Capital Markets

July-August 2014 Capital Markets Monitor and Teleconference

Monetary Policy Uncertainty and Low Volatility


A striking feature of the current global economic recovery, particularly since mid-2012, has been the substantial increase in asset valuation—to record highs—amid a fall in volatility, to the lowest levels since 1993. Specifically, since April 2012, global equities have risen by more than 40% as measured by the MSCI World index, while the VIX has fallen to just over 10%—albeit with some modest correction in recent weeks.

Against a backdrop of subdued economic and earnings growth, this buoyant financial market performance can be attributed to near-zero interest rates and plentiful central bank liquidity. In addition, as noted in the June 17-18 FOMC meeting, market participants “may not factor in sufficient uncertainty about the path of the economy and monetary policy.” In other words, risk aversion has fallen to remarkably low levels, helping drive a pronounced compression of credit spreads and a marked rise in equity market valuations.

Going forward, with uncertainty likely to increase on both fronts, a correction from current ultra-low levels of volatility could continue, accompanied by a correction in asset valuation—particularly in the corporate sector, where leverage has increased substantially.

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Following the publication of the July-August 2014 Capital Markets Monitor, Hung Tran hosted a teleconference on July 15, 2014. The recording of the briefing and the Q & A session is now available for replay.

Watch the webinar