Market volatility is back as Covid and Fed uncertainty hit sentiment

Traders watch as a screen shows the press conference of Federal Reserve Chairman Jerome Powell following the announcement of Federal Reserve interest rates on the floor of the New York Stock Exchange (NYSE) in New York, the United States, July 31, 2019.

Brendan McDermid | Reuters

LONDON – Volatility in global stock markets is back, triggered by uncertainty over central banks’ and monetary policy plans increasing Covid-19 cases worldwide.

The VIX volatility index, a real-time measure of volatility expectations for the next 30 days, fell slightly lower in the extended hours early Monday, but stayed above the 20 mark, which is often viewed as the dividing line between normal and high volatility.

Last week the VIX rose more than 16% to its highest level since May as markets digested a surprisingly restrictive turn by the US Federal Reserve.

The Dow Jones industry average also had its worst week since October, with index-linked futures contracts initially falling more than 200 points in early pre-trading on Monday before reversing to indicate a higher open.

The troubled trading on Monday also took place in Asia, where Japan’s Nikkei 225 closed with a minus of 3.3% and Europe, where the continental Stoxx 600 Index fell 0.8% in early trading just to offset its losses and break into positive territory, returning to the flat line multiple times.

Matteo Andreetto, head of State Street Global Advisors’ SPDR ETF business in the EMEA region, told CNBC on Monday that as Covid cases rise, the potential for monetary tightening and high stock valuations on a historical basis a Market correction could be possible.

“I think what will be most likely is that the volatility will increase significantly. The data on the Covid side is clearly very high and we are seeing some discrepancy between the development of vaccination programs in some of the largest countries and that What is.” happened in emerging markets, “he said.

“That could potentially make a difference in the pace of recovery on a global scale.”

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Markets have been buoyed in recent months by gradual signs of recovery from the pandemic and consistent, unprecedentedly loose monetary conditions from central banks.

However, rising inflation has sparked speculation that central banks might try to withdraw some of these incentives sooner rather than later, a suspicion reinforced by the Fed’s announcement that it will hike rates twice in 2023.

Stephane Monier, Lombard Odier’s Chief Investment Officer, told CNBC’s “Squawk Box Europe” on Monday that the market fluctuations were a little exaggerated.

“We see some exaggeration mainly in the fact that the minutes (Federal Open Markets Committee) show that FOMC members have aligned their expectations with market expectations prior to the FOMC (meeting),” he said.

He added that the potential rate hikes are still two and a half years away, so equity markets could continue to do well in the months ahead.

Monier also noted that so-called growth stocks like tech stocks didn’t decline as much after the Fed meeting as some value and cyclical stocks like industrials and commodities.

So-called value stocks are considered undervalued and are expected to benefit from the economic recovery after the pandemic. Growth stocks, on the other hand, are likely to rise faster than the rest of the market. Cyclical stocks are those whose performance generally corresponds to the development of the world economy.

“It has to do with the fact that it is very much rate-driven. Interest rates go up, this is reflation trading, this is more value, and cyclical stocks go up, and vice versa, when rates go down, as it has been since the FOMC began to surpass the technology, “added Monier.

“We assume that there will be a lot more volatility in the coming weeks.”

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