This analysis is by Terence Hove, Senior Finacial Markets Strategist at Exness
Global volatility in 2025 has been elevated but contained characterised more by short, policy-driven dislocations than systemic stress. As markets transition into 2026, consensus expectations point toward a low to moderate volatility environment, yet this surface calm masks structural fragilities, stretched valuations, geopolitical overhangs, and persistent policy uncertainty. Markets have absorbed aggressive rate-cut repricing, tariff disruptions, and AI-driven speculative flows, but these catalysts have left risk assets pricing in a Goldilocks scenario that may be difficult to sustain through a slower global growth phase.
Source: UGC
Volatility in 2025: Episodic, Policy-Sensitive, but Not Systemic
While the VIX hovered around the mid-teens, suggesting normalised risk-taking rather than distress, the volatility character shifted meaningfully. The market is quicker to react to data or policy surprises, reflecting thinner liquidity and high positioning in crowded trades. Abrupt spikes around tariff announcements and macro data surprises underscored how geopolitics and policy shocks are acting as the primary volatility generators, not credit or liquidity stress. This “policy-reactive volatility regime” is likely to persist through 2026.
Equities and Credit: Strong Performance Built on Narrow Foundations
Equity markets delivered robust double-digit gains in 2025, but leadership has become increasingly concentrated in AI-linked mega caps. Earnings resilience and easing expectations have supported valuations, yet these pillars are vulnerable to even modest growth disappointments. Credit markets have mirrored this optimism: spreads remain tight, indicating solid risk appetite, but also highlighting complacency. With valuations stretched and dispersion rising, 2026 returns are expected to be more idiosyncratic and highly sensitive to earnings quality and pricing power.
Rates, Bonds and FX: Repricings Have Created Future Opportunity
Government bond markets underwent repeated repricings as expectations for the speed and depth of Fed and ECB cuts recalibrated. The pivot toward lower yields in late-2025 marks a turning point, improving forward return expectations for high-quality duration. FX volatility stayed muted, signalling confidence in global macro stability. However, this low-vol regime is conditional on bond-market stability. Any shock to inflation, fiscal policy, or the US term premium could quickly lift implied vols and drive broad risk-off dynamics.
Outlook for 2026: Stability on the Surface, Fragility Underneath
Consensus forecasts a constructive but slowing global growth cycle. Earnings should remain supportive, bond carry is more attractive, and EM FX may benefit from high real rates. Yet this benign baseline sits atop three destabilising risk complexes: geopolitics, US policy uncertainty, and financial-system vulnerabilities.
The Three Dominant Risks Heading Into 2026
1. Geopolitical & Trade Tensions – The Principal Structural Risk
Geopolitical risk has become a persistent macro driver, shaping energy, inflation and risk premia. Key insights:
- Conflict hotspots (Ukraine, Middle East) remain potential volatility accelerants, particularly for commodities. Any disruption near Hormuz would reprice Brent meaningfully higher.
- US-China friction and tariff escalation are now structural features, not cyclical anomalies. The mid-teens US tariff regime has yet to show its full inflationary bite.
- Safe-haven demand for gold reflects this chronic geopolitical uncertainty, acting as a barometer for latent systemic stress.
2. US Policy and Political Uncertainty – The Highest-Probability Volatility Catalyst
The US enters 2026 with converging risks across monetary, fiscal and political domains.
- Midterm elections will amplify policy noise, elevating volatility premia in FX and rates.
- Fed independence risk particularly under a more interventionist administration could materially destabilise US rates markets.
- Fiscal policy is a swing variable pre-election stimulus (tariff rebates) could stoke inflation, while a Supreme Court reversal of tariff legality could abruptly cool it. Markets must price both paths.
This policy bifurcation makes the US the primary source of macro uncertainty in 2026.
3. Valuation & Credit Vulnerabilities – High-Asset Prices Meet Slowing Growth
Valuation risk is now a systemic feature of markets:
- US equity multiples are extended, dominated by AI mega-caps whose earnings delivery must be flawless. A deceleration in AI monetisation is a plausible tail risk.
- An AI-sector correction would disproportionately affect the top 20% of US households, creating negative wealth effects that could tip growth.
- The private credit sector is the least understood vulnerability. Rapid growth, leverage, and illiquidity create classic late cycle fragilities. Stress need not spark a full financial crisis, localised failures could still propagate through funding channels.
Strategic Implications
2026 may present a benign top down macro profile, but markets remain acutely sensitive to policy, geopolitical and valuation shocks. The investment environment demands:
- Selective equity exposure tilted toward earnings resilience and pricing power.
- Active duration management to capture improving bond carry while navigating policy uncertainty.
- Disciplined credit selection given tight spreads and late cycle risks in private credit.
- Risk-aware FX strategies that account for episodic US driven volatility.
In short, the base case is stable, but the tails are fat and increasingly policy driven.
(Sponsored)
Source: TUKO.co.ke
