The View | Surprisingly strong US dollar and return of volatility shatter investors’ once-bullish confidence

As the second half of 2018 gets under way, financial market bulls can be forgiven for asking themselves how it all went so wrong. 

At the start of this year, most investors were convinced that volatility would remain subdued, the period of synchronised global growth would persist and the US dollar would continue to weaken.

In the January edition of Bank of America Merrill Lynch’s authoritative global fund manager survey, a monthly report which canvasses the views of institutional investors around the world, “shorting”, or selling, volatility was the most popular trade.

Fast forward five months, and all three of these big bets – as well as several others, such as bullish wagers on the stock markets of the euro zone – have backfired spectacularly.

In a sign of the extent to which market developments have wrong-footed investors, the previously paltry returns offered by cash have beaten those on bonds and equities. According to a report from JPMorgan summing up the first half of this year, “returns this low and this broad have only occurred twice in the past 25 years”.