Markets enjoy blessed relief now that severe storms have passed
Financial markets are intensely boring right now. It’s bad news if, say, you’re a journalist newly assigned to write a weekly column on the subject. Just for the sake of arguing.
For most other people, however, it is a blessed relief. In March 2020, when the pandemic really hit and markets were collapsing, people outside the tight financial community were much more focused on their safety and the safety of their families and on buying canned goods. than on the valuation of shares.
But this volatility has a real impact, as the Bank of England recently reminded us in a blog post. “Financial markets reflect changes in the economy. But sometimes they amplify them too, ”the central bank said. In other words, markets can make bad situations worse, increasing funding costs for anyone trying to raise new debt or new equity.
To illustrate this point, the blog takes us back to the events of the spring of last year, when markets were forced to swallow a huge wave of economic disruption caused by global lockdowns in one fell swoop. The price of risky assets, unsurprisingly, collapsed.
Several structural and technical issues in trading and fund management quickly made this collapse self-reinforcing.
Participants in the derivatives market were often required to provide much larger collateral to counterparties – demands that peaked around mid-March 2020. This sparked more sales. More thinking about how warranty claims are calculated, with the aim of reducing the impact of the vicious circles that ensue, could be a useful exercise, the blog suggests.
In addition, many funds have been forced into liquidation. Funds, particularly those focused on corporate bonds, have received an increase in redemption requests. Responding to these requests quickly as promised was difficult for funds with hard-to-sell underlying assets. At its peak, net outflows reached 5% of assets under management of corporate bond funds in March, the biggest wave of demands since the global financial crisis. Again, for these funds, the only answer was: sell bonds, quickly.
Hedge fund leverage betting, very lucrative in good times but quickly very damaging in bad times, has also hurt, as has the intense stress among banks facilitating trading across a range of asset classes. .
All of this warrants “further investigation,” according to the blog, if we are to avoid similar dark situations with potential real-world effects in the future. The last time, only the strong intervention of the central banks stopped the rot.
March 2020 was an extreme example of stress, to be sure. Yet, with this period etched in such recent memory, it is reassuring, in a way, that nothing, even remotely, close to typical levels of volatility, is at stake now. This keeps financing costs surprisingly low and gives the global economy the breathing space it needs to recover from the shock of the pandemic.
Is it calm? Absolute Strategy Research points out that the S&P 500 benchmark of US stocks has been squeezed into increasingly narrow trading ranges in recent weeks. It moved more than 1 percent in both directions in a single day just twice during the entire month of June. Even then it dropped and then jumped a similar degree on several consecutive days, so it was pretty much a washout. New highs are close to a daily event, but they come in small increments.
In currencies, the tone is also asleep. “It is not foolish to suggest [major currency] the ranges for the year have been paltry, ”wrote Alan Ruskin, Deutsche Bank macro strategist.
“It is still plausible that the euro is recording its narrowest annual range against the dollar since the fall of Bretton Woods,” he said. The common European currency is probably on track for “a similar ignominious record” against the yen. Even the generally more dynamic transactions, like the Australian dollar against the yen, are also in deep sleep.
And all this before the start of the traditional summer lull.
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Even cryptocurrencies, usually a trusted source of insane unpredictability, are asleep. After a dramatic halving of the price of bitcoin earlier this year, prices have stabilized in a narrow range around $ 33,000 per pop. Some true believers say the second crypto winter has set in, similar to the long period of downturn after the last milder boom and recession in 2017.
That, of course, could change with just one tweet from Elon Musk. But back in the world of more established asset classes, barring a severe inflationary shock or Delta variant curve, optimistic stability appears to be the prospect for the months ahead.
In part, explains Karen Ward, chief market strategist for Europe at JPMorgan Asset Management, part of this is due to investor confidence in central banks’ willingness to cushion shocks. “In addition, we are still in a pattern of waiting,” she said. It will take months to answer the big question of how long inflation persists and how severe it is. “The data won’t add any information to this story” anytime soon, she said. “It might be the end of the year before we know it.”
Enjoy the silence. It’s “a little boring,” as one commenter told Bank of America analysts. “But you’re not selling a boring deal.”