What has happened to volatility?

Turkey experienced an attempted coup, the UK electorate surprised the world by voting to leave the EU and Japan disappointed by not firing the monetary policy bazooka as everyone expected them to. Recent geo-political events cook up the perfect storm for volatility. What happened? Well, it might be easier to ask what didn't happen - what didn't happen was a sustained rise in volatility.

Take foreign exchange as an example. 

HSBC FX put it this way: "During 2015, FX markets were far more volatile than during the quiet summer of 2014... The outlook being priced into implied volumes throughout 2015 was that realised volatility would remain higher than usual."

But this is not what has happened. 

HSBC explained: "This surprisingly relaxed outlook suggests that we are entering a new volatility regime. Implied volatility is low despite what should have been significant shocks to the market. Implied volatility is low even though the outlook is filled with plausible risks. This suggests that it is likely to take a serious shock now in order to make the market run for cover."

Richard Cochinos, Head of Europe G10 FX Strategy at Citi, told Bloomberg: "We are seeing less volatility... when we look at the 'vol' series across foreign exchange, a lot of those are actually near the lows and continue to fall lower. And it's not just currencies, you are seeing it in fixed income, you are seeing it in equities as well."

Looking at recent activity in the market for US treasuries he continued: "Ultimately, when people are looking at the (flattening in the trade in) fixed income they are expecting this curvature to continue to flatten from here going forwards, with some expectation of G4 liquidity."

Perhaps bond yields are now so low that the markets have decided that they cannot fall much lower, but neither are they likely to rise. If this is so that may indeed lead to less volatility.

Yet, HSBC recently cited high volatility as the key reason for the poor showing of its latest results. Group chairman, Douglas Flint said: "It is evident that we are entering a period of heightened uncertainty where economic risks are being overshadowed by political and geo-political events."

Maybe then, when geo-political risks are high, money flows into safe assets, and the ongoing rush to safety has produced low volatility in the markets. 

Or is it that the attempted military coup in Turkey had a limited impact on the markets because it was over so quickly, and in any case occurred during a weekend? The markets may also be concluding that the UK vote to leave the EU may lead to a kind of watered down version of Brexit, and thus the effect on the markets is not so dramatic in the long run, despite the short term market fluctuations that were experienced in the week following the outcome.