Buckle up | FinancialTimes

Yesterday, CNBC was able to roll out its “MARKETS IN TURMOIL” package, and honestly, it felt fitting. Stocks took a sudden and mysteriously violent drop on Thursday.

After rising 3% on Wednesday after Federal Reserve Chairman Jay Powell indicated that the central bank was not considering raising rates more than 50 basis points at a time, the S&P 500 then went up. fell 3.6% on Thursday.

Interestingly, various analysts, investment managers and financial journalists were better able to say what happened yesterday – and present myriad arguments for what it means – than exactly Why it happened.

Our colleagues Robert Armstrong and Ethan Wu have done a great job exploring some of the potential explanations in Unhedged, but here’s what other people are saying.

What happened?

Tellingly, yesterday’s pain was most intense in US tech stocks, and particularly in its frothier corners, accentuating a selloff that began when the Fed first made a hawkish fall pivot. latest.

The Nasdaq fell nearly 5% on Thursday, completely reversing Wednesday’s 3% gain. This follows a similar pattern to late April, when another 3% plus one day gain was immediately reversed the next day.

A red day for the markets coincided with Karl Marx’s birthday © posted by u/shivamYe to r/wallstreetbets

Sharp reversals like this are actually deeply unusual, as Bespoke Investment Group’s George Pearkes pointed out in an overnight note.

Aside from one event in 2020, you have to go back to the financial crisis of 2008 and the bursting of the dotcom bubble in 2000-01, to see such reversals. And there have only been seven since at least 1971 – two of which have now happened in the past two weeks.

Elsewhere, US Treasury yields rose across the curve, but not uniformly. While two-year US government bond yields rose 8 basis points to 2.71% at the end of Thursday, the 10-year bond yield jumped 14 basis points to 3.06% and the 30-year Treasury yield climbed about 16 basis points. at 3.16 percent.

According to Jay Barry, managing director of interest rate strategy at JPMorgan, there have only been six instances in the past decade in which 30-year bond yields have risen more than they’ve shown. did on Thursday.

Why did this happen?

Mike Zigmont, head of trading and research at Harvest Volatility, said some investors feared the Fed was getting “obscenely aggressive” before Powell used his press conference to dismiss speculation that a rise of 0, 75 percentage point could be considered later. double.

Once those worries were banished, there was a “huge” bull run which in turn sparked a “ton of intraday momentum” on Wednesday, Zigmont said.

April was a disastrous month for equities and the market was poised to rebound, he added, but it “shouldn’t go up 3% on what was essentially a pep talk.” [from Powell]”. Thursday’s car crash was the “answer to that answer”, he argues.

It’s like a runaway train: if you go long and start to see your gains from yesterday melt away, you’re going to start panicking and dumping and saying, “we’re in a bear market”. [Wednesday and Thursday] were proof that the world is very sensitive, emotions are yo-yoing like crazy.

[Wednesday and Thursday] were digestion sessions – even though the Fed hit the nail on the head on policy adjustment expectations, there’s so much nervousness about it that people don’t really know how to process the huge amount of information that hit them. The group dynamic begins to settle. In a normal market, bears and bulls clash. If you get a rally, you get a loud rally, it’s never a square step up or down. This is currently not the case.

By late Wednesday, Powell’s “dovish rise” had lowered dollar and bond yields, boosted equities and tightened credit spreads, essentially easing financial conditions, said Huw Roberts, chief analyst. at Quant Insight. “Thursday the market realized that this is completely the opposite of what the Fed is trying to design; the only consistency we got from Powell is that financial conditions need to tighten.

An intriguing explanation for why the Fed’s revaluation selloff has turned so violent is the dynamics surrounding two large leveraged exchange-traded funds, known as TQQQ and SQQQ.

TQQQ, or ProShares UltraPro QQQ to give it its full name, is a $13 billion triple-leveraged version of Invesco’s QQQ, a monster $169 billion ETF that tracks the Nasdaq 100 index. SQQQ is a $2.9 billion “inverse” version of QQQ that attempts to do three times the inverse of the Nasdaq.

Some analysts suspect that the hedging of these leveraged ETFs (TQQQ fell more than 14%) may have exacerbated the Nasdaq’s decline. From Mike Gormley of JPMorgan. Apologies for the Greek.

At close, leveraged ETFs (think TQQQ, SQQQ) must have sold $15 billion and the theoretical SPX short gamma of around $55 billion probably led to $15-20 billion for 1% ( therefore ~45-50 billion dollars) of sale during the immediate decline. We stabilized at the close which is likely due to prepositioning on the leveraged ETF sell as it was well publicized and the SPX gamma hedge pulled back earlier (we traded higher during last 30 minutes).

Gormley believes the trigger for this sudden reversal was the Bank of England’s interest rate hike on Thursday despite forecasting a recession later this year, and/or the US announcing that they would fill their emergency oil reserve.

Overall, it is clear that systematic selling, short gamma positioning mixed with shallow market depth led to the exacerbated decline in stocks. When we look at potential triggers, our candidates are the BOE rate hike where the updated MPR indicated risks of stagflation or spike in oil on the stock Biden would start buying to fill the SPR. . You can see the timing of the cable crash and peak oil near when the e-minis have collapsed, with the timing of the oil just around the move.

What does it mean?

Stock analysts at Barclays said the selloff signaled investors are finally waking up to what they call “a new paradigm” for financial markets, where they seek to “sell the rally” rather than “buy the trough” – after a decade. where he reigned supreme.

After years of unlimited and free money, markets and economies are now facing a new paradigm. Learning to live with tighter liquidity will not be a smooth process, in our view, although the scum has already been removed from parts of the financial markets. Investors need to keep their seat belts on.

The problem seems to be that investors seem unusually uncertain about the way forward. DataTrek Research’s Nick Colas pointed out that the Vix volatility index did not rise above 33 points on Thursday – even below the March peak – despite the S&P 500 having its 15th worst day in a decade.

Markets seem unable to decide whether they want the band-aid of accommodative monetary policy to be torn off quickly or only slowly. While markets may soon stabilize – the last two post-Fed meeting periods have seen rallies – today’s action tells us that investors should proceed with extreme caution.

On Twitter — where one of us spends far too much time — many wags were thrilled to see CNBC’s “boiling markets” lineup, given its tendency for routs.

There was a glimmer of good news on Friday, with US nonfarm payrolls rising by 428,000 in April, above economists’ expectations. But the S&P 500 and Nasdaq Composite shrugged and fell 0.6% and 0.7% respectively at pixel time.

Let us know what you think in the comments below.

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