Global Markets: Is the Calm After the Storm Over?

The U.S. Federal Reserve’s renewed appetite for rate increases challenges the status quo in markets.

By Richard Barley
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After careening wildly through the first quarter, global financial markets have been far calmer so far in the second. Now, this fragile stability may be coming to an end.

It is surprising, in fact, how little distance many markets have covered in April and May across a range of asset classes. Take the S&P 500. In the first quarter, it swung in a 230-point range; by Feb. 11 it was down 11% for the year. By March 31 it had regained its poise and was up 0.8% for the year. In the following seven weeks, the index has moved in a 60-point range and is little changed overall.

The dollar fell sharply in the first quarter, too—declining 4.5% against the euro by the end of March—but moves since then have been more muted. The rapid emerging-market rally, which got going in February, has petered out in the past few weeks. Gold rose 17% in the first quarter, but has moved mostly sideways since March.

So the path taken by financial markets in the second quarter has been extremely narrow, relying in part on the murky economic outlook and the central-bank status quo persisting—hardly an ideal state of affairs. But the apparent determination of the U.S. Federal Reserve to challenge the market’s complacent view on interest-rate increases—with an explicit reference to the likelihood of a move in June in the minutes of April’s meeting—may cause renewed volatility.

After all, among the reasons for better-behaved markets have been lower U.S. Treasury yields and a softer dollar based on waning expectations of a Fed rate increase. But markets that have regained their poise can actually encourage the Fed to believe it has room for maneuver. This is the “ Yellen call,” the opposite of the so-called Greenspan put that investors once thought underpinned asset prices.


And if the Fed takes advantage of that, investors will have to reconsider a range of asset prices.

Consider that one of the more striking features of markets in the second quarter has been the ability of both government bonds and stocks to do well. Ten-year U.S. Treasury and German bund yields fell sharply in the first quarter—by around half a percentage point—and remain close to their lows even now.


If the Fed is on the move, that poses a clear challenge for ultra-low yields; an added factor is that oil prices have rebounded a long way, which may lead to higher headline inflation measures later this year.

What will be crucial to watch is whether financial conditions tighten in a world where growth still appears fragile and sluggish, and potential spillover effects of this. Already, there are signs of nerves on China’s exchange rate—a key factor in the turmoil that hit markets last summer and at the start of this year.

It is time for investors to buckle up.

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