After weeks of normalising volatility, markets were rocked by a fresh burst of volatility last week (albeit, not reaching anywhere near the levels seen in March). This should not be surprising to investors. There is a lot of uncertainty in the global economy today. Economic demand has been shattered by the impact of COVID-19 lockdowns, the prospect of a ‘second wave’ is coming into view, and the shape of the economic recovery remains a mystery to markets. But no sooner has volatility reared its ugly head, then the US Federal Reserve steps in to calm markets with fresh stimulus. Markets are playing the “Fed Game”.
The “Fed Game” simply implies that bad economic news will result in more support from the US government and US central bank (The Federal Reserve). Good news is still good news – but now, bad news is also good news! If markets continue to interpret the news-cycle through this prism, it suggests upward momentum (ignoring day-to-day volatility) in markets may continue for some time.
The long-term effects of this are highly uncertain, but in the immediate term, markets may well keep on playing the “Fed Game”, and asset prices will continue to march on higher.
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