The Challenges Of Volatile And Turbulent Markets

The Challenges Of Volatile And Turbulent Markets

The return of market volatility is not surprising given the turbulent economic, political and geopolitical fluidity around the world.

This year has been characterized by spikes in volatility: sharp gainers, and sharp decliners, Y 2016 looks like more of the same, which should force participants to pay attention to the dynamics of potential tipping marks.

The Big Q is not whether market volatility is on the rise; it is the uncertainty about spikes being temporary and reversible, and, get this one, whether injections of liquidity from both public and private sources will continue to stabilize market, and for how long?

Volatility and Turbulence in the markets have financial and economic implications, some of them are listed below, as follows:

  1. Volatility is to be expected, given rather sluggish global economic fundamentals, national politics that are heavily influenced by anti-establishment movements and a number of geopolitical instabilities and threats. The most recent financial market instability was amplified by the US Fed’s decision to lift rates last Wednesday, which confirmed the divergent monetary policies undertaken by the world’s most-influential central banks, the ECB, BOE, BOJ and PBOC.
  2. These bouts of volatility are amplified by fragile market liquidity caused by the limited appetite of broker-dealers to provide their balance sheet in a counter-cyclical manner. This phenomenon gets worse as these intermediaries get ready to close their books for the year.
  3. Excessive volatility, especially when associated with sharp downward movements in asset prices, is detrimental to the real economy for 3 reasons: 1) by increasing risk aversion among many investors and thus reducing the flow of capital to productive activities, 2) by threatening the volatility repression approach that central banks have been using to encourage greater consumption and investment, and 3) by risking the disorderly deleveraging and liquidation of over-extended investors.
  4. Concerns about excessive volatility are a lot greater when markets approach tipping marks. 3 market segments: energy, high yield bonds and emerging-market currencies are unhinged. Others could follow if bouts of volatility and illiquidity become more frequent, sharper and harder to reverse relatively quickly.
  5. With economic and corporate fundamentals struggling to improve quickly enough, the task of stabilization has repeatedly fallen to liquidity injections from 2 sources: central banks, including through the use of large-scale asset purchase programs; and companies, which have deployed cash from their balance sheets for share repurchases, pay higher dividends and carry out mergers and acquisitions.
  6. Whenever adverse volatility is apparent, some market participants call for the central bank to step in to restore calm. That occurred last Friday when some suggested the Fed should reverse the 25 bspt interest rate hike it had implemented just 2 days earlier.
  7. The US Fed is in no hurry to reverse its action. In fact, it is much more likely to hike interest rates again in March then it is to cut them. Although the other big central banks will press continuing stimulation, the now-divergent stance of global monetary policy makers will provide less support to asset price repression overall. As a result, more of the burden of stabilization will fall to the deployment of corporate liquidity.
  8. Such a configuration is a less supportive of financial markets, which will operate in a higher volatility regime, notwithstanding continued liquidity injections from companies and central banks, even if these are at a lower level globally.
  9. Global growth is continuing to slow, and as some very important emerging economies struggle to fully stabilize, do not expect economic and corporate fundamentals to play a sufficient stabilizer role for asset markets.
  10. Financial markets are now transitioning from a world in which real and perceived liquidity injections have effectively repressed volatility to a new operating regime.

So, the Big Q for Y 2016 and beyond is not if volatility will be more frequent and  violent than in the last few years, because they will be.

The challenge for participants will to carefully monitor the tipping marks for various market sectors, along with price overshoots and asset-class contagion.

Pay attention, its your money and your responsibility. The name of Wall Street game is to make Money.

Tuesday the US major market indexes finished at:

Volume: Trade was in line with about 850-M/shares changing hands on the NYSE

  • NAS Comp +5.6% YTD
  • S&P 500 -1.0% YTD
  • DJIA-2.3% YTD
  • Russell 2000 -5.2% YTD
WBR Analysis for DIA:  Overall Short Intermediate Long
Neutral (-0.11) Neutral (-0.16) Neutral (-0.23) Neutral (0.06)
WBR Analysis for SPY:  Overall Short Intermediate Long
Neutral (-0.13) Neutral (-0.03) Bearish (-0.25) Neutral (-0.11)
WBR Analysis for QQQ:  Overall Short Intermediate Long
Neutral (0.11) Neutral (-0.16) Neutral (0.00) Very Bullish (0.50)
WBR Analysis for VXX:  Overall Short Intermediate Long
Neutral (-0.07) Neutral (0.19) Neutral (-0.06) Bearish (-0.35)

Stay tuned…

Paul Ebeling

West Brook Radio

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