Risk Focus: Potential for Higher Volatility
We are seeing signs of an inflection point in the global risk environment. A confluence of U.S. fiscal policy uncertainty, an increasingly inflationary backdrop, an extended business cycle, and tighter monetary policy may signal higher volatility across global equities, currencies, interest rates, and credit markets. We are seeing early signs of this in short-dated interest rate volatility, which may reverberate across other asset classes due to the U.S. dollar’s status as a major reserve currency, and could impact everything from global bank funding rates to mortgage rates.
U.S. Election Causes Emerging Market Volatility
Despite relatively cheap valuations, volatility in emerging debt and equity markets has picked up following the U.S. election (see chart). On the other hand, most developed credit (and equity) markets are maintaining a lower volatility profile.
Corporate credit market volatility is somewhat lower and higher inflation may reduce corporate interest expense, improving corporate credit profiles and marginally lowering the risk of their debt. However, judicious selection of credit strategies that can insulate investors from interest rate volatility is important.
We anticipate stabilizing volatility levels for energy sector commodities as they recover from oversupply induced crude oil repricing, and benefit from higher demand and a more carefully managed supply.
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