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- JPMorgan highlights a "rolling bear market" in cross-asset volatility, which it says represents a series of major mispricings in the market.
- The firm finds that cross-asset price swings are more underpriced than at any point since 2014, prior to when the Federal Reserve started tightening monetary conditions.
- JPMorgan outlines the eight "wild card" scenarios it says could shake global markets out of their historic slumber.
If you've noticed subdued trading activity in everything from equities to commodities and currencies, you're not alone.
JPMorgan is well aware that asset classes of all types are seeing muted price swings. The firm refers to the phenomenon as a "rolling bear market in volatility," and it's a bit puzzled as to what to make of the situation.
On one hand, JPMorgan thinks it makes sense that cross-asset volatility around the world is declining, since the global economy is in a slowdown phase. But the firm also notes that investors are already factoring in a central-bank-led stabilization of the global business cycle - something that hasn't exactly transpired.
That's created what JPMorgan describes as a series of mispricings in the volatility market. And that's ultimately resulted in aggregate volatility that's the most underpriced since 2014, before the Federal Reserve began tightening monetary conditions.
Now it must be noted that this doesn't mean volatility at its core is historically low. That distinction belongs to the doldrums of 2017, when price swings - especially in stocks - were locked near the lowest on record. The measure being evaluated by JPMorgan instead looks at actual volatility relative to where it should be.
The chart below shows just how out-of-whack conditions are right now. In addition to the 2014 dip, cross-asset volatility is also mispriced to a degree not seen since the taper tantrum in 2013.
And then there's the period before the collapse of Lehman Brothers. While price swings aren't that mispriced quite yet, the fact that it's even close is alarming to JPMorgan.
JPMorgan
So what could right the ship and reprice cross-asset volatility higher? JPMorgan lays out the following eight "wild cards," listed in decreasing order of immediacy. Provided in parentheses is the likelihood the firm assigns to the catalyst actually occurring.
1) Failed US-China trade talks that trigger a tariff increase (low)
2) US tariffs on the European Union in the next three months (moderate)
3) The Mueller report is so incriminating that the House starts impeachment proceedings against President Donald Trump (low to moderate)
4) An oil price increase above $80 per liquid barrel for Brent (moderate)
5) A last-minute scramble to lift the US debt ceiling, in September or October (moderate)
6) The US-China trade war gives way to a technology war that hurts the sector's earnings (moderate)
7) The Fed raises interest rates against in early 2020 because core inflation hits 2.2% for a couple months straight (low)
8) Democrats look headed for a 2020 US election sweep built around reversing Trump's tax cuts (moderate)
With all of that established, JPMorgan wants investors to know that they shouldn't necessarily get defensive out of fear. That's because investor positioning isn't in dangerous territory, meaning they're not at risk of getting squeezed out.
Instead, traders should be looking at these drivers and licking their chops at the possibilities increased price swings might bring about. After all, people can make way more money when the market is whipsawing, as opposed to when it's historically quiet.