News

Financial markets currently appear relaxed – perhaps too relaxed. While geopolitical storms are gathering and an open confrontation between the US government and the central bank is unfolding, equities, bonds and currencies remain remarkably calm. “The current stillness is not a sign of stability, but potentially a warning signal,” explains Thorsten Fischer, Managing Director and Head of Portfolio Management at Moventum AM. What investors need to be aware of now.

As the US administration clashes publicly with the central bank, markets remain unfazed: no sharp swings in the dollar, no turbulence in government bonds. Political storm meets economic silence – a contradiction that says a great deal about the current market regime.

“Many investors interpret low fluctuations as a sign of safety,” says Fischer. But the present phase of calm is deceptive: low volatility is not necessarily a guarantee of security – it can instead indicate risks building beneath the surface.

Equity markets, too, are displaying extreme composure. The VIX volatility index, a measure of market fluctuations in the US, remains at a rarely low level. Hedging against price declines is cheaper than it has been in a long time – and at the same time hardly used. In the bond market, the MOVE Index also signals unusual calm and little stress. “This combination, confirmed by measurably low volatility in the S&P 500 index and in US government bonds, is historically the exception rather than the norm,” Fischer notes.

Behind the scenes, systematic strategies and volatility funds are reinforcing this effect. Many models adjust their risk exposure to measured market calm: as volatility falls, equity allocations are increased. Additional buying pressure emerges, making markets appear even more stable. Yet this superficial calm makes the structure more fragile. If a sudden trigger occurs, many players react simultaneously – with potentially disproportionate market movements.

“The current market silence is not an equilibrium,” Fischer explains, “but a distinct regime in which market mechanisms and investor behaviour have adapted to low volatility.” This entails risks if the “logic of calm” breaks down. In such phases, even an inconspicuous signal can be enough to trigger collective reallocations.

Quiet markets feel stable and are therefore particularly dangerous. For end investors, calm is often sold as apparent security, even though it is merely a snapshot. “Volatility is less a threat than an adjustment to new information,” Fischer says. The greatest risks are rarely born in nervous markets – they are usually only revealed there. And where volatility disappears, risk often continues to grow invisibly.

Those who follow robust investment processes do not rely on short-term market sentiment. Sound strategies factor in the volatility cycle – and take into account the fact that periods of calm are rarely permanent. The supposed all-clear sign sent by low fluctuations is, above all, one thing: a reason to remain vigilant.