Paradigm shifts and new volatility regime

Yesterday we had written that people should always be on the lookout for structural changes (or the cliched jargon version called paradigm shift) to reconfigure their bets. With the Biden era formally starting in the US one can argue if such a change has happened. Markets anyways have been preparing for the change since the election results were announced and a formal anointment changes nothing materially on the ground. But still to appreciate the change we need to see what happened in last 4 years. The previous administration had a penchant to change the status quo. The global accords, trade agreements (NAFTA, TPP), military coalitions (NATO), Fed Treasury relationship etc. all and sundry were questioned and changed.

Readers would remember that the initial years were marked by a bitter twitter war with the North Korean regime. In the later years the relationship between the two countries reached the other side of the spectrum too. On the Fed side, calling its chief a nincompoop (or its equivalent) was also a regular affair as the Central Bank tried to raise rates and restore normalcy in the conduct of monetary policy. Then in 2019 the focus shifted to the US China trade war with sanctions and a tariffs seesaw becoming the norm. The deal was finally signed in January 2020.

Now all this and that too very visibly on twitter led to markets entering into a structural high volatility zone. Risk on Risk off dichotomy used to get invoked daily or sometimes on an hourly basis. Now this is not to say that the world in any way has suddenly become a more certain and predictable place. The only point here is that a potent source of volatility has given way to a much more traditional operating regimen. The unknown unknown (as Donald Rumsfeld would put it) are still there. Any ways how this development will manifest in market moves is a point of debate? Emerging market assets doing well, broad Dollar decline, Chinese Yuan continued appreciation can be some of the likely outcomes.

On the market update side, Dow Jones closed 288 points in green scaling all-time highs. Indian stock market BSE Sensex also breached the 50k mark for the first time in history. Now as we wrote above, the risk on is the current flavour and that too with a low volatility scenario, is the perfect recipe for equity market rise. A lion’s share of the promised 1.9 trillion USD is ultimately expected to find its way to high yielding assets which can keep this party going for some time. The Indian equity markets have seen close to 22k Crore of FPI inflows in the month of January 2021 itself. On the domestic bonds side, we will see the OMO auction for INR 10k today. The next big event on the horizon remains the budget and RBI monetary policy both in the first week of February.