Too early to panic: 2018 might still be OK - ING

Historically volatility has been a lagging indicator, mimicking short-term interest rates with an approximately two years lag and in other words, interest rate hikes today might lead to more volatility in two years’ time, explains Peter Vanden Houte, Chief Economist at ING. 

Key Quotes

“To be sure, the European Central Bank or the Bank of Japan is not even thinking of a rate hike, meaning central banks are not yet tightening across the board. This reduces the risk of significant market corrections in the short run. On top of that, the ECB will still be buying plenty of corporate bonds until at least September 2018, which all but limits the risk of notable spread widening. That said, in the past increasing volatility and rising risk premia in the US have often spread across the globe.”

“Even on that count, it still looks a bit early to panic. Looking at monetary policy in the US, historical evidence would suggest that 2018 could see at most a slight increase in volatility and risk premia, but that 2019 might be a lot more tricky in this regard. But of course, as we have heard before, this time it might be different.”