October is traditionally the scariest month of the year, as evenings start to get darker and days colder, our thoughts turn to the winter that is inevitably coming.  The same can be said for the stock markets, as October has been historically one of the most volatile months of the year.  The theory suggests that after a lull during the summer, when politicians, traders and analysts are on holiday, they return to either deliver significant rhetoric, to make major trades or to examine data.  This causes the measure of volatility to jump, as the index lags a month, comparing September to August.

The volatility index spiked 30% on Thursday on the back of data from the US which showed the American economy was growing at an annualised rate of 4.2%, the strongest tally in almost four years.  The strong second quarter growth figure was higher than consensus, although still in line with the way in which economists have expected the US economy to grow.  The Federal Reserve commented that rates could be raised to levels that could restrain growth; Jerome Powell was confident that wage inflation showed no signs of the labour market overheating, even on the back of US unemployment falling to its lowest level since 1969.

This was not a surprise and consistent with the forward guidance that the US central bank has been giving us all year.  We know when the next rate hike will be (December) and we know what the cycle of tightening interest rates will be next year (mostly likely three).  However, this arguably good and fully expected news caused markets to over react and they are fearful that the Federal Reserve may tighten monetary policy faster than they have stated.  We are back to bad news being good for the markets, as this slow monetary tightening, while good news could lead to an acceleration in the raising of interest rates.  This is typical behaviour of a market adjusting from an accommodative phase that has endured for almost a decade and knowing that the end of the economic cycle is on the horizon.

We must remember that this normalisation of interest rates in the US is a sign that the economy is strong and that the new normal is not interest rates at 5%, but  much closer to 3%.  The same cannot be said of Turkey, whose annual rate of inflation hit 24.52% in September, its highest level for 15 years.  This will undoubtedly put pressure on the Turkish central bank, which only last month raised interest rates to 24%, in an attempt try and prevent a deepening of its currency crisis.