams. And any chaos in U.S. rates will eventually be transmitted to the rest of the world, judging by the historical relationship between German bunds and Treasuries.

“Though the rates can diverge significantly due to differences in the monetary policy between major central banks, the volatilities tend to remain more closely tied,” said Mayank Seksaria, head of macro strategy and research at Macro Risk Advisors.

A New Export

Trade and foreign policies stateside, meanwhile, are inciting market turbulence across the globe -- from foreign exchange to commodities.

“The U.S. is driving a larger share of market volatility than the rest of world for once,” said Mark McCormick, North American head of foreign-exchange strategy at Toronto-Dominion Bank, who highlighted geopolitics as another means by which the world's largest economy was fostering market gyrations.

The ebbs and flows of Nafta renegotiations have stoked swings in the Canadian and Mexican currencies. In April, enhanced sanctions on Russia prompted the largest divergence between the ruble and Brent since January 2009.

President Trump's running market commentary in 2018 has also offered opinions on commodities including aluminum and crude, with his remark about OPEC creating “artificially very high” oil prices temporarily dampening the cost per barrel. Since then, uncertainty about whether the U.S. will pull out of the Iranian nuclear accord despite pleas from major allies has added a geopolitical risk premium that helped push up the benchmark Brent to above $75 dollars.

Investors may be left to ponder whether the Trump administration's “America First” agenda to spur domestic production and slim the trade deficit risks the U.S. becoming the primary source, manufacturer, and exporter of volatility for markets worldwide.

Volatility has become a “Made in the U.S.A.” phenomenon, Barclays' Deshpande concluded.

To contact the reporter on this story: Luke Kawa in New York at lkawa@bloomberg.net.

To contact the editors responsible for this story: Tracy Alloway at talloway@bloomberg.net, Jeremy Herron at jherron8@bloomberg.net, Samuel Potter

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