Wall Street Risks A Breaking Point After Week of Monetary Mania - Bloomberg

Wall Street Risks a Breaking Point After Week of Monetary Mania - Bloomberg 2022/9/24 上午10:26
Markets
Wall Street Risks a Breaking Point

After Week of Monetary Mania
Extreme moves are flaring up across asset classes and
regions
Freakish gyrations put stress on risk models used by big
money
Earnings Expectations 'Out of Whack': BofA's Subramanian
By Lu Wang
2022年9⽉24⽇ GMT+8 上午4:16
Central bankers are hellbent on tightening the monetary spigots even if

something in financial markets breaks. After haywire cross-asset moves this
week, that tipping point looks dangerously close.
As the S&P 500 plunged another 4.7% over five days, bonds and currencies
staged historic gyrations that threaten to cause fresh havoc for stock
investors already grappling with the lows of this bear market.
Treasury yields leaped above levels last seen more than a decade ago, with
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the speed of the selloff proving frenetic even by the standards of a manic
2022.
The dollar soared to a two-decade high, tightening financial conditions for a

slew of borrowers in the developed and emerging world while causing Japan
to intervene to support the yen for the first time since 1998.
For good measure, UK bonds and the pound sank faster than any time in the
past four decades -- an in-tandem plunge typically seen in emerging-market
trading -- as Britain’s fiscal policy makers unleashed a risky new growth
plan.
With more hawkish monetary action coming, get ready for all manner of
freakish cross-asset moves in a world of thin liquidity from stocks to
Treasuries.
“What we’re seeing is a massive spike in cross-asset volatility and it is leading

to a deleveraging or derisking across all asset classes,” said Benjamin Dunn,
president of Alpha Theory Advisors.
Whether risk models typically used by the big money can cope with what’s
shaping up to be the fastest global monetary tightening campaign in the
modern era is the big question. If more big moves rock Wall Street and
beyond, trading signals that guide how professional investors allocate money
risk turning red -- threatening more liquidations and volatility.
“Most models are not used to these several standard deviation moves we are
seeing almost on a daily basis,” Christian Hoffmann, portfolio manager at
Thornburg Investment Management, said in an interview on Bloomberg TV.
“We’re not seeing a real liquidity crisis yet but the market remains incredibly
fragile.”
There have been few signs of outright panic right now. But the danger lurks
that a wave of selling spills into other assets. Big asset managers operate
under risk-management frameworks where rising volatility often necessitates
the unloading of portfolios, a process sometimes referred to as a VAR shock
in a reference to the value-at-risk model.
To Alpha Theory’s Dunn, Friday’s collapse in British bonds and currencies

may have become an event risk that contributed to the rout in assets like oil
and silver.
Yields in 10-year UK government bonds saw their biggest one-day jump on

record after a tax-cut package fueled concerns about inflation and further
monetary tightening. The pound tumbled to the lowest level since 1985,
sliding 3.5% in the third-largest drop in 20 years.
“These look like forced liquidations,” Dunn said.
READ MORE
Pound Plunges, Bonds Suffer Record Selloff on UK’s Stimulus Plan
Surging Yields Leave Stock Bulls No Cover in Spiraling Selloff
Japan’s Historic Intervention Fails to Alter Forces Sapping Yen
Chaos is the signature feature of global markets in the pandemic era. But the
widespread turmoil is a new experience for those investors who had enjoyed
smooth returns built on free money in the previous decade.
Now, central banks around the world are racing each other to step up their
fight against inflation at the cost of growth. Just this week, more than a dozen
central banks moved to tighten monetary policy. Some were forced to hike
rates to protect their dollar peg , such as United Arab Emirates and Saudi
Arabia.
Suddenly, worries about whether there will be a recession have turned into
bets on just how bad the pain will get. Traders ratcheted up wagers that
signaled angst over a serious entrenchment, with the yield curve between
two-year and 10-year Treasuries reaching the most negative level since early
2000.
Meanwhile, two-year Treasury yields have climbed for 12 straight days, a

streak of losses not seen since at least 1976.
“When you’ve got the chief policy maker and others saying, ‘We’re going to
inflict pain,’ that’s scary and it challenges anyone that had a more rosy
picture,” said Chris Gaffney, president of world markets at TIAA Bank. “It
comes back to the confidence in policy makers to steer us through this and I
think that’s been shaken.”
Buffeted by losses that have snowballed well past 20% for both US bonds and
stocks this year while uncertainty of the future of the economic path lingers,
investors are seeking shelter in safe assets. Cash-like funds attracted $30.2
billion in the week through Wednesday, while global equity and bond funds
saw outflows of $7.8 billion and $6.9 billion, respectively, EPFR Global data
compiled by Bank of America Corp. show.
Monetary “tightening now is a huge fly in the ointment for the volatility we’re
seeing that’s echoing around markets,” Lara Rhame, chief US economist at FS
Investments, told Bloomberg TV. “We’re now in a world where persistently
higher inflation means we have to focus on real asset alternatives. You can
not just chuck it into the big indices any more.”
— With assistance by Shery Ahn, Haidi Lun, Vildana Hajric, Lisa Abramowicz,
and Sebastian Boyd

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Wall Street Risks a Breaking Point After Week of Monetary Mania - Bloomberg 2022/9/24 上午10:26

Wall Street Risks a Breaking Point

Earnings Expectations 'Out of Whack': BofA's Subramanian

Central bankers are hellbent on tightening the monetary spigots even if

The dollar soared to a two-decade high, tightening ﬁnancial conditions for a

“What we’re seeing is a massive spike in cross-asset volatility and it is leading

in a reference to the value-at-risk model.

To Alpha Theory’s Dunn, Friday’s collapse in British bonds and currencies

Yields in 10-year UK government bonds saw their biggest one-day jump on

“These look like forced liquidations,” Dunn said.

Pound Plunges, Bonds Suﬀer Record Selloﬀ on UK’s Stimulus Plan

Surging Yields Leave Stock Bulls No Cover in Spiraling Selloﬀ

Japan’s Historic Intervention Fails to Alter Forces Sapping Yen

Meanwhile, two-year Treasury yields have climbed for 12 straight days, a

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