Volatility Subsiding?

Terry Flanagan

Market volatility this year has been largely blamed to the frailty of the global macro-economy, but improvement in the euro zone may diffuse uncertainty.

Different schools of thoughts amongst investors spell either more or less volatility next year. Market participants have also debated a difference between sound fundamentals and global geopolitical instability, due to the euro zone debt crisis.

The situation out of Europe is seemingly a main driver of the U.S. equity markets as long as the situation remains tenuous. Though, recent European agreements to keep tighter controls on the Euro-zone nations’ fiscal budget to keep the region’s united currency intact is a constantly changing, and fluid situation, the markets seem to be reportedly taking in the positive news.

According to asset manager Factor Advisors, the S&P 500 and the euro are currently positively correlated, at +0.84. Similarly, the British pound is also in a similar relationship with the large-cap U.S. stocks. The 90-day realized correlation between large-cap U.S. stocks and the U.S. dollar is -0.85, the most negative it has been in about a decade.

Moreover, increasing participation to help troubled European banks is imminent.

“The world’s major central banks launched a joint action to provide cheap, emergency U.S. dollar loans to banks in Europe and elsewhere, aimed at alleviating the impact of Europe’s government debt and budget problems on global markets,” said an unnamed spokesperson from investment manager, Eagle Asset Management.

While, the Organization for Economic Cooperation and Development (OECD) lowered its growth forecasts for the world’s largest economies, the organization also announced the euro zone is headed toward a mild recession.

In the U.S., unemployment continues to stifle for the economy recovery. Europe could be heading in a similar direction. Despite positive news, research provider, Eurostat reported a new euro-zone high unemployment rate of 10.3 percent in November with one of the region’s highest unemployment rates at 22.8% in Spain. Austria reported a 4.1% unemployment rate and 5.5% unemployment rate in Germany.

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