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Financial markets have been in turmoil during the past couple of weeks. Disappointing macro data, further downward corrections to corporate earnings expectations, rising political tensions on US-China trade policy and the US government shutdown, and policy communication hinting at a more dovish stance from the Fed were among the key triggers for the rollercoaster ride. At the same time, it seems to have been very much the market ecology itself, with low liquidity conditions and concentrated investor positions, that drove the jump in market volatility since mid-December. While many market levels aren’t much different from a month ago, much has happened since then. In the weeks before Christmas, equity markets corrected strongly downward and thereafter rebounded from oversold levels, partially helped by last week’s supportive comments from Fed Chair Jerome Powell. Along the way, the VIX volatility index level jumped above 35, approaching its highest level for last year. Other indexes made dramatic daily moves, with the US S&P 500 gaining 116.6 points, or 6.44 standard deviations, on 26 December.
