The volatility spike in February is, in our view, a clear wake-up call for investors, and the market correction has partly removed the complacency that characterised financial markets in the last few months. While technical factors (position unwinding of specialised short volatility funds) are the main cause of it, we should not underestimate other factors that deserve attention, and which will potentially will write a new story for financial markets.
The financial cycle is becoming increasingly mature after an extended bull market for risk assets; a repricing of inflation expectations is under way (some signs of wage inflation are finally materialising in the US in an economy running at full employment and fuelled by robust fiscal stimulus). While Central Banks (CB) will clearly remain vigilant in order to assess any financial stability risks, a removal of excess monetary accommodation, with different speeds among various CB, is expected to continue, with a progressive tightening of financial conditions, potentially leading to higher market volatility.
