The lack of market liquidity does not create the volatility we have seen over the last two months, but only acts to amplify it. While it is difficult to attribute the recent bouts of volatility to any single event, rising inflation expectations based on stronger eurozone growth and a stabilisation in the oil price are the likely culprits. Overstretched positioning and speculation also rank as big contenders. And, of course, hindsight – always a wonderful thing – suggests that the five-basis-point yield on offer on a nine-year German Bund was never really a good sign.
As we come into the summer, the Greek debacle is likely to still be rumbling on, although the crisis changes so fast an outcome may be known by the time this article is published. At the same time, the US Federal Reserve may well be inching towards its first rate hike in over five years, with most market commentators anticipating a September date for lift-off. Taken together, these two uncertain events have the potential to create a perfect storm of volatility late in the summer, and with liquidity thinner than normal, that volatility could make for a very bumpy ride indeed.
Kerry Craig is global market strategist of JP Morgan Asset Management
