Trade Tensions, Tariffs, and European volatility
As the discussions of trade wars and tariffs persisted throughout 2018 and into 2019, it may have influenced a sense of uncertainty in the global financial and commodity markets as companies might have to rethink their supply chains and manage potential disruptions and at least in the short-term experience increased pricing if the firm is on the buy side or potentially lose market share if they are on the sell side.
Uncertainty versus risk:
Increased uncertainty frequently equates to market nervousness and increased volatility, potentially causing a reduction in investment and spending. Uncertainty may occur when markets or an economy are in a transition or future outcomes are less known. First, let’s define uncertainty and how it differs from risk. As noted by Frank Knight (1921), risk entails a set of known results and known probabilities. Uncertainty lacks enough information to determine a known set of expected outcomes and probabilities. Economists sometimes know it as “Knightian Uncertainty”. Uncertain scenarios lend itself to market and economic behavior when the participants have less confidence in what the result will be or when it may occur. 2018 was a year filled with global announcements on trade and this article looks at the question, have global trade tensions impacted European volatility as measured by the VSTOXX® volatility index?