Introducing our Macro Volatility Index

November 12 2019

Imogen Bachra, CFAEuropean Rates Desk Strategist

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Jim McCormickGlobal Head of Desk Strategy

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Uncertainty looks set to rise; we use our new proprietary Index – a simplified approach to assessing global volatility – to monitor the state of play.

As market dynamics have evolved over 2019, we expect to see an increase in market volatility going forward. In order to observe the level of volatility being priced in globally, across a number of different markets, we created the NatWest Markets Macro Volatility Index (‘the Index’).

Components of the NatWest Markets Macro Volatility Index

Put simply, the Index is a global, cross-asset measure of volatility.  It is composed of six existing volatility indices across three asset classes (interest rates, foreign exchange and equities) each with a regional focus, as you can see in the chart below. They each represent the relevant market’s expectations for volatility in real time. By combining them together we hope to gain a holistic perspective on implied volatility across the globe.

The NatWest Markets Macro Volatility Index has been equal-weighted across asset classes (not across the indices themselves). That means that the average of the three equity indices comprise one-third of the NWM Macro Volatility Index in total whilst the average of the two interest rates indices comprise another third, and the foreign exchange (FX) index makes up the final third.

Existing Volatility Index

Asset class


NWM Index Weighting

CBOE [1] Volatility Index




EURO STOXX 50 Volatility Index



Nikkei Stock Average Volatility Index



JP Morgan Global Forex Volatility Index

Foreign exchange



Merrill Lynch Options Volatility Estimate Index

Interest rates



NatWest Markets EURO Rates Volatility Index

Interest rates






Source:  NWM, Bloomberg

What are the benefits of the Macro Volatility Index?

A simplified approach to measuring volatility

Taken together, the Index offers us a simplified approach to measuring volatility across markets in one time series. At the same time, it enables us to compare each individual asset class to the historical averages as well as other sectors to understand what it is specifically that is driving market moves.

As the charts below show, by breaking down the Index into its sub-components, we are able gain a deeper understanding about periods where market volatility rises (which is represented within the Index as a rise upwards) or falls, and which asset class (rates, equity or FX) is driving the move.

NWM Macro Implied Volatility Index

Source:NWM, Bloomberg

Macro volatility is increasing due to moves in interest rates and equity markets

Source:  NWM, Bloomberg

Volatility is coming: We expect an upward trend in the Index  

Looking out to 2020, we expect an increase in market volatility globally for two key reasons:

1) Markets are not pricing enough recessionary risk into growth-related assets

Our central forecast is that the global industry weakness we’ve seen in 2019 will persist and broaden into 2020. We forecast global growth at just 2.4% in 2019 and 2020, which is lower than the current general consensus (take for example the Bloomberg consensus which is  3.1% as at end-October 2019).

Recent data from October’s Purchasing Managers Index (PMI) surveys for the manufacturing and services sectors are also continuing to weaken, supporting our view. But specifically, there is currently a very large gap between the price of growth-linked assets (i.e. those most sensitive to the business cycle) and the current weak data in the manufacturing sector (i.e. manufacturing PMIs).

We interpret this as a reflection of the fact that growth-linked assets need to catch up to the reality of the weaker growth picture, and these assets should be pricing in a much higher level of recessionary risk.

We estimate that something close to a 15% drop in equities would be required to bring the Index of growth-linked assets closer to the current weak level of manufacturing PMIs. This suggests that a much higher level of implied volatility should be priced in globally across asset classes, given the level of growth/recessionary risks on the horizon.

2) Positioning may well become stretched in volatility markets

Volatility globally has been trending downwards since 2016 and troughed at record lows in late 2017. Since then, markets have been hit by a series of one-off factors causing sharp upward spikes; take for example, the spike in the CBOE Volatility Index in early 2018, then the sell-off in Italian government bonds in mid-2018. But each of these volatility spikes has been subsequently met with a significant wave of asset selling, pushing volatility back down to the lows – a dynamic which we think is unsustainable.

Stay tuned

Watch this space for more updates about how the Index performs over the coming months.

[1] CBOE stands for the Chicago Board Options Exchange

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