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Volatility is back

Volatility is back

Stock markets across the globe underwent a sharp correction in late January and early February. After a steady rally that had lasted several months, capped by the strongest January since the 1990s, the release of a labour market report showing higher than expected US wage growth heralded a burst of heightened activity. Equity valuations fell, rebounded and fell again, amid unusual levels of intraday volatility. This correction coincided with higher volatility in government bond markets. Long-term Treasury yields had been gradually rising since mid-December, as investors seemed increasingly concerned about inflation risks as well as the macroeconomic impact of US tax reform. A sudden spurt in yields at the very end of January preceded the stock market drop in the United States and subsequently in other advanced economies (AEs). Government bond yields also increased in several other AEs, as the synchronised upswing in global growth led investors to price in a less gradual than previously expected exit from unconventional policies.[…]