Volatility Returns in a Big Way: Our Reaction

Volatility returned in a big way earlier this week. Over the past few trading sessions, equity market volatility as measured by the VIX[1] more than doubled, and global equities from Europe to the Asia Pacific region suffered steep declines. What happened? Optimism over synchronized global growth and supportive macro conditions led to outsized gains in equity markets to start the year. But more recently, some investors worried the economic momentum was too much of a good thing, and optimism gave way to concerns about the future path of inflation and interest rates.

Volatility has now stabilized somewhat, but clearly the well of optimism that led US equities to new highs has run dry, at least temporarily. But the global economy remains on firm footing, and that has not changed over the past few trading sessions. Here’s a look at what other global markets are signaling to investors and clues about how long the volatility might last.

Flight to quality hasn’t taken off

Perceived safe-haven assets that investors tend to favor during episodes of heightened volatility have not been as well bid as one might expect during such a pronounced drawdown in equities. As panic struck the US stock market, there was little evidence of a rush into less risky assets. Mixed and generally muted performance across the US dollar, gold and US Treasurys provides some evidence that systemic risk has not risen materially.