‘Volatility near all-time lows’

SINGAPORE: Financial markets may be in a spin, but volatility in the global economy is near alltime lows, according to Oxford Economics Ltd.

Oxford’s measure of macroeconomic volatility — which is based on five-year rolling averages of the standard deviations for year-over-year growth and inflation — shows the impact of the global financial crisis a decade ago has completely dissipated.

The long-awaited pick-up in United States wages that triggered an equity market slump since Friday shouldn’t threaten a good year for trade and the global economy, said Gabriel Sterne, Oxford’s global head of macro research in London.

US equities rebounded on Tuesday amid more market turbulence.

“Low volatility in the world economy and the weak dollar are both ingredients to push momentum going forward,” he said. “And in that respect, we’re pretty optimistic about world trade and ... the world economy.”

China data on production that serve as leading indicators for trade are flashing green, and even if China responds to the US slapping tariffs on some goods early this year, the retaliation would remain muted, according to Oxford.

The dollar’s slump this year and US Treasury Secretary Steven Mnuchin jawboning towards a weaker currency is a further boon to exports the world over, said Sterne. He sees a 10 per cent depreciation in the dollar contributing to a six per cent rise in global trade over the long run.

Research from the Bank for International Settlements backs up the point. A report released in January argues that “paradoxically, a weaker currency against the dollar may actually serve to dampen trade volumes, rather than stimulate them.” That’s because about 80 per cent of bank trade credit is denominated in dollars, and a weaker greenback flatters b orrowers’ b alanc e sheets, the research shows.

Financial market corrections are to be expected after a long rally, and are usually transitory as “bargain hunters” can be expected to jump in and reverse the dip, said Sterne.

“It doesn’t really lead us to change our central view that the main forces of stability are pretty strong at the moment,” he said.

Meanwhile, Southeast Asian share markets except Singapore rebounded yesterday after two days of hefty losses, but gains were largely capped as US stock futures dipped during late Asian trading hours.