The unusual volatility that has taken hold of financial markets in recent weeks, resulting in some impressive moves up in asset prices and many more harrowing declines, will be with us for a while. Driven by a combination of tactical and structural forces, it is indicative of an ongoing shift in markets’ operating environment. And because of its potential for altering household and corporate behaviour, as well as the heightened risk of financial accidents, it amplifies the need to better manage downside risks to the global economy.
There are six major reasons why higher volatility, up and down, is the new norm for financial markets:
? First, the emerging world’s spreading economic slowdown is eroding a fundamental underpinning of high and stable asset prices. Gone is the notion of a steady global growth “equilibrium”, albeit at a relatively low level, in which dynamic emerging economies offset the sluggishness in Europe and Japan. Indeed, in virtually every systemically important emerging country (including Brazil, China, Russia and Turkey) growth is slowing; and, as highlighted by Mario Draghi, European Central Bank president, last Thursday, Europe is in no position to take up the slack — leaving too much of a burden on the US to act as a powerful global growth locomotive.