What's behind more volatile markets? Will volatility persist? via ForexLive

A UBS research note asks … What's behind more volatile markets?

In summary…

Volatility is back

• There are reasons to expect that this is only just the beginning
• Volatility spikes are likely to recur

From a top-down perspective several factors are contributing to higher volatility:

• The first is monetary policy divergence
• The second is the disruptive end to the commodity super-cycle

Monetary policy divergence is likely to increase market volatility:

• Changes in Fed policy are often the source of significant moves across capital markets … the Fed's policy decisions impact the anchor of all valuations, the risk-free rate. Uncertainty about the path of the risk-free rate is transmitted via changes in liquidity, credit and term premiums across the universe of fixed income assets, and via changes in discount rates to the present value of future cash flows (i.e. to equity valuations)
• Under ‘QE' and even during the ‘taper', Fed communication and policy actions were predictable in ways not possible once rate normalisation commences
• The Fed's next steps will be data-dependent and the incoming data will be predictably un-predictable
• The Fed is now going out on its own
•  ECB embarking on a ‘QE' program
• Bank of Japan may have to ease again
• Some emerging central banks, including in China, India or Turkey, are or will be easing

The second big shift in asset price volatility stems from the end of the super-cycle in commodity market:

• Over the past decade rising demand (above all from China) and sky-rocketing commodity prices induced significant new investment in commodity production, including in energy and basic materials. As fresh supply comes onto the market, prices are returning to familiar long-term trends
• The restoration of supply/demand equilibrium is not instantaneous, nor smooth … excess investment by marginal producers, the actions of large market participants, the unwinding of excessive expectations and the impacts of leverage can all make for big dislocations as markets adjust
• No reason to believe that those sources of volatility have run their course

And … other sources of potential market swings:

• Political and geopolitical uncertainties
• Fragile, uneven global recovery will offer many opportunities for investor sentiment to gyrate between optimism and pessimism in 2015 (and beyond)

posted via ForexLive