Political noise? Markets don't care - it's all about growth

Tue Mar 14, 2017 1:52pm EDT
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By Jamie McGeever

LONDON (Reuters) - One of the biggest mysteries in global markets so far in the Trump era is the historically low level of volatility that has prevailed despite all the turmoil and uncertainty that analysts warned his victory would unleash.

The best explanation may be the most mundane: the global economy's growth is at its most steady and predictable for decades, since recovering from the financial crisis, trumping any short-term political surprise, even in the White House.

Crucially, the economic recovery and consequent stability hasn't been built on a borrowing binge, suggesting the low volatility climate can continue - with episodic spikes - even should there be more political shocks in store, such as in Dutch, French or German elections this year.

As a result, investors are likely to feel encouraged to continue seeking out riskier assets that offer relatively high returns, thereby supporting the rally that has broadly prevailed since 2009 in markets such as stocks and corporate bonds.

Volatility in global growth is the biggest single driver of financial market volatility, according to JP Morgan. And since recovering from the 2007-09 crisis, growth has been steady and predictable almost to the point of boring.

The recovery has been built on the foundations of steps taken by policymakers since the crash, not least the trillions of dollars of central bank stimulus and the rebuilding of the shattered banking system.

"This is a very stable world economy. It's never been so stable, and this is why the market is so stable and risk premia so low," said Jan Loeys, head of global asset allocation at JP Morgan.

"Markets reflect fundamentals, and if the fundamentals are stable, asset prices will become less volatile," he said.   Continued...

FILE PHOTO: A street sign for Wall Street is seen outside the New York Stock Exchange (NYSE) in Manhattan, New York City, U.S. December 28, 2016. REUTERS/Andrew Kelly/File Photo