• Stock market momentum petering out:
Although the world’s stock markets continued to rise in March, despite renewed concerns over the Greek financial crisis, upside momentum has weakened, for two reasons. First, uncertainty over the global economy has increased, due for example to the rise in CDS premiums for Greece and other European countries, and prolonged weakness in the US dollar. Second, the preference for risky assets has waned on the prospect of imminent monetary tightening worldwide and a consequent end to liquidity-driven rallies.
• Volatility easing:
Volatility indices in advanced markets, such as VIX, VStoxx, VKospi, and CHIX, are now stable, having returned to start-of-year levels on easing risk associated with G2 and southern Europe. Given the close correlation between the VKospi and VIX and between the VKospi and KRW/USD rate, steadiness in the indices shows that both stock and forex markets are regaining stability. Volatility skew in Kospi200 options (an indicator of investment sentiment) tells us that investors' downside expectations have significantly weakened. The decline in skew, however, also indicates that the spot market is overheated.
• Volatility of individual stocks trending downward:
Short- and long-term volatility of individual stocks declined steadily last month, but the performances of some stocks slowed from early this year—a sign of slowing upward momentum in the stock market. All things considered, we advise investors to adopt a long delta strategy involving stable stocks or to create long/short watch lists based on short- and mediumterm volatility. The CDS premiums on Korea's bellwether stocks rebounded temporarily in February and have since declined to their January level.
• Volatility on a downward slope:
Volatility in the world’s stock markets has fluctuated slightly since January and will likely stay that way until 1H10, as many uncertainties are in store for 2H—eg, global monetary tightening and a buildup of inflationary pressure. With no major changes likely in financial markets, speculative investors worldwide are wondering when to take profits and choose new investment alternatives. Increasingly questioning the reliability of volatility indices that have fallen to a ytd low, investors should become more cautious over investment alternatives ahead of structural changes in global forex, stock, and bond markets. We expect short positions on stock futures and stock index futures to expand in 2Q on prospects of
increased profit-taking pressure on stock markets.
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