SINGAPORE (Dec 25): During 2017, volatility has been low — in stocks and in bond markets, even in indicators of macroeconomic activity.
As we look forward to 2018, our analysis suggests that many of these measures of uncertainty may increase. One example is the shape of the yield curve: a flatter US Treasury yield curve (the spread between two- and 10-year Treasury notes, which has declined sharply) is historically not a good omen. However, this is usually a longer-term warning and, given that we are experiencing a particularly extended economic cycle, would not make a compelling case for rushing to the sidelines of financial markets today, in our view.
However, when volatility is at historical lows, perhaps you do not need to attempt to see where the lightning bolt comes from. In a world that feels complacent and desensitised to many of the risks that we remain conscious of, perhaps it is enough to simply anticipate a change and be prepared.