There’s so much to watch out for in financial markets. Everything is so interlinked that weakness in one quarter almost always signals strength elsewhere – not to mention opportunities for the canny investor. And one thing never to take your eye off is volatility, the theme of this month’s edition of ‘Thinking Ahead’.
Volatility is the eternal bugbear of the markets: not enough and there’s no money in trading. But when there’s too much and prices are swinging around at a fearsome pace, the risk of getting burned keeps cautious investors on the sidelines.
This month, Peter Dixon takes a look at volatility in the financial markets today, where it could be heading and how unprecedented low levels have skewed hedging costs and risk. He asks whether we are at risk of declaring that ‘this time is different’ and whether in fact this new low-vol world of recent years is just the pause before the mean reversion.
There’s no doubt that central banks’ excessively loose monetary policy and asset purchase programmes have crimped volatility. With less trading, prices stagnate, and less to attract the short-term buyer. But as QE begins to taper off and banks continue to ramp up borrowing costs, it will be interesting to see how volatility adapts. Will investors get Goldilocks volatility – neither too hot nor too cold? Only time will tell, but maybe volatility is due a renaissance.
I hope you find that this month’s edition of ‘Thinking Ahead’ once again offers you some fresh insight into the issues driving today’s markets. Please send your thoughts and comments on the magazine to me at ThinkingAhead@commerzbank.com.