Key points

• Financial market volatility has increased in recent months but still remains relatively low by historical standards.
• While the macroeconomic data continues to point to a strong US economy, we are expecting the US Federal Reserve to be more cautious and data dependent as they approach more neutral interest rate settings.
• While US-China tensions are likely to be a source of volatility as news headlines emerge, we expect that this will ultimately come to a resolution in a way that avoids a full-blown trade war.

Key developments

A noticeable feature of markets in the ten years since the GFC has been an unusually low amount of market volatility. Buoyed by stimulus from central banks, it has often felt like asset markets have largely marched higher in a straight line, with much less volatility than in normal times. However, in a sign that this phase may finally be coming to an end, equity markets experienced a material pullback in October, following by a rise in two-way volatility across most asset classes in November. That said, implied volatilities from options markets still remain low …