August has been a tumultuous month for markets, with uncertainty about the health of the global economy triggering heightened volatility.
At the beginning of the month, U.S. jobs report weaker than expected Stirring fears of potential economic recession causing U.S. stocks to fall. At the same time, the Bank of Japan took a more hawkish stance, leading the central bank to ease monetary policy. Japanese yen “carry trade” and saw The Nikkei fell more than 12%.
this VIXAn indicator of expected market volatility exceeded 65 points on August 5, which was higher than about 23 points on the previous trading day. The index then quickly pulled back, finally trading around 14.5.
Gerry Fowler, head of European equity strategy and global derivatives strategy at UBS, told CNBC that the spike in volatility was a “huge overreaction.”European Squawk Box” Tuesday.
He explained that UBS had been expecting volatility levels to rise from levels seen earlier this year, with a combination of lower nominal GDP, interest rate cuts and job market uncertainty historically adding to volatility.
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“So really, the past few weeks have been exactly what we thought, except that our surge was a huge overreaction and that had an impact on the market, but again, the pullback now seems like a bit of an overreaction,” said Fu. Le said.
“Until we can be certain that this economic slowdown will not lead to a loss of U.S. jobs, we should expect this uncertainty to lead to a modest increase in volatility—a stark contrast to what we are seeing.”
Fowler said a key driver of volatility will be whether a slowdown in the U.S. economy leads to further job losses and whether the U.S. experiences a “hard landing.”
He said the next monthly non-farm payrolls report and weekly jobless claims will be important indicators in the coming weeks.
“All employment data points will be key data points in the coming months as we determine whether the economic slowdown that is now quite evident is a mid-cycle slowdown that rate cuts will ultimately support, or whether a mid-cycle slowdown is a mid-cycle economic slowdown. The key to slowing down.
Looking ahead, Fowler said UBS expects markets “to stabilize at slightly higher levels of volatility than currently available.”
The market is likely to trade range-bound by then, he said. “It could be a range that’s slightly sloping up, slightly sloping down, maybe sideways. But it’s not the strong market that we have,” he added.
