What will life after zero look like?

RISK assets are grinding higher and volatility is extraordinarily low. Nominal economic growth is subdued (but rising) and monetary stimulus still plentiful. What are the implications of the first post-crisis divergence in central bank strategy? And what does life after zero (rates) look like?

Valuations are becoming stretched across markets and investor complacency is high. Many asset owners hold similar investment views: long credit, long momentum and short emerging market risk. This sets markets up for more volatility - especially as the focus shifts from the end of US quantitative easing (QE) to worries about the timing and magnitude of US interest rate hikes. Easy monetary policies by central banks have pushed down bond yields, encouraging risk taking and inflating asset valuations. Volatility is suppressed in equities, bonds and currencies. Government bonds look particularly dear and credit markets are moving in the same direction. Dispersion in the credit markets is unusually low, with a rising tide lifting all bonds. These markets have essentially become rate, not credit, plays.

Relaxed financial conditions are pushing asset owners into look-alike yield-seeking trades. The longer monetary policy smothers volatility and underwrites heady valuations, the bigger the eventual recoil. Geopolitical risks bubbling to the surface add to the potential for volatility spikes. The market response to political crises is often nasty, brutish and short.