Important developments today:
1. Financial market volatility is at its lowest since 2007
2. US manufacturing activity remains resilient amid contraction in Eurozone
Financial market volatility is at its lowest since 2007. Market volatilities for stocks, bonds, and currencies are the quietest they have been since 2007 as investors have become more confident over the past five months. Equity volatility, measured by the Chicago Board Options Exchange Volatility Index (or VIX), have plunged 64% in the last two quarters, the highest decline ever, and now trading at the level before the financial crisis of 2008, that wiped out $37 trillion in market values from global stock markets. Notably, one of the factors contributing to the low volatility was that world stocks markets have been highly correlated this year, with all regional indexes posting double digit gains in the first quarter.
US manufacturing activity remains resilient amid contraction in the Euro zone. In contrast to the contracting activity in Europe, manufacturing activity in the US continues to gather pace. The Institute of Supply Management’s Factory Index rose to 53.4 in March from 52.4 the previous month – the 32nd successive month of growth in manufacturing activity (the 50 mark separates contraction from expansion). Indeed, not withstanding declining export orders, the measure of orders waiting to be filled was little changed from the previous month, thereby suggesting that the US economy is continuing to weather slower growth elsewhere in the global economy. In contrast, under the weight of fiscal austerity, tight credit conditions and increasing unemployment, manufacturing activity in the Euro zone fell for the eight successive month in March. More worrying is that weak manufacturing activity that was observed for the highly-indebted Euro zone economies in previous months spread to some of the core economies in March. Indeed, output in both Germany and France contracted in March.
Among Emerging Markets
In Europe and Central Asia, Turkey’s trade deficit narrowed by 20.4% year-on-year (y/y) to US$5.9 billion in February, according to TurkStat, as a weak lira boosted exports by 17.1% and, aided by efforts to reduce domestic credit growth, curtailed import growth to 1.1%.
In South Asia, Sri Lanka’s inflation rate accelerated to 5.5% (y/y) in March from 2.7% in February driven mainly by upward adjustments to administered prices for fuel, electricity and transportation and also due to a depreciation of Sri Lankan rupee.
In Sub-Saharan Africa, South Africa’s Kasigo purchasing managers’ index dropped to 55.1 in March from 57.9 in February (A level above 50 indicates expansion), suggesting a favorable but less optimistic outlook for manufacturing as the continuing downturn in Europe crimps export demand from the region.