Traditionally an environment of tightening interest rates has been accompanied with rises in market volatility. However, despite the Federal Reserve increasing rates twice so far this year, and with another planned in September, the VIX Index – often referred to as the ‘fear gauge’ – recently hit new lows.
“Until recently Fed tightening has been associated with increased, rather than decreased volatility,” said Wade. “For example, the VIX index spiked after the first move in Fed funds in December 2015 and again during the taper tantrum of 2013, when the Fed signalled an end to quantitative easing.”
Other factors which have in the past played a role in driving volatility are investors’ concerns surrounding China devaluing its currency and sharp falls in the price of oil.
“From this perspective it could be argued that volatility is low because investors are now comfortable with the Fed’s tightening policy, China has clarified its position on the renminbi and the oil price is more stable,” he said.
“We would add that the current low level of volatility today also owes something to favourable political outcomes in Europe where there has been no swing toward populism.”
