As the Russian headlines have caused off and on tension over the past 6 months, I’ve generally used the price action of the Russian Ruble to gauge the seriousness of the situation as assessed by the traders closest to the situation. Well, this morning, the ruble is nearing all-time lows vs. the U.S. dollar:
The Russian stock market has also started to take a hit, after bouncing for much of August even as the Ruble was unable to rally:
The situation in Ukraine has not affected U.S. stocks for much of the past 6 months, save for a few brief pricks here and there. However, the recent escalation has been gradual but consistent, reflected by the downtrend in the Ruble since late June. It has had a much larger impact on European stocks, which have much closer trade ties to Russia and are hurt more by the bi-lateral sanctions.
Nonetheless, the volatility markets remain quite sanguine even as Russian-related assets indicate rising risks. Here is the global volatility snapshot showing the current 3 month volatility level of various assets (blue dot) vs. the 52 week average (orange dot):
Most asset classes remain below their 52 week average in implied volatility, with the notable exception of the German DAX index. Germany’s close ties to Russia have led to more protection buying on German stocks.
Even the 52 week averages are quite low, though, as the absolute level of implied volatility remains near all-time lows for most assets. That is hardly the backdrop that suggests heightened geopolitical risk or imminent escalation, despite the headlines (see today’s Bloomberg story about Russian hackers attacking JPMorgan and other banks).
Historically, budding conflicts are usually resolved by negotiation rather than fighting, since both sides usually have more to lose by increased tensions. That’s why it’s concerning that the Ukrainian situation has become more severe even as negotiations have continued. Traders don’t seem too concerned based on options prices, but in the past few years, volatility markets seem to have become coincident indicators rather than any sort of leading indication of potential risks.