Volatility’s Ringing the Door Bell

Volatility has made a dramatic comeback, like that friend who swears they’re “just popping in for a quick hello” and ends up crashing on your sofa-bed for a week. Suddenly, the remote control is not where you left it and there are no clean towels.

Remember what everyone was saying in January? It would be another banner year for equities. The U.S. would outperform while Europe muddled along. The dollar would remain strong. Yields would fall as central banks cut rates. Chinese tech was uninvestable. 

Well… it’s not quite working out that way.

So, what has changed? I’ve tried to distil the views from our trading desk and came up with two main factors: (a) the huge plot twist of European outperformance and (b) the uncertainty (and volatility) caused by Trump’s hyperactive policymaking style.

On Europe, investors were caught wrong-footed. U.S. outperformance over Europe was as strong a consensus as you could get in financial markets—many called it “U.S. exceptionalism.” Then suddenly, the continent was jolted into action in an unprecedented manner, flipping the script on fiscal spending, especially for defence, and causing substantial revisions to its growth outlook.

The result: fixed income and equity investors were left scrambling to reposition. We’ve also been hearing a lot of discussion around FX hedging, especially from investors whose portfolios are denominated in foreign currencies but have considerable USD equity exposure.

More broadly, we could be going through level shift in volatility, perhaps similar to what we had in 2022. Back then, the combination of geopolitical turbulence and the evolving Fed hiking cycle kept markets on edge. Now, Trump’s policies are raising uncertainty across the board, and there’s no sign this is about to change.

The VIX, the classic market gauge of uncertainty, supports this view. The index has woken from a relatively calm slumber over the last two years and is now back in the 2022 range (roughly the 20-30 level).

Like that unexpected houseguest, volatility seems to have unpacked its bags and settled in for the long haul. As investors, our choice is now to offer it a cup of tea or change the locks. What will you do?

Nilesh Jethwa
Chief Executive Offer – Marex Solutions Division

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