Volatility in the US and China has followed opposite paths as the months-long tariff spat dragged into 2019. Risk in China’s market, as represented by the CSI 300, has climbed nearly 300 basis points this year, reaching a peak of 27% in the beginning of May, as measured by Axioma’s short-horizon fundamental China model. China’s short-horizon risk subsequently dropped abruptly, but jumped 30 basis points in the past five days, nearing 24.4% last Thursday. On the other hand, the Russell 1000’s volatility has fallen 670 basis points year to date, according to Axioma’s US short-horizon fundamental model, despite a small rise in risk in the past couple of months. The US’s risk remained flat (around 13.9%) last week, on news of renewed talks between the US and China.
The short-horizon fundamental risk of China was almost double that of the US’s last week, with a percentage difference of over 10%. The risk spread between the US and China has soared in 2019, after being at parity for a short time in the beginning of January. The spread even dipped below zero in the latter part of January, with the US’s risk surpassing that of China’s by 2 percentage points. We have not seen a negative US-China spread since 2012. However, the current level of the US and China risk spread is slightly above the 14-year median of 9%.
See graph from the China Equity Risk Monitor as of 20 June 2019: