Reflecting on March: Continued suppressed volatility

Market volatility levels and the strength of European equity markets

We reflect on market volatility levels, the political situation in Europe and the performance of the continent’s stock markets, considering what these could mean for investors.

Volatility

What has happened?

Equity market volatility, as measured by the VIX Index, remained suppressed in March. Low volatility has been a feature of financial markets since the beginning of the year, with the average level of the VIX Index during the first quarter at its lowest level since the fourth quarter of 2006.

Why?

Reduced volatility has come despite relatively elevated levels of political risk, with President Trump’s inauguration in January, and the French presidential campaign well under way ahead of this spring’s election. Strong economic data, often correlated with the VIX Index, has helped to keep volatility low, in addition to monetary policy at the world’s major central banks remaining overwhelmingly accommodative, even taking into account the Federal Reserve’s March rate hike.

What should you take away from it?

Equity markets historically have performed well when volatility is low, as has been the case in the first three months of 2017, and periods of low volatility often follow periods of low volatility. However, low volatility environments can end quickly and investors should be mindful of events that could trigger a rise in the VIX Index, including a deterioration in economic data, unfavourable political events and unexpected changes in monetary policy by central banks.

European stocks rally

What has happened?

European equity markets performed strongly during March. The MSCI Europe ex. UK Index rose 3.9%, in local currency terms, while equity markets in peripheral eurozone nations such as Spain and Italy outperformed those from so-called ‘core’ countries like Germany and France. The Spanish IBEX Index and the Italian FTSE MIB Index rose by 9.5% and 8.4%, respectively, during the month.

Why?

Political risk in the eurozone faded to some extent in March helping to support equity indices. The Dutch general election that took place on 15th March saw the right-wing Freedom party led by Geert Wilders fail to win enough seats to become the country’s largest party, while in France, polls ahead of this spring’s presidential election suggest that Emmanuel Macron will defeat the Eurosceptic Marine Le Pen. Additionally, economic data have been strong, with the eurozone composite PMI at its highest level in almost six years.

What should you take away from it?

While political risks have subsided to some extent, uncertainties in the eurozone remain. The first round of the French election is set to be held on 23rd April and while Macron has polled well recently, the UK’s EU referendum and the US election have taught us that the polls can be inaccurate on occasions. Additionally, the political situation in Italy remains unstable and Greece continues to negotiate the release of its next tranche of bailout funds. That said, should the political uncertainty in the eurozone subside further, then that could be an additional catalyst for European equities, particularly if the economy continues to perform well.