HSBC Asset Management reported a rise in the policy uncertainty index after US trade and Federal Reserve headlines. This came as US shares remained range-bound and market volatility stayed low. The VIX volatility index was listed at 20, and credit spreads were described as at multi-decade tights. The note said textual measures may overstate uncertainty, including by the metric’s creators.

Tariffs Growth And Inflation

It said a lower effective tariff rate could support GDP growth and affect inflation. US growth was described as running around its trend pace, helped by profits and AI-related capital spending. HSBC said inflation may stay sticky through 2026 but ease in a gradual and uneven path towards the target. It also said higher policy uncertainty supports expectations that the Fed will remain on hold in the next few months. It added that market activity is shifting beneath the surface, from growth and momentum towards value and emerging markets. It said 2026 market risks could rise if inflation stays high and limits the Fed, or if profits weaken. We see a disconnect between headlines about policy uncertainty and the actual calm in the market. While a policy uncertainty index has spiked, the VIX is holding near 20, a level close to its long-term average and far below the highs over 30 we saw back in 2022. This suggests that for now, the market believes the Federal Reserve will remain on hold in the coming months.

Positioning For A Low Volatility Regime

Given the Fed is likely sidelined with the target rate holding at 4.75-5.00%, we should consider strategies that profit from low volatility. This environment is favorable for selling options to collect premium, such as writing cash-secured puts or credit spreads on major indices. The market’s current range-bound trading provides a tailwind for these income-generating trades. However, this calmness could be an opportunity to buy protection cheaply. With credit spreads on corporate bonds at multi-decade lows, the market is pricing in very little risk. We could view the low VIX as a chance to buy longer-dated call options on volatility or out-of-the-money puts on the S&P 500 as a cost-effective hedge. Under the surface, a significant rotation is underway that we must position for. Looking at recent performance, value-oriented ETFs have started to outperform growth sectors, while emerging market indices like the MSCI EM are up over 5% year-to-date, outpacing the S&P 500. We can use options to get exposure, buying calls on value and emerging market ETFs like XLF and EEM. Inflation data remains a key focus, and while it’s sticky, it is slowly moderating. The last CPI reading in February 2026 showed inflation at 3.2%, which is still above the Fed’s target but continues the bumpy downward trend we observed through 2025. This reinforces the view that the Fed will wait, making options on short-term interest rates less attractive but keeping an eye on long-duration bond ETFs for signs of a shift in long-term expectations. The real tests for our positions will come from two potential shocks. If the next inflation report shows a surprising reacceleration, it could force the Fed’s hand and break the market’s calm. Similarly, we will be watching the upcoming first-quarter earnings reports very closely for any signs that robust corporate profits are beginning to weaken. Create your live VT Markets account and start trading now.

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