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Market Volatility in 2018

The extreme market volatility witnessed over the last few weeks may not be over yet, with some commentators expecting more chaotic selling in the weeks and months ahead. While talk of the next financial crisis is a big stretch, rising inflation in the US could lead to renewed fears and ongoing unpredictability if interest rates increase at a faster rate than expected. Despite current calm conditions following the meltdown, make no mistake, market volatility could return at any moment.

The Dow Jones plunged almost 1,600 points on February 5, a steep drop of 4.6 percent that was largely mirrored by other global markets. While this was not the biggest sell-off in history like some commentators suggested, it was one of the largest in many years. Despite trillions of dollars being wiped from the markets over the course of the week, Wall Street has managed to dust itself off since then and start the long climb back into positive territory. Wall Street managed 4 percent growth last week alone, leaving its total losses from the meltdown at about 7 percent.

In order to comprehend the nature and magnitude of this huge market correction, it's important to understand what the catalyst was for such strong movement. The sell-off was largely due to a sudden spike in US wages growth, which justified existing fears that inflation might be about to take off. If inflation does rise at a faster rate than expected, interest rates are also likely to gather more momentum. Even if the growth in wages was skewed by seasonal factors like some people suggest, the pervasive fear that drove the markets into meltdown was very real and can't be ignored.

The future for the markets will depend greatly on what happens next. While inflation figures released since February 5 largely confirmed investors' fears, it seems the market had already factored this in - at least for now. Instead of dropping further, Wall Street and other global markets have resumed the optimistic growth pattern that has defined the last few years and the US dollar has even gone into reverse. The fear, however, is that this growth can't continue, that it's unsustainable, that eventually - the markets will listen to the cold hard numbers and volatility will return.

Interest rates in the United States will have a huge impact on global markets this year, with rising rates increasing borrowing costs across the globe for the first time in many years. The US Federal Reserve has also announced plans to begin reversing its money printing program called Quantitative Easing, withdrawing cash that was put into the system after the Global Financial Crisis. While this is a long process that will probably take decades rather than years, adjustment is never easy and change often leads to volatility. With markets already dealing with a new inflation environment and interest rate hikes on the horizon, it looks like the bumpy ride isn't over yet.

 

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