“This Was Not Supposed To Happen”: Nomura Reveals “The Market Risk That Should Have Everyone Worried”
by Tyler Durden
ZeroHedge.com
Mon, 06/25/2018
Increasingly more trading professionals are becoming worried about some “terminal” event in market liquidity, one which sees stocks breaking lower and failing to snap back.
One week ago, we quoted Goldman’s co-head of trading, Brian Levine, the man responsible not for some weekly research periodical but running arguably the most sophisticated trading floor in the world, said that his biggest concern is that the market may “break” and not snap back:
… in a situation with actual bad news, the current US market structure may not be able to handle it, and there could be a downward spiral.
Now, the head of Global FX Strategy at Nomura, Bilal Hafeez, picks up where Goldman left off and in a note titled “the market risk no one is talking about, but should have everyone worried”, confirms that the biggest threat facing the market is the market itself.
Hafeez first notes the growing frequency of market quake events, noting that this year has seen numerous bouts of risk aversion from the VIX spike in late January to the Italian bond sell-off to the ongoing EM sell-off. As the Nomura strategist explains, “by their nature, these were unexpected, but they also delivered two larger surprises. First, the lack of correlation between markets. Normally, we would expect contagion and a more cathartic sell-off across multiple markets. This could simply be a case of tremors before the “earthquake” where correlation will return.”
But it is the hidden risk of poor market liquidity that is the cause of sleepless nights:
The second and less discussed surprise has been the dire state of market liquidity during these risk aversion episodes. Investors attempting to unwind their positions have struggled to do so. Unable to find bids in the market, they have either had to keep those positions or exit other more liquid investments.
Hafeez then points out another risk we have discussed in recent months: the growing fragility of the market itself, a topic which Goldman’s Chief Markets Economist Charles Himmelburg has been obsessing about recently as well:
This was not supposed to happen. Markets were supposed to be more liquid thanks to ample central bank accommodation and the electronification of financial markets. But it may well be these forces that have resulted in the fragility of market liquidity.
The Rest…HERE
