Wild swing rattles markets as Fed unleashes volatility

A trader works on the floor of the New York Stock Exchange (NYSE) in Manhattan, New York City, U.S., May 5, 2022. REUTERS/Andrew Kelly

NEW YORK, May 6 (Reuters) – Volatility has been the watchword for markets in recent months, as concerns about an aggressive Fed, soaring commodity prices and geopolitical tensions stemming from the war in Ukraine affect asset prices.

The S&P 500 recently fell 1.2% on Friday and benchmark 10-year Treasury yields hit a nearly four-year high of 3.12%, capping a week that saw massive swings in stocks and bonds in the days after the Fed’s monetary policy meeting Read More

Here are charts showing how volatility has unleashed in the markets and various factors driving the moves.

A VOLATILE YEAR

Volatility has increased across all asset classes over the past year, with stocks, bonds, currencies and commodities seeing more pronounced moves. Concerns about how aggressively the Fed will tighten monetary policy in response to rising inflation have been a key driver of the moves, triggering swings in fixed income markets, propelling the dollar to 20-year highs and affected stocks.

Concerns about how monetary policy tightening by central banks will affect global growth have recently surfaced, with the Bank of England warning on Thursday that Britain is at risk of a double-dip recession and inflation above 10%. by raising interest rates to their highest level. since 2009. read more

THE ACTUAL DEAL

Another culprit, linked to expectations of a hawkish Fed, has been the sell-off in Treasuries that pushed 10-year Treasury yields above 3% so far since the end of 2018 on Thursday.

As yields rise, they can dampen the appeal of stocks, particularly those in high-growth sectors like technology, where companies’ cash flows carry more weight going forward and decline when discounted at higher rates.

“If rates are going to move to a higher range, that breeds a new valuation regime,” wrote Michael Purves, chief executive of Tallbacken Capital. “Regardless of the fundamentals, the regime change process is inherently volatile.”

Meanwhile, real yields on 10-year US Treasuries, which subtract projected inflation from the nominal yield, recently turned positive for the first time since March 2020, eroding key support for US equities. USA Read More

BIG SWINGS

As a result, the year so far has been marked by big moves in asset prices, especially in equities. As of May 5, the S&P 500 has posted 44 daily moves of one percent or more so far this year, the second-highest total in at least a decade and double the number it had posted at this point in 2021. .

BUY THE DIP?

The volatility has weighed on investors and hit confidence. A possible victim may be the strategy of buying on the downside or taking advantage of stock market weakness to buy stocks.

While falling buyers have generally been rewarded over the past two years as a dovish Fed helped buoy markets, stepping in to buy weakness has become much riskier in recent months. There have also been signs that retail investors, who have been avid plunge buyers in the past, are becoming more hesitant to do so. read more

Still, some investors see little evidence of the outright panic that has tended to mark recent market lows.

“To find a bottom, we typically like to see a spike in volatility, panic and another lower leg (in the S&P 500) to turn things around,” Christopher Murphy of Susquehanna International Group wrote in a note on Friday.

Even more aggressive policy tightening by the Fed could lead to such a panic, he wrote.

“That, of course, risks breaking some unforeseen things and would result in a lot of pain.”

Information from Saqib Iqbal Ahmed; written by Ira Iosebashvili; Edited by Nick Zieminski

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