Upended by rising Treasury bond yields, volatility has returned to global stock markets as investors grapple with concerns over tighter U.S. monetary policy, a brewing trade war and slowing economic growth in China. The CBOE Volatility Index, or VIX, has moved higher and stocks have pulled back in the first half of October. The selloff has been led by declines in the shares of technology companies, including many of the names that consistently drove equity markets to new highs during a nearly decade-long bull market.
“The stock market pullback is not particularly surprising, when you consider that rates are rising, the labour market is tight and the Federal Reserve is removing some liquidity from the system,” says Capital Group economist Darrell Spence. “Equity valuations were also elevated, and the market had been underestimating what the Federal Reserve said it was going to do in terms of increasing short-term rates. And there is a trade dispute with China that could put further pressure on the economy.”
Indeed, investors should expect more volatility ahead as we approach several potentially market-moving events, including the U.S. midterm elections, further Fed tightening and the withdrawal of crisis-era stimulus measures by the European Central Bank. We see several factors that could continue to spur market volatility. Here, we discuss five of them:
1. Rates are rising and the Fed is removing monetary accommodation.
U.S. equities may have been due for a pullback, but part of the answer lies with the bond market. The rapid rise in rates in recent weeks was the immediate trigger. It is not so much the direction that has surprised markets as much as the pace of the bond market reaction, with the 10-year bond yield touching a seven-year high of 3.23%, and the 30-year bond yield hitting a four-year high of 3.4%.