The S&P500 reached a high of 2014 on September 22, then plunged almost 10% in three weeks before regaining 100 points in less than a week. The wild ride was replicated in the US Treasury market, where yields (which every Wall Street economist had told us were on an upward trajectory) plummeted to 1.6% from 2.6% in a three-week period.
This resurgence of volatility could have been a good opportunity to make money if you had called the trend correctly. However, I’m not sure that many surfed the wave adroitly. These difficult weeks have highlighted some of the key trends that affect markets and the banking industry.
Firstly, due to the Volcker rule and other regulatory restrictions, there seems to be a lack of market-making liquidity. No one steps in to take the opposite side of a trade. This could prove disastrous if you have a stampede out of credit bonds, where liquidity is already limited.
Secondly, central banks have kept rates too low for too long. How many times in the last year have we heard that the Fed and the Bank of England are going to stop asset purchases and start raising rates? Yet, as soon as the markets sell off in preparation for such tightening, the authorities scramble to make soothing noises and insist that the money spiggots will remain open.