Volatility Isn’t Just for Stocks Anymore

Swings across asset classes have mounted in recent days, flashing a warning sign for the stock market.

Fluctuations in oil, bond and currency markets have jumped this month amid trade tensions between the U.S. and China and fears of slowing economic growth. U.S. stocks continued to fall Monday after declining last week and investors are bracing for continued turbulence across markets. The S&P 500 and Nasdaq Composite each fell 1.2% Monday. The Dow Jones Industrial Average dropped 1.5%.

Three gauges of swings in different assets have risen this month, FactSet and Cboe data show.

The Merrill Lynch Move Index, which measures volatility in government bonds, has jumped about 43% this month, FactSet data through Friday show. Measures of currency volatility and oil-market swings through the Cboe/CME FX Yen Volatility Index and Cboe Crude Oil ETF Volatility Index also have risen in August. The currency volatility gauge last Monday hit the highest level since early January.

The volatility across other asset classes has led some analysts to warn that it could surge even further in stocks.

The jump in currency and bond volatility can be a harbinger for stock volatility, said Stuart Kaiser, head of equity derivatives research at UBS Group AG. “That becomes a risk that equity volatility is going to move even further.”

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Expected swings in the Chinese yuan and U.S. dollar currency pair also jumped recently, as they did during the August 2015 swoon in equities and serving as a warning sign for stock prices, according to Credit Suisse.

For example, the last time expected swings jumped this high for the yuan-dollar currency pair was Aug. 11, 2015, wrote Mandy Xu, an equity derivatives strategist at Credit Suisse, in a note last Monday. Fears that China’s economy was slowing stoked selling in stocks around the world that month.

“We think risks going forward are tilted to the downside,” Ms. Xu wrote.

Since the financial crisis, the Cboe Volatility Index — also known as the VIX — has been considered an early warning signal for market distress. But how does it work? WSJ explains. Photo Composite: Tom McCarten for The Wall Street Journal.

This was partly on display last week: The yuan’s recent depreciation preceded the biggest fall for equities in months on Monday, while government-bond moves fueled fluctuations in stocks Wednesday.

In another sign that investors are bracing for big swings in markets over the next month, near-dated futures contracts tracking the Cboe Volatility Index, or VIX, jumped above ones expiring later. Generally, investors account for higher volatility later because of greater uncertainty further out, making the inversion unusual for the derivatives markets.

This expectation of near-term market swings could last, some analysts say. It is unclear when trade tensions will dissipate, and those have wide-ranging implications on stock, bond and currency markets.

“The biggest driver of financial markets right now is the trade tensions,” said Brian McMahon, chief investment officer of Thornburg Investment Management. “People aren’t sure which way to turn.”

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Write to Gunjan Banerji at Gunjan.Banerji@wsj.com

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