Trends in sentiment and volatility suggest complacency

Trends in sentiment and volatility suggest complacency. One of the consequences of central bank policies may be markets characterised by low levels of volatility. Some financial commentators have even talked about the death of volatility. At the same time, investor sentiment has hit bullish 10-year highs last witnessed in August 1987, December 2004 and October 2007. The trends in volatility and sentiment suggest a growing culture of complacency. The key risk is an interest rate surprise caused by inflation and gross domestic product (GDP) rising faster than expected, probably in the UK and the US, forcing central banks to raise interest rates ahead of the consensus and causing painful corrections in asset prices, particularly in bonds. We are more concerned about the impact on fixed income than equities but US equities appear to be fully valued relative to other markets and some profit taking would seem prudent. Read more: (VIEW LINK)