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Traders beware: Six weeks of intense volatility ahead

A relatively light few weeks of market news might have lulled traders into false sense of security, but one analyst told CNBC investors should now prepare for an intense period of volatility.

"We have so much event risk over the next six weeks: tapering, German elections and a decision on the Japanese consumption tax. Markets are going to be incredibly volatile," Paul Krake, founder of Hong Kong investment firm View From the Peak: Macro Strategies.

First in line will be the much anticipated Federal Open Market Committee (FOMC) meeting on September 17-18, where Fed chairman Ben Bernanke is expected by some to start winding back the bank's $85 billion per month bond buying program by $20 billion per month.

(Read More: September or December taper – does it really matter?)

After months of speculation, and volatile reactions to any kind of indication of a taper, many analysts fear a heavy correction once the tapering finally takes place. But Krake said although he expected the event to cause volatility, the reaction might not be as heavy as many expect.

"You're going to have a near term correction of around 5 percent [in the S&P 500], maybe a little more, in the big picture that's nothing," he said. "There is going to be a realization that despite that fact that the Fed is going to be buying less bonds they are still going to be buying bonds, just at a slower pace. At the end of the day policy is very constructive for equities."

(Read More: Emerging market taper terror 'quite overdone': Mobius)

Following the FOMC meeting, traders will have only a few days to recover before another major risk event, the German elections on September 22, dubbed by many as the most important event of the year for Europe.

Chancellor Angela Merkel is broadly seen as a "shoe in", but Krake said the event is bound to cause volatility in the run-up and in the aftermath. On Sunday, Merkel warned her supporters not to get complacent over her expected win, warning that the election would be a "close call".

"Germany is the most important economy and most important leader in Europe. It will be a positive response when she wins, because sometimes markets don't look at opinion polls... but markets would get trashed if she lost," said Krake.

(Read More: German election puts Europe's ambitions on ice)

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The third major risk event to shape markets in the next six weeks, according to Krake, will be the Japanese government's decision on whether or not to push through its plans for a consumption tax hike.

(Read More: Is consumption tax hike the 'wrong policy' for Japan?)

The tax proposal seeks to hike the rate from 5 to 8 percent in April next year and to 10 percent by October 2015. The tax hike is considered a vital step towards getting Japan's fiscal house in order, but critics say it risks damaging the county's fragile growth trajectory. A decision on the issue is expected to be taken in late September to early October, Reuters reported earlier this month.

Krake said a delay would cause a broad sell-off in Japanese equities, and a surge in yen strength.

"If they walk on this, foreigners will react badly and dump Japanese equities. It's not a yen weakening event, it's a yen strengthening event as that's a risk-off scenario," he said.

(Read More: Hiking Japan's sales tax: why it's now or never)

Getting protection

Ahead of this volatile period, some analysts have advised snapping up downside protection. The volatility index (VIX) has traded well below its five-year average of 23.4 recently. On Monday, it traded at 14.37.

"Buying downside protection is cheap right now and with event risk ramping up through September and into October, you could make an argument that this index could be closer to 18 in the coming weeks," said Chris Weston, chief market strategist at trading firm IG.

—By CNBC's Katie Holliday: Follow her on Twitter @hollidaykatie

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