Investors and Wall Street analysts are sounding the alarm of a possible “market disaster” as a spate of turmoil in U.S. stocks and bonds and a stronger dollar are causing rising stress levels in the financial system.
Tensions in U.S. markets, compiled by the U.S. Treasury Department’s Office of Financial Research, have surged to their highest level since the May 2020 coronavirus pandemic riots.
Even as Wall Street stocks rise to start the new quarter, the OFR’s financial stress index is near a two-year high at 3.1, while zero indicates the market is doing well. It added to a list of benchmarks that suggest an increasingly stretched trading situation in US government debt, corporate bonds and financial markets.
“The rate at which things break down around the world . . . This is clearly a ‘neon swan’ and indicates that we are clearly in a market accident phase,” said Charlie McElligott, a strategist at Nomura Securities. ‘ said.
Growing concerns have been fueled by a series of significant rate hikes by the Federal Reserve to curb inflation. Rising borrowing costs and fears of a slowing economy have sparked a sharp sell-off in public markets, pushing the U.S. currency higher and hurting global peers.
Interest rate hikes by the European Central Bank and the Bank of England, and a canceled tax plan by the UK government have also amplified market volatility this year as global policymakers try to keep inflation in check.
“When financial conditions are so tight, who and what is causing central banks to turn a blind eye,” said Michael Edwards, chief investment officer at hedge fund Wyeth Multistrategy Advisors. “Everyone is looking for something,” he said. “they [the Fed] determined to tighten financial conditions, [because] The economy is doing very well. . . they must use the funding market as a delivery mechanism. So someone gets hurt. ”
McElligott said a 20% fall in the Japanese yen this year, a sharp decline in British government bonds in recent weeks and a few loans left on bank balance sheets meant that lenders would not sell to investors even at steep discounts. pointed out that it is not possible. , as a sign of market tension.
He said the strong dollar was “causing a huge economic burden…and increasingly shifting to the market.”
Stress means the market isn’t working as it should. Companies can’t easily raise money, securities are harder to buy and sell, prices are volatile, and investors are reluctant to take risks.
The situation has deteriorated all year, but it was evident until late, mainly in the stock market, where valuations plummeted as borrowing costs rose and growth prospects declined.
Private companies were unable to list their shares, and banks had to withdraw planned debt loans for their customers because investors refused to open their checkbooks.
Last month, the bank took on $6.5 billion of debt to finance the acquisition of software maker Citrix on its balance sheet after failing to find a willing buyer for its entire debt financing. I was forced to
“This is a story about boiling lobsters. “That’s what’s happening in the market. The Federal Reserve is heating up. But it’s not yet clear where the weaknesses are, as the market is still awash with liquidity.”
JPMorgan Chase & Co. economist Bruce Kassman said on Friday that the relative health of the banking system and low demand for funds by much of the corporate world means that vulnerabilities to the financial system remain low. Stated. But U.S. banks have warned that the rise in the OFR index is evidence of widespread stress across financial markets and a decline in appetite for risk, brought on by a stronger dollar and rising U.S. interest rates.
“Risks to global financial stability are increasingly unknown unknowns to the outlook,” Kassman said.
The corporate bond market is also showing signs of tension, said Marty Fridson, chief investment officer at Lehman Rivian Fridson Advisors.
Fridson said there has been a significant increase in the past month in the number of premium investors seeking to hold junk-rated corporate bonds, which are riskier than safe-haven government bonds. According to his calculations, the junk bond market currently reflects a 22% recession chance, up from just 2% in mid-September.
Corporate defaults more than doubled between July and August, according to rating agency Moody’s. Bank of America strategists warned on Friday that their gauge of stress in credit markets was at a “borderline critical level” and that if it climbed further, “the market would begin to malfunction.”
Separately, the Goldman Sachs index, which measures market impairments and turmoil, has risen on the back of funding market stress and heightened volatility in the $24 trillion US government bond market.
10-year government bond yields, a benchmark for global borrowing costs, rose from about 1.5% to 3.6% this year, briefly past 4% last week for the first time in 12 years.
Its market volatility has also reached its highest level since the coronavirus turmoil in 2020, according to the Ice BofA Move index.
Volatility can also be viewed on a daily basis. The biggest move for 10-year Treasuries in 2021 was a 0.16 percentage point drop on Nov. 26.
Federal Reserve policymakers remain focused on raising interest rates, but are also wary of the potential dangers of a market downturn.
Federal Reserve Vice Chairman Lael Brainard said on Friday, “As monetary policy tightens globally to combat high inflation, cross-border spillovers and spillbacks are linked to financial vulnerabilities. It is important to consider how they interact: “We are alert to financial vulnerabilities that may be exacerbated by the emergence of additional negative shocks.”