Why Are Equity Markets Ignoring Geopolitical Risks?

As the Trump reflation trade dwindles and the US president finds himself entangled in a flurry of controversy, volatility in the first half of 2017 is actually falling.

The VIX, a measure of volatility in the S&P 500, plunged 20%, reaching the lowest level since 2006. However, with geopolitical uncertainties mounting, how long can low volatility last?

The VIX is vital, it shows how fearful investors are, or in other words, the price of worries. The gauge is instrumental in deciding to go long or short on not just the S&P 500 but on the wider US equity market.

Markets enjoyed a sea of green in the first half of 2017, shrugging off shocks from Washington, North Korea and the UK elections. The curve of risker assets is going up however the worry is that there should be more downs accompanying those highs.

Volatility describes how much the market veers up and down, or price fluctuations. Like a wave, for every high we see, there should be a swing down.

The markets are driven by two opposing forces – fear and greed. The trouble with low volatility is that the balance is tipped way over to the greed side: the wider the gap, the harder the fall.

Previously, an unbalanced situation like we are seeing today led to a sudden jolt in the markets where asset prices fell sharply. The last time the VIX was so low was just before the Lehman Brothers crash at the cusp of the Great Recession.

As the European Central Bank and the Bank of Japan start to navigate out of ultra-low interest rate policies, we should see an uptick in volatility.