(Bloomberg) — Bank runs. The tighter Federal Reserve resolves against inflation. Credit risk, and recession risk. Investors have taken several jitters in the last few days. Moving them all at once can be impossible.
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The problem for traders is that as soon as one risk subsides, another takes its place. The economy is overheated – or at risk of being hit by financial stress. One day bond yields rise due to rising inflation concerns, the next they fall as lenders’ woes convince everyone the Fed will back down.
The result has been increasingly wild moves across the spectrum of asset classes, swings that may persist on another news-filled stretch.
“It’s impossible to position for next week,” said Jim Bianco of Bianco Research. “What stocks want is no contagion and the Fed withdraws from hiking. They will get one or the other, not both.”
In a week characterized by the biggest US bank failure in more than a decade and the decline in any stocks in five months, the most jarring event could be in Treasuries, where yields climbed two days since the financial crisis. The biggest decline was observed in Such rate shocks have a habit of forcing speculative money out, especially in an economy where Fed angst has made short-term bonds a popular trade.
Beyond the impact on speculators, past swings in Treasuries on Thursday and Friday’s scale are worrying signs for the cross-asset landscape and the US economy. Data crunched by Bespoke Investment Group shows that in its nearly 50-year history, two-year Treasury years have recorded a two-day decline of 45 basis points 79 times. With two exceptions, in 1987 and 1989, all of those episodes were during or within six months of the US recession.
While only time will tell whether the failure of SVB Financial Group portends a wider risk to the financial system, investors did not wait for clarity. The S&P 500 slipped 4.6% in five sessions, the most since September. Financials fell 8.5% in the gauge.
The turmoil in stocks may be more than superficial numbers. A note from the Goldman Sachs trading desk said that on a scale of 1 to 10, Thursday and Friday were an “8” in terms of client frenzy. Hedge funds and traditional fund managers trimmed the group amid SVB’s woes, especially as client positions at banks turned bearish. The former has been a net seller of financial stocks for nine straight weeks.
At Morgan Stanley, “bearish trading was widespread” on Tuesday and Wednesday among clients reacting to Fed Chair Jerome Powell’s flamboyant announcements, according to a trading-desk report. Long-short hedge funds retreated from the market overall, while retail investors sold about $1.6 billion worth of stocks.
While all of this points to high volatility, it has been a mistake to underestimate the stock market’s ability to instinctively correct itself over the past few years. Bloomberg columnist Aaron Brown noted last week that investment climates such as today — when bond yields and stock valuations are high and equities have already fallen 10% — almost always favor stock bulls in more than a century of data. are solved. This is a testament to the upward trend of the market.
Still, with a key reading on US consumer inflation due on Tuesday and March 21-22, placing a big bet on stocks or any other riskier asset looks very promising. Risk-taking from stocks was on the rise again on Saturday, with one of the largest stablecoins in the cryptocurrency world trading well below its one-dollar peg.
“If you have bets with an expiration date, be prepared to crush even further,” said Peter Malouk, president of Creative Planning. “This is the price you pay for speculation and that is what we have seen here. We will continue to see speculators continue to be punished heavily.
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