The View | Slower global growth may be just what the doctor ordered

Another week, another sign that financial markets have entered a period of heightened volatility following nearly two years of remarkable calm.

Last week, the benchmark S&P 500 equity index suffered its biggest weekly decline since January 2016, falling 6 per cent, while the technology-heavy Nasdaq Composite index plunged 7.3 per cent, its steepest fall in three years. The VIX Index, Wall Street’s so-called “fear gauge” which measures the anticipated volatility in the S&P 500, is back above its long-term average of 20 and close to the level at which it stood just after February’s “mini-crash”.

Yet this time round, the precise reason for the sell-off is unclear.

Was it growing fears of a tit-for-tit campaign of escalating trade tariffs between the US and China following President Donald Trump’s decision last Thursday to impose 25 per cent tariffs on US$60bn of imports from China? Or perhaps the bullish picture of the US economy painted by Jerome Powell, the new chair of the Federal Reserve, last Wednesday as a justification for tighter monetary policy in the coming years? Or maybe the sell-off in tech stocks triggered by the data mining scandal at Facebook?

That there is confusion over the catalyst for the latest bout of turmoil shows just how nervy and disoriented international investors have become since volatility erupted at the end of January.

The reaction in government bond markets, however, is revealing.

Earlier this year, fears about a sudden spike in inflation and an earlier-than-anticipated withdrawal of monetary stimulus caused yields on sovereign bonds to rise sharply, with the yield on benchmark 10-year US Treasury bonds surging 60 basis points between early January and late February. Last week, however, US and German 10-year yields fell nearly 10 basis points, suggesting that the inflation scare has abated.

The new bogeyman appears to be a slowdown in global growth, accentuated by concerns about the effects of a trade war.