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LOOKING AHEAD TO 2020: WILL LOW VOLUME GROWTH LAST?
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2017 was one of the most blissfully boring years on instrument that is the bazsis of a futures market witnessed near record low volatility. The reason is simple. Central banks have created enormous sums of money with low interest rates across the developed world and still-aggressive quantitative easing (QE) expansions on the part of the European Central Bank (ECB) and the Bank of Japan (BoJ). When central banks create a great deal of money, and leaving markets trading in narrow ranges or trend channels.
A synchronized global recovery, spurred in no small part by these easy monetary policies, played a large role in creating a stable environment that was conducive to positive and low volatility returns in risky assets such as credit and equities. The irony is: as we look forward to 2018 and beyond, it may be that very same synchronized global recovery that brings the placid period to an end and ushers in a much more volatile end to the decade.
As the global recovery continues, more central banks will likely begin to follow the lead of the U.S. Federal Reserve (Fed) and tighten policy. In stark contrast with every other developed nation’s central bank, the Fed halted but even begun reversing QE. The Bank of England isn’t too far behind. It has one rate hike and an end to QE under its belt. Meanwhile, as the European and Japanese economies gather strength, their central banks are slowing the pace of QE with an eye to eventually bringing it to an end. Finally, China is cracking down on credit growth which could have a sharply negative impact on commodity markets.
In a nutshell, with the world economy moving ahead at a decent clip, commodity prices rising and labour markets tightening, central banks are getting ready to pull the plug on cheap money. This could have decade draws to a close. The period of low volatility could gradually, or perhaps suddenly, come to an end, sending the implied volatility of options soaring and eventually provoking a correction in risky assets such as credit, equities and commodities.
So when will such a correction happen? We don’t know exactly but the following weird chart might provide some insights.
24 | ADMISI - The Ghost In The Machine | January/February 2018
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