Regular readers will recall that if you’re in equities, one of your main concerns going forward should be the extent to which volatility in currency markets spills over into stocks.
As politics continues to drive FX, I think it’s reasonable to assume that we’re in for some rather turbulent times. There’s no chance whatsoever of political uncertainty dissipating in the near future and you’re reminded that there are possible black swans lurking around every corner (e.g. Marine Le Pen in France).
That likely portends more confusion in FX and that confusion will one day manifest itself in equities. So when you wake up one morning and futs are pointing to dramatic losses at the open because something broke overnight in FX, don’t say you weren’t warned.
With that in mind, here’s a chart from Goldman which “plots the share of 3-standard deviation days that have happened in the past year in each asset class, as a fraction of the total across asset classes.”
Unsurprisingly, “FX and fixed income stand out as having had the most extreme moves recently.”