The power of words
Consensus point of view: Market conditions could become more volatile either because things go wrong and there’s less policy ammunition left or because it’s difficult to withdraw the stimulus and financial instability rises.
Counterpoint view: We agree that volatility will probably rise from here. But we differ on the nature of its potential rise. Unexpected events could derail the recovery, such as new virus variants. But the main risk, to us, is too much of a good thing: stronger-than-expected growth and perhaps a more protracted period of inflation could lead to a repricing in the bond market, flattening yield curves as investors test central banks’ resolve to refrain from hiking. Rather than raising equity market volatility in and by itself, this could raise bond market volatility first and foremost, and affect risk assets as a consequence, especially at a time when discussions around the tapering of asset purchases will likely intensify. But it’s unlikely to happen in a straight line, with alternating periods of rising bond yields and risk asset outperformance.