Wild swing disrupts markets as hawkish Fed unleashes volatility

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

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

The S&P 500 recently fell 1.2% on Friday and benchmark 10-year Treasury yields were at a nearly 4-year high of 3.12%, capping a week that saw massive swings in stocks and prices. bonds in the days following the Fed’s monetary policy. political meeting. Read more

Here are charts showing how volatility erupted in the markets and various factors behind the moves.

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Volatility expectations have soared across all asset classes

A VOLATILE YEAR

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

Concerns about how tighter monetary policy by central banks will affect global growth have recently come to the fore, with the Bank of England warning on Thursday that Britain risks a double whammy of a recession and… double-digit inflation as it raised interest rates to their highest since 2009. read more

Rising real yields rattled growth stocks

THE REAL DEAL

Another culprit — tied to expectations of a hawkish Fed — has been the sale of Treasuries that has driven 10-year yields to 3% since late 2018 on Thursday.

As yields rise, they can tarnish the attractiveness of equities, especially those in high-growth sectors such as technology, where corporate cash flows are more weighted to the future and decline when discounted. at higher rates.

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

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

Reuters Charts

LARGE SWINGS

As a result, the year so far has been marked by sharp swings in asset prices, particularly equities. Through May 5, the S&P 500 has recorded 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 recorded at this stage in 2021.

Reuters Charts

BUY THE DIP?

The volatility weighed on investors and hammered sentiment. A possible victim could be the strategy of buying the dip or taking advantage of stock market weakness to recover stocks.

While bearish buyers have generally been rewarded over the past couple of years, as a dovish Fed helped support markets, stepping in to buy on weakness has become much more risky in recent months. There have also been signs that retail investors – who have been avid bear buyers in the past – are more hesitant to do so. Read more

Yet some investors see little evidence of the outright panic that has tended to mark past market lows.

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

Even more aggressive Fed policy tightening could potentially lead to such a state of panic, he wrote.

“This of course risks breaking unforeseen things and would lead to a lot of pain.”

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Reporting by Saqib Iqbal Ahmed; written by Ira Iosebashvili; Editing by Nick Zieminski

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