Market Risk Monitor - October 2016

Oct 28, 2016
By BlackRock

Current market risk environment


A disconnect

In the previous issue of Market Risk Monitor, we noted that the result of the UK’s EU referendum could trigger a prolonged period of uncertainty. In the event, proactive central bank action meant that after the initial shock we observed a rapid return to the low volatility regime that has been prevailing for quite a while now with most risk asset prices recovering. This points to an environment that is still largely conditioned by monetary policy.

Market Risk Monitor

Ed Fishwick and Tara Sharma from the Risk & Quantitative Analysis Team discuss the current risk conditions and the implications for investors.

As we go into the last quarter of 2016, our metrics suggest a backdrop where measurable risk is subdued. Nevertheless, absolute and relative valuations in certain market segments represent a source of risk. Furthermore, we see some disconnect between our standard metrics and significant levels of economic and geopolitical event risk.

What are the implications?

Markets appear to have become more fragile and are now highly sensitive to news flow. Moreover, when reversals in the risk environment occur they are very pronounced and swift. For short-to-medium term orientated portfolios this calls for dynamic decision making and swift implementation of changes in risk positioning.