Liquidity dries up, risk repriced

Global markets enter February shaped by a sharp and lasting reset in monetary expectations. The nomination of Kevin Warsh as Federal Reserve Chair has accelerated a transition away from speculative excess towards a disciplined repricing of risk. January marked the beginning of what markets now recognise as a period of “hawkish institutionalism”, with policy credibility and balance-sheet discipline back at the centre of US monetary strategy.
The most visible impact of this shift was the historic volatility in precious metals. Silver’s sudden 30% intraday collapse and gold’s retreat below the $5,000 level reflect the rapid unwinding of the long-standing “debasement trade”. For years, investors positioned for a dovish Federal Reserve that would rely on inflation and balance-sheet expansion to manage the $38 trillion US debt burden. That assumption has now been decisively challenged.
Under Warsh’s leadership, the Fed has signalled a clear preference for balance-sheet reduction through Quantitative Tightening rather than relying solely on interest-rate adjustments. This stance has reinforced the idea of a scarcer, higher-quality dollar. As a result, the liquidity premium that had driven non-yielding assets sharply higher has been removed. Margin increases and forced liquidations amplified the move, exposing the extent of leverage that had accumulated in precious-metal markets disconnected from real yields.
At the same time, the US dollar has strengthened as scarcity and policy credibility return as core themes. A firmer dollar has weighed on global equities and commodities, reinforcing a more cautious market tone. In energy markets, oil prices remain capped despite geopolitical tensions, as investors focus on an IEA-projected surplus of nearly four million barrels per day and the absence of meaningful supply constraints.
Equity markets globally continue to struggle to hold record levels as the equity risk premium adjusts to tighter financial conditions and reduced liquidity support.
Volatility reflects this change in regime. The VIX rose roughly 18% through January and continues to target the 20 level, signalling the return of a structural volatility premium. Markets are once again pricing tail risks tied to trade tensions, fiscal sustainability and restrictive credit conditions. Capital preservation, rather than aggressive growth, has clearly re-emerged as the dominant institutional priority as February begins.

Mohanad Yakout

Senior Markets Analyst, Scope Markets