Market Selloff Continues

Financial markets experienced another volatile week as investors wrestled with the concept of higher inflation and interest rates. Unlike the selloffs since the financial crisis, the current market turmoil has originated from an improving economic situation and the realisation that easy monetary policy will not be perpetually given. Other complexities have also had their part to play in the movements over the last couple of weeks. Those who have made steady returns from betting on low volatility were fiercely shaken out of their positions causing several products that were attempting to exploit low volatility to close. The question now is whether there has been enough of an adjustment to reflect new expectations or if there is a transformed market dynamic where investors are becoming more valuation sensitive and aware of equity risk.

Bank of England signals higher interest rates

Throwing fuel on the fire of the Federal Reserve the Bank of England also signalled that interest rates are likely to increase faster and higher than previously expected. The committee cited a strong global economy and limited slack in the UK economy as reasons for the guidance. Central banks have shifted their concern from supporting GDP growth to getting in front of excess inflation as unemployment reaches historically low levels. The long-awaited increases in wage growth appears to be coming through in many markets as employers are competing for a dwindling supply of workers. Central banks will continue to closely monitor this as accelerating wage growth will lead to higher inflation.

US Federal Shutdown

The US went into its second federal shutdown in three weeks; however, this was shorter lived than the last. On Wednesday, an agreement was reached between Democrats and Republicans on a budget deal to secure government funding. Nevertheless, the increases in the size of the planned spending led the Republican senator Rand Paul to delay the Senate vote on the deal. This meant that although Senate passed the deal, this missed its deadline to keep the government funded. However, an agreement was reached early on Friday morning allowing federal workers to return to work.

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