Now that the big storm has passed, the market is enjoying a happy relief
Currently, the financial market is very dull. If you are a reporter who is newly responsible for writing a weekly column on this topic, that would be bad news. Just for debate.
However, for most other people, this is a happy relief. In March 2020, when the pandemic really hit and the market collapsed, people outside the financial world focused more on protecting themselves and their families, and purchasing canned food, rather than worrying about stock valuations.
But this kind of volatility will have an impact on the real world, as the Bank of England recently stated A blog post. “Financial markets reflect changes in the economy. But sometimes they also amplify them,” the central bank said. In other words, the market may make a bad situation worse, thereby increasing the cost of financing for anyone trying to raise new debt or equity.
To illustrate this point, the blog brings us back to the events of last spring, when the market was forced to swallow the huge wave of economic destruction caused by the global blockade.There is no doubt that the price of risky assets collapse.
Several structural and technical issues in trading and fund management quickly made this collapse self-reinforcing.
Participants in the derivatives market are often required to provide more collateral to their counterparties-this demand culminates around mid-March 2020. This triggered more selling. The blog suggests that it may be a worthwhile exercise to consider more about how to calculate mortgage requests and focus on reducing the impact of the resulting vicious circle.
In addition, many funds were forced to liquidate. Funds, especially those that focus on corporate bonds, have received a large number of redemption requests. For funds whose underlying assets are difficult to sell, it is difficult to meet these requirements quickly as promised. At its peak, the net outflow of corporate bond fund management assets reached 5% in March, which was the largest wave of requests since the global financial crisis. Similarly, for these funds, the only answer is: sell bonds quickly.
Leveraged bets by hedge funds (which are lucrative during the boom, but quickly cause severe damage during the boom) have also been hurt, as has the tremendous pressure among banks that facilitate transactions in various asset classes.
If we are to avoid similar grim situations that may have a potential impact on the real world in the future, then all of these require “further investigation.” Last time, only the strong intervention of the central bank could prevent decay.
March 2020 is undoubtedly an extreme example of stress. Nonetheless, as this period is remembered in recent memory, it is gratifying to some extent that nothing far from the typical volatility level is at work now. This keeps financing costs extremely low and provides the breathing space needed for the global economy to recover from the shock of the pandemic.
How quiet is it? Absolute Strategy Research pointed out that in recent weeks, the S&P 500 benchmark index of US stocks has been squeezed into a narrower trading range. Throughout June, it moved more than 1% in either direction only twice in a day. Even so, it fell and then rose at a similar rate for several days, so it was roughly a baptism. New highs appear almost every day, but they arrive in small increments.
On the currency side, the tone is equally sleepy. “Proposals are not ruthless [major currency] The volatility this year is very small,” wrote Alan Ruskin, a macro strategist at Deutsche Bank.
He said: “The exchange rate of the euro against the dollar may hit the narrowest annual range since the collapse of the Bretton Woods system, which is still reasonable.” The euro against the yen may have a “similar shameful record.” Even transactions that are usually more active, such as the Australian dollar against the Japanese yen, are in a dormant state.
And all this happened before the traditional summer off-season.
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Even cryptocurrencies, which are usually a reliable source of cyclical unpredictability, are dormant. After the sharp drop in the price of Bitcoin earlier this year, the price has stabilized within a narrow range of approximately $33,000.Some true believers say The second crypto winter It has already begun, similar to the long period of slowness following the last mild boom and bust in 2017.
Of course, this may follow Single tweet From Elon MuskBut returning to the world of more mature asset classes, unless there is a severe inflation shock or a Delta variable curve ball, the outlook for the next few months seems to be optimistic and stable.
Karen Ward, Europe’s chief market strategist at JP Morgan Asset Management, said that part of the reason is that investors believe that the central bank is willing to cushion shocks. “In addition, we are still in holding mode,” she said. The big questions about how long inflation lasts and how obvious it proves will take months to answer. She said, “These data will not add any information about the story in the short term.” “Before we know it, it may be the end of the year.”
enjoy the silence. As one commenter said to Bank of America analysts, this is “a bit tedious.” “But you are not selling in a dull market.”