The hidden risks of stability

20 Jul 2004 By Edward Hadas

Most markets have been peaceful for the past quarter. Better risk spreading and the end of the easy carry trade are largely responsible. Stable markets are good for economies and bad for traders. That sounds appealing. But watch out for surprises.

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Volatility in equities, credit, interest rates and foreign exchange markets has been at very low levels for the past three months.

Indices of implied volatility in the US and have Germany equity indices have spent the first half of 2004 at about 15%, the lowest level since 1996 and 1997 respectively. The actual range of trading has been very narrow – 7% for the S&P 500.

Credit default swap prices at 65 basis points reflect the lowest expected level of credit risk in the past five years.

The euro/dollar exchange rate has varied only 9% over the past six months, with no net change. The pound/dollar exchange rate has also varied by only 9%, with a 3% net gain in the period.

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