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Wall Street’s fear gauge hits lowest level since before crisis

Wall Street’s so-called fear gauge slid to its lowest level since before the credit crisis on Monday as the broad US stock market inched closer to a new all-time high and the technology-heavy Nasdaq Composite closed at a record.

The Chicago Board Options Exchange’s implied volatility index, also known as the Vix, slipped as much as 9 per cent on Monday afternoon to touch 9.90, its lowest mark since February 2007.

The gauge measures the prices of short-term US equity options, and is constructed to reflect how volatile traders think stocks will be in the coming month. It has remained stubbornly subdued over the past year, despite a string of geopolitical events that investors and strategists had warned could rock markets, including US and French elections and the Brexit vote in the UK.

“It has been a surprising development this year that with all the uncertainties we would be looking at the least volatile four-month start to a year in several decades,” said Rocky Fishman, an equity derivatives strategist at Deutsche Bank.

The latest step down by the Vix comes as polls in the French presidential election continue to suggest low odds of a victory by the anti-euro populist Marine Le Pen this weekend. That has buoyed equities and quelled a tremor of volatility that erupted last month.

The S&P 500 has advanced 1.7 per cent since the first round of the French election on April 23, including a 0.2 per cent rise on Monday that took the stock index to 2,388, near a new record high. The Nasdaq, which is up more than 3 per cent over the same period, advanced 0.7 per cent on Monday to set its sixth straight closing record.

Apple, Amazon and Facebook — part of the so-called Fangs stocks that have driven the Nasdaq’s 13 per cent rally so far this year — all closed at record highs.

Jerry Lucas, a senior strategist with UBS Wealth Management, attributed the dip in volatility and rise in global equity markets to the easing in French election concerns as well as the avoidance of a government shutdown in the US.

“The markets may have a little overly benign view,” he said. “But . . . once you get through this Sunday [second round of French elections], there is not that much on the radar for the next few months that can really upset the market.”

The Vix has averaged 13.6 over the past year and just 12 so far this year, more than 30 per cent below its historic average of 20. The index settled 6 per cent lower on Monday at 10.11, also its lowest closing level since February 2007.

Equities are not the only becalmed market. For example, Bank of America Merrill Lynch’s Move index, a measure of expected volatility in the $14tn US Treasury market, has also receded lately, falling more than 20 per cent from the Friday before the French vote.

“If you look at implied volatility, it is at or near one-year lows across every asset class and nearly every region” we track, said Mandy Xu, a derivatives strategist at Credit Suisse. “Investors are pricing in zero risk in the near term.”

Nonetheless, more expensive longer-term Vix futures imply that investors remain concerned that the placidity will not last, and some traders are ratcheting up wagers on Vix rising again through exchange-traded products that buy short-term futures on the index.

The number of shares outstanding of VXX, one of the most popular Vix ETPs, is currently near an all-time record of 65m, and the shares outstanding of UXVY, a more aggressive, leveraged version of VXX, touched a new high of 27.5m on Monday.

Todd Hawthorne, lead portfolio manager of a volatility-focused investment fund at Boston Partners, said: “The death of volatility is greatly exaggerated. You can see that in the longer end of the curve.”

Additional reporting by Pan Kwan Yuk

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