Michael Purves Talks Cross Asset Volatility
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What are the conversations you're having with your clients these days? Well, one thing I think I've certainly been doing is standing back and looking at sort of some of the cross-asset correlations and how those are moving, because I think those give clues as to what type of risk environment we're edging into there. And so one of the interesting things here, Thomas is referencing the VIX at 21, which is really not that high a level there. That's right in line with its long-term average there. But at the same time, you're seeing very high process of correlations. For example, like crude's correlation with the VIX right now over the last several days, really since these attacks began, it's in the top 2% of all readings going back a decade.
If you look at crude's correlations with high yield spreads, those are also in the top 2%. And what's interesting about that is that high yield is now correlating with the VIX, which it had kind of de-correlated. It's supposed to be positively correlated, right? You know, spreads back up, VIX back up, you know, when risk-off happens. That correlation kind of broke down over the last 18 months for all sorts of interesting reasons, but now that correlation's coming back. Now, as it relates to the VIX, what's Interesting also is that the VIX at 21, yes, it's been correlating with the crude prices, but the cross-stock correlations are still really kind of muted. They've gone up a lot over the last couple of weeks, but they're not really high here, right?
And you're still staying on any given day. One stock can be in the green and a bunch of other stocks can be in the red there. So we're not really in the sort of risk-off environment, but crude is clearly driving the market. So I think that sort of begs the questions about how are you really trying to contextualize what's been happening here. I think, again, you have to step back a little bit and just think, look, we had a great year last year in the equity market. A late winter malaise is kind of normal without Iran, right? That's something that could be expected here. We had a bad jobs report with some...
What are the current market tensions affecting volatility?
really important questions that were begged by the complexion of what jobs were being dropped, particularly in the, you know, sort of those pillars of job growth, the leisure and hospitality. So if there's a Fed today, what do you do? I mean... Yeah, you... Artfully dodge as many questions as you can to get off the stage. No, but seriously, I think it's interesting. I mean, Tom was referencing urea prices, sulfur prices, helium prices. All these things will impact producer prices that will sort of weave its way. Did you have inorganic chemistry freshman year in college? Did you go down in flames like I did? Continue on urea and ethylene. We need more on methyl ethyl ketone if this continues. Oh, God.
But all those things do raise questions about, I think, what the Fed has to deal with today is what I call inflation complexity. Oh, I love that. Can we steal that? Sure. Okay. in some ways similar to post-Ukraine, some different.
How do cross-asset correlations indicate risk environments?
But those are going to linger and creep into the inflation metrics we see a few months from now, right? And maybe longer than that.
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