Investors should brace themselves for more episodes of volatility in global markets which could complicate the tightening of monetary policy, according to a warning from the influential head of the world’s top central banking body.
Claudio Borio, the head of the monetary and economic department at the Bank for International Settlements (BIS), said markets and the economy are “sailing in uncharted waters” and that it is “unrealistic to expect no further market ructions”.
Stocks last month fell sharply across the world in a correction after an extended period of historically low volatility across markets which had unnerved investors.
The trigger for the moves came at the start of February as wage data in the US showed a marked increase in pay, prompting fears inflation could rise faster than expected and force the Federal Reserve to tighten monetary policy faster to stop spiralling price rises.
Speaking ahead of the Basel-based body’s quarterly review, published today, Borio said that “some volatility is healthy” after the “insidious… illusion of permanent calm”.
Borio described the stock market slide, which saw US stock indices lose more than 10 per cent from peak to trough, as a “bolt from the blue” which was exacerbated by exchange-traded products and automated investment strategies as well as exotic new derivatives of volatility indices in ways reminiscent of the 1987 stock market crash.
The volatility spike served as an “illustration of how synthetic leveraged structures can create and amplify market jumps, even if the core players themselves are relatively small”, the quarterly review said.
However, the new-found sensitivity to inflation among investors means central bankers trying to raise interest rates to give them more ammunition before the next recession must tread “a narrow path” to avoid derailing growth.
“Treading the path will call for a great deal of skill, judgment and, yes, also a measure of good fortune,” he said.