Saqib Iqbal Ahmad

NEW YORK, (Reuters) – Volatility is the buzzword in markets these last few months as concerns over a hawkish Fed and sky-high commodity price rises, along with geopolitical tensions arising from the conflict in Ukraine, roil asset values.

The was recently down 0.2% on Friday and yields on the benchmark 10-year Treasury were at a near 4-year high of 3.08%, capping off a week that saw massive swings in stocks and bonds in the days following the Fed’s monetary policy meeting.

Below are graphs that show volatility across various markets as well as the factors driving it.

GRAPHIC: Volatile world – https://fingfx.thomsonreuters.com/gfx/mkt/gkplgkewnvb/Pasted%20image%201651850464155.png

VOLATILE YEAR

In the past year, volatility has increased across asset classes. Stocks, commodities and currencies have all seen more extreme moves. The Fed’s response to rising inflation fears have been the key driver for the volatility. This has triggered gyrations on fixed-income markets and lifted the dollar to its highest level in 20 years. Stocks are also being affected.

Recent concerns about how tightening monetary policy by central banks could impact global growth are being raised. The Bank of England warned Thursday that Britain faces a double-whammy of recession and higher inflation as it raises interest rates to their highest level since 2009.

GRAPHIC: Real bad – https://fingfx.thomsonreuters.com/gfx/mkt/mypmnyroevr/Pasted%20image%201651850295599.png

THE TRUE DEAL

Another culprit – linked to expectations of a hawkish Fed – has been the sell-off in Treasuries which sent yields on the 10-year past 3% for the time since late 2018 on Thursday.

As yields climb, they can dull the allure of stocks, particularly those in high growth sectors such as technology, where companies’ cash flows are more weighted in the future and diminished when discounted at higher rates.

Meanwhile, real yields on the U.S. 10-year Treasuries – which subtract projected inflation from the nominal yield – recently turned positive for the first time since March 2020, eroding a key support for U.S. equities.

GRAPHIC: Stock swings – https://graphics.reuters.com/USA-MARKETS/VOLATILITY/znpnemgbevl/chart.png

Buy THE DIP

Volatility is a problem for investors that has also hampered sentiment. The strategy of “buying the dip”, or profiting from stock market weakness, could be a potential casualty.

Although dip buyers enjoyed a lot over the past 2 years due to a buoyant Fed, buying on weaker markets has been far more risky in recent months. There have also been signs that retail investors – who have been avid dip buyers in the past – are more hesitant to do so.