Are Markets Pricing In a 'Rare Disaster'?

Investing is "unusually difficult" because of current uncertainties and there are some signs that the markets are pricing a "rare disaster" – but the situation is not as bad as it was in 2008, analysts at Goldman Sachs wrote in a market note.

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Greeks will vote on Sunday in an election that many analysts see as a make-or-break moment for the euro zone. Spanish 10-year bond yields hit 7 percent for the first time on Thursday, with investors spooked by a downgrade of the country's credit ratingto just above junk status.

"The pricing of European assets, of European bank credit, and of skew in euro/U.S. dollar are all consistent with the notion that the market is pricing a meaningful probability of very bad outcomes in the euro area itself," the Goldman Sachs analysts wrote.

The skew – the difference in implied volatility between out-of-the-money and at-the-money options, a reflection of investors' concerns of sharp losses in the price of the underlying asset – for the euro/dollar hovered at a relatively stable average for the first decade of the euro zone, but it has increased sharply since late 2009, the analysts explained.

"After a brief correction, it bounced higher in 2011, and it now appears to be on its way to new highs. This too is consistent with an unusually high level of concern about a deep problem in the euro area," they added.

The picture is more mixed when it comes to broader assets, the analysts said, noting that outside the assets most directly affected by the euro zone crisis, measures of volatility and skew "have not shown the same kind of increases."

"Traditional measures of uncertainty - such as implied equity volatility for the US and for other countries - have increased. Unsurprisingly, the increases have been sharper in European equities, particularly in the periphery," they wrote.

"But with few exceptions, indicators of market concerns of this sort have not yet come close to the levels seen in November 2008, May 2010, or October 2011," the analysts added.