Markets enjoying blessed relief now are going through heavy storms


The financial markets are, now, intensely deaf. This is bad news if, for example, you are a new journalist tasked with writing a weekly column on the subject. Only for the purpose of the argument.

For most other people, however, it is a blessed relief. In March 2020, when the pandemic really hit and markets were in crisis, people outside the tight financial community were much more focused on keeping themselves and their families safe, and buying canned food, than worrying about valuations. of capital.

But this volatility has an impact in the real world, as the Bank of England recently reminded us. a blog post. “Financial markets reflect changes in the economy. But sometimes they amplify it too, ”the central bank said. In other words, markets can exacerbate worse situations by increasing financing costs for anyone trying to raise new debt or capital.

To illustrate the point, the blog takes us back to the spring events of last year when markets were forced to swallow a huge wave of economic disruption from global shocks in one fell swoop. The price of risky assets, unsurprisingly, fell.

Many structural and technical problems in the trading and management of funds have quickly caused that self-reinforcing collapse.

Derivatives market participants have often been asked to send larger pieces of collateral to counterparties – requests that have reached a crescendo towards mid-March 2020. This has sparked more sales. Thinking more about how collateral requirements are calculated, with an eye on reducing the impact of the vicious cycles deriving from them, could be a worthwhile exercise, the blog suggests.

In addition, many funds have been forced into liquidation. Funds, particularly those focused on corporate bonds, have received a growing demand for repayment. Meeting those demands quickly as promised was tough for funds with underlying assets difficult to sell. At the peak, net outflows hit 5 percent of assets managed for corporate bond funds in March, the largest wave of claims from the global financial crisis. Again, for these funds, the only answer was: bond sales, fast.

Bets exploited by hedge funds, highly lucrative in good times but quickly very damaging in bad times, have also hurt, as has the intense stress between banks that facilitates trading in a range of asset classes.

All this guarantees “further investigation” the blog says, if we are to avoid similar macabre situations with potential real-world effects in the future. Last time around, only the heavy intervention of central banks stopped the rot.

March 2020 has been an extreme example of stress, of course. Yet, with that period engraved in such a recent memory, it is reassuring, in a way, that nothing even close to the typical levels of volatility is at play now. This keeps financing costs extraordinarily low and gives the global economy the breathing space it needs to recover from the pandemic shock.

How quiet is it? Absolute Strategy Research points out that the S&P 500 benchmark index of U.S. equities has been crushed in increasingly tight trading regions in recent weeks. It moved more than 1 percent in each direction in a single day only twice throughout the month of June. Even then, he fell and then jumped to a similar degree on consecutive days, then it was about a wash. New highs are close to an everyday event, but come in small increments.

In value, the tone is the same sleep. “It’s not charitable to suggest [major currency] The intervals for the year have been poor, ”wrote Deutsche Bank macro strategist Alan Ruskin.

“It is still plausible that the euro could record its tightest 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 typically liveliest trades, such as the Australian dollar against the yen, are also in a deep sleep.

And all this before the traditional summer break comes into play.

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Even cryptocurrencies, generally a reliable source of challenging unpredictability, are dormant. Following a dramatic drop in the price of bitcoin earlier this year, prices have settled in a narrow range around $ 33,000 a pop. Some true believers say the second Crypto Winter it has settled, similar to the long slow period after the last boom and the mildest bust in 2017.

Which, of course, could change with one unique tweet yes Elon Musk. But back in the world of more stable asset classes, except for a serious inflation shock or a Delta curve variant, optimistic stability appears to be the outlook for the coming months.

In part, says Karen Ward, Europe’s leading market strategist at JPMorgan Asset Management, which is because of the faith among investors in central banks ’willingness to cushion shocks. “Also, we’re still in a holding model,” he said. The big question around how much inflation will stay around, and how much inflation will slow down, will take months to answer. “The data will not add any information to this story,” he said shortly. “It could be the end of the year before I know it.”

Enjoy the silence. It’s “a little deaf,” as one commenter told Bank of America analysts. “But don’t sell a deaf market.”

katie.martin@ft.com



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