Market overview

POLICY UNCERTAINTY: A NEW VOLATILITY DRIVER

Business cycles have become smoother since the “great moderation” started in the 1980s


o Central banks have gained credibility by adopting inflation targeting monetary policies.
o Monetary policies have focused more on growth stabilisation given the global spread of disinflation.
o Inflation and growth have both become less volatile since the mid-1980s.

 


Accommodative monetary policies have dampened market volatility


o Since the 1980s, the U.S. Federal Reserve (the “Fed”) has been increasingly dovish to counter several financial shocks.
o Since the Great Financial Crisis (“GFC”), monetary policies have been focused on asset reflation to offset debt-deflation scenarios.

 


Volatility has structurally declined, but markets are still exposed to spikes


o Market volatility has declined due to lower macro fluctuations and massive liquidity injections.
o Yet, uncertainty has become a significant driver of market shifts given its impact on sentiment, and eventually on macro-economics. And thus, monetary policies must take this into consideration.