Markets

Christopher Langner is a markets columnist for Bloomberg Gadfly. He previously covered corporate finance for Bloomberg News, and has written for Reuters/IFR, Forbes, the Wall Street Journal and Mergermarket.

Reading the headlines recently, you'd think the world was falling apart. But stock-market volatility in Asia, particularly Hong Kong, is virtually non-existent.

The city's Hang Seng Index ended January up 6.2 percent, its best performance for that month since 2012, as investors continued to bet on reflationary policies by President Donald Trump.

Trump Card
Hong Kong's Hang Seng Index rallied 6.2 percent in January, its best performance for that month since 2012
Source: Bloomberg

Sixty-day volatility, meanwhile, dropped to an almost two-year low Wednesday.

Dead Calm
A key gauge of volatility for Hong Kong stocks dropped to the lowest since March 2015 this week
Source: Bloomberg

That calm has seeped into expectations of future swings as well. The implied volatility of index options also decreased to their lowest since March 2015 last week.

Don't Worry
Implied volatility in options points to a calm three months ahead for Hong Kong
Source: Bloomberg

A closer look at the chart above suggests this can't last. When volatility was this low previously, it almost doubled in a matter of days.

There are a few possible reasons for that. Options trading in Hong Kong is still fairly illiquid compared to bigger markets such as the U.S., which means corrections sometimes take a while to happen and then come all of a sudden. Volatility has also been low across many markets in Asia, with Australia, Japan, Singapore and South Korea all boasting a 60-day measure that's close to the lowest in two years.

It's partly a reflection of what's happening in the U.S., where the Chicago Board Options Exchange Volatility Index, or so-called fear index, touched the least since July 2014 on Friday. That gauge also measures future expectations of volatility and may too be underestimating trouble ahead.

Relaxed, Really?
The VIX, also called the fear index, sank to the lowest since July 2014 on Friday
Source: Bloomberg

A quick look around prompts that conclusion. Trump's erratic policies suggest uncertainty is high regarding the direction of the world's largest economy, so the S&P 500 Index could be in for a bumpy ride. How China, the world's second-largest economy, will react is also unclear. Both have a bearing on the Hang Seng Index, which in some respects is China's doorway to the world, tracking as it does shares of companies on the mainland, while the city's freely traded currency is pegged to the dollar.

Whether stocks in Asia finish up or down in 2017 is anyone's guess. What's probable is that the ride to get there won't be as smooth as implied volatility suggests. Options traders might want to revisit their models.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net