Covid volatility pierced the calm market.Get used to it


Market dynamics

How to look at the latest market shake? If you blink and miss it, then you are a good partner. But in retrospect, Monday was a bit of a horror show.

In the worst trading day of the year, the pan-regional European Stoxx 600 index fell 2.3%. The U.S. took the baton, causing the S&P 500 to fall to a similar degree, and then regaining a little balance at the end of the day.

Oil prices have fallen by 7%, and the OPEC cartel and its allies close to reaching an agreement to increase production can only explain part of it.

Bonds are higher. The 10-year benchmark Treasury bond yield fell below 1.18% for the first time since February, a drop of more than 0.1% on the day. However, perhaps most notably, the pain of reinflationists did not stop there. The second day also brought a sharp rise in the market’s major safe-haven assets, which kept the yield below 1.13%.

The situation is clear: this is a typical outburst of nervousness, piercing the seemingly ruthless, even dull market sentiment. However, finding a satisfactory explanation is more tricky.

After rationalization, the first is that investors finally wake up Delta variant Coronavirus. This has some intuition: in 2020, from the initial outbreak of Covid-19, Asia has gone through weeks of destruction before Western investors take it seriously.Until northern Italy closure In late February of that year, investors ran for safety earnestly. This may be a replay.

Considering this argument further, some people believe that the bond market—the magnet in times of crisis—in some way understands Delta’s severe potential economic impact better than stock market investors, so the impact there is more significant and lasting.

It is true that bond investors tend to pay more attention to potential doom and disaster than their counterparts in the stock market. They can smell the central bank’s stimulus measures a mile away. But this explanation does not really hold. Stock investors also read newspapers. The real shift in market sentiment, from benign and boring to worried and vacillating, will not completely subside in two days like this episode.

By the middle of the week, not only did bonds fall again, but the stock market also rose.

For weeks, the potential impact of Delta has been a known risk for investors. Its impact on public health is obviously worrying, and companies are suffering from the so-called “pingdemic“The app instructs workers to quarantine. But frankly, Delta’s impact on the market is only that it may push major economies back to a strict, economically punitive lockdown. Now, this seems to be politically toxic.

TS Lombard senior macro strategist Oliver Brennan wrote in a report this week: “We are as worried about Delta variants as everyone else.” “But objectively speaking, our investment case is not Unaffected by the current wave of viruses: In this wave, the connection between cases and hospitalization is weak. Don’t let your heart dominate your mind.”

A senior bond trading banker in London believes that he has an answer to what is really happening here. “Well, it’s August,” he told me this week. I will not let him blush because he recognizes him; although Britain is already very hot, the past 18 months have felt very long, but of course it is still July.

Leaving aside the calendar chaos, his view is that the market is in holiday mode. It is quiet, and its movements are usually small and slow, and many traders and investors who desperately need to change the situation have come ashore. In any given year, such a sleepy summer day is usually characterized by sudden, seemingly random shocks under related bad trading conditions.

Mark Dowding, Chief Investment Officer of BlueBay Asset Management, said: “You often see these high-quality products appearing, especially in the summer.” “Many processes are down to machines and models, but you don’t get your head. You can have something like that. It looks like the sky is falling down on days like Monday, and then you have other days all Goldilocks.”

Bond investors and traders agree that “their” markets are currently a little uneasy, just like the opposite direction in February. Then, as asset management companies were eager to sell bonds to prepare for higher growth and inflation, yields soared at an alarming rate. Now, yields are showing the same awkward, stop-starting lack of liquidity during their decline. “The Federal Reserve has already said’we are looking at the data’, so it has not given very clear leadership,” Dowding said. He added that this made the bond market a little uneasy.

The stupid summer season is not a new phenomenon. Sadly, neither is the Delta variant of the coronavirus. But in the coming weeks and months, the two may combine to cause further mistakes.

Kasper Elmgreen, head of stocks at Amundi, said that after a very strong reinflation transaction, the market began to worry about the “other side” of the Covid pandemic. “You can double drug use, but you still get this. That’s not the narrative from last year. It’s not so black and white,” he said.

He said to be prepared for the bumps on the road. “This is not a straight line. This will never be a straight line.”

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