Calm Markets – Time To Hedge?  

Thirty-eight years ago, almost to the day, an estimated $1.7trn was wiped off global stock markets in what became known as Black Monday. There wasn’t an obvious catalyst for the sell off, but a combination of overvalued stocks, widening US deficits and rising interest rates were all deemed contributing factors and added to the snowball effect.

Fast forward to today and, and although markets appear calm, a growing number of risk factors that could easily derail sentiment. Trade tensions, ongoing conflict in both Europe and the Middle East, sticky inflation preventing central banks from cutting rates as aggressively as they’d like, and widening government deficits (to name a few) have markets on edge. Nevertheless, for now at least, risk assets continue to perform well: global indices remain close to record highs, and the sharp sell-off we saw in April is a distant memory.

Warning lights in a quiet market

There are a couple of warning signals that we shouldn’t ignore. First, the recent failures of Tricolor Holdings and First Brands raise questions about whether other issues might yet surface. That was then followed by news that Zions Bancorp and Western Alliance Bancorp said they were exposed to alleged fraud, triggering a sharp sell-off in their share prices and weighed heavily on broader financial stocks. Sentiment has since recovered, but the price action suggests markets are nervous.

Secondly, the rally in gold. Traditionally sought after for its safe-haven appeal and as a hedge against inflation, the precious metal has more than doubled in value since the beginning of 2024. Many analysts argue the move reflects a world awash with liquidity, hence both global equities and gold rallying in tandem. However, it could also signal concern about persistent price pressures and the destabilising of fiat currencies.

Finally, derivative markets are starting to show signs of stress. The VIX index (often described as the market’s fear index) spiked last week to its highest level since April. Granted, it’s a long way from the dizzying heights reached in April post Liberation Day, but a jump in option volatility is reminder that the market remains on tenterhooks.