After a three-week selloff in financial markets, measures of risk show investors in Asia are assuming a return to stability, and with a level of confidence that could be horribly misplaced.
Asset classes from commodities to equities are moving in lockstep to a degree not seen since March 2010, while currencies such as the yen and defensive stocks such as utilities have unusually joined the rout.
But measures of volatility remain low and credit curves flat. Scarcely any foreign money has left the region, suggesting that investors continue to price in a benign environment.
This combination of low volatility and coordinated moves among risky assets is ominous. It heightens the risk that a collapse in one market will quickly spread, as happened in March 2010 just before a Greece ratings downgrade roiled markets across the world.
The collapse that has wiped more than $3 trillion off the global equity markets so far in May, on fears the euro will break up, may have more room to run.
"We are in a mispricing of risk here and I would use the temporary relief that we have seen as an opportunity to add on or rebuild tactical short positions in emerging markets," said Benoit Anne, head of emerging markets strategy at Societe Generale.
ALL FALL DOWN
What's disquieting for Asia is that, unlike in previous selloffs, no asset in the region has been spared.
The Japanese yen and Australian dollar are weaker, albeit modestly, and sectors such as utilities, in which investors usually park money in times of stress, are not displaying their characteristic defensive nature.
Thirty-day simple daily correlations of the S&P 500 index of US stocks with gold, oil, the Hang Seng index, MSCI Asia-Pacific stocks and commodities have all moved close to 1, showing their moves are synchronised.
Volatility has meanwhile been suppressed, both by the cheapness of the VIX, the widely used volatility measure on S&P 500 shares, as well as the abundance of cheap cash pumped into markets by central banks that has led to a global hunt for yields.
At 25, VIX is at half the levels it was in September 2011 and a third of its 2008 peak. Volatility on the Hang Seng index has climbed this month but is still half its September 2011 peak.
The Greek elections are in mid-June. The European Central Bank doesn't meet until June 6, the US Federal Reserve next reviews monetary settings at the end of June and China's central bank has just recently eased policy, which implies a few weeks of lull in policy circles.
It is quite plausible that markets seize while they wait for policy and political outcomes.
With the S&P index in the initial phases of a decline and the strange manner in which gold and oil have followed the downtrend in other asset classes, the threat of the situation morphing from a 2011-like brief risk-off mode into a 2008-like rout is very real.
"Copper and oil were going in completely different directions, now they are headed in the same direction. And gold as well," said Bhanu Baweja, strategist at UBS.
Among possible reasons the markets are discounting the threat of 2008-like mayhem, when credit markets froze and Lehman Brothers collapsed, is that bank funding markets are comfortable, supported by liquidity operations by the European Central Bank and the US Federal Reserve, and volatility has been low for the past year.
"To derive solace from historical volatility could turn out to be very backward-looking," said Baweja.
"And there is no amount of ECB liquidity that will prevent a tightening of money markets in Europe and therefore a significant increase in volatility and distress selling if retail investors come knocking. That will happen."
POSITIONING
The other big risk is positioning.
This month, the MSCI Asia-Pacific ex-Japan index and the Hang Seng -- which until the end of February was among the world's top-performing benchmarks with a gain of 18% -- are both down about 9%.
They fell as much as 14% in September, while both lost about a fifth of their value in the aftermath of the blow-ups of Lehman Brothers and AIG in 2008.
There is plenty of evidence that currency markets too are taking risk lightly. Future or implied volatility priced into one-year options for the Korean won, Asia's most volatile currency, has been inching higher but remains well short of last year's peaks. Inter-day volatility is even lower.
Outflows from Asia have been modest. Foreigners have sold a net $290 million of Indonesian shares in May, and $240 million worth of Thai shares, about a sixth of the net amounts they bought in the first four months of 2012.
Asia-focused funds have likewise reported light redemptions, estimated at about a billion dollars and mostly from exchange-traded funds.
"As a real money manager, we tend to look through temporary volatility," said Scott Bennett, head of Asian credit at Aberdeen Asset Management. Bennett manages US$1.5 bln of Asian credit.
"We generally don't react in a large manner in the middle of a crisis or a selloff as we should have been positioned correctly beforehand."
At the same time, the cheapness of Asian equities could prove irresistible.
A big rally in the early part of the year followed by the plunge this month has brought valuations nearly back to where they were in December, when the world was bracing for 2012 to be a year of disappointments in growth and recovery.
"The market is looking cheap again," said Jonathan Garner, chief Asia emerging markets equity strategist at Morgan Stanley.
"That said, I don't think you can put a finger right now on obvious catalysts for the current prices to change in a material way. We are probably in a period of uncertainty at least until the next round of Greek elections, or until we see more policy action from China or the ECB or Fed."