Elevated Volatility Likely to Remain in August

July has been an attention-grabbing month in the financial markets, with August unlikely to offer calmer waters. Major central banks dominated a large segment of the limelight last month as they continue to attempt to rein in spiralling inflation.

The Reserve Bank of Australia (RBA), the Reserve Bank of New Zealand (RBNZ), and the European Central Bank (ECB) hiked key interest rates by 50 basis points. The latter was a surprise for many desks, putting an end to negative rates.

On the very same day as the RBNZ, the Bank of Canada (BoC) took things a step further and surprised markets by lifting the Overnight Rate by 100 basis points to 2.5 per cent. The FOMC concluded the month by increasing its Federal Funds target range by 75 basis points to between 2.25 per cent and 2.5 per cent — a well-telegraphed move. While the world’s major central banks continue to embark on monetary policy tightening, the Bank of Japan (BoJ) held rates steady.

Considered by many as the most influential central bank, the Fed increased its benchmark rate at the July meeting — its second consecutive 75 basis-point hike — as the central bank remains determined to cool inflation (annual: 9.1 per cent). The Fed has increased rates by 225 basis points this year so far. Interestingly, in his post-meeting Press Conference, the US Federal Reserve Chair Jerome Powell suggested a more ‘data-dependent style’ and adopted a ‘meeting-by-meeting approach’, similar to the ECB. This implies that incoming data will have a magnified impact on most asset classes going forward; couple this with geopolitical themes, and uncertainty in August is likely to remain elevated.