Omicron and the uncertainty of U.S. monetary policy disrupt global markets

The financial market has been hit hard in the past week, Omicron coronavirus variant Just as the Fed expressed its willingness to accelerate the US monetary tightening policy, it swept the world.

The dizzying volatility of global stock markets wiped out trillions of dollars in valuations, but only partially reversed a few hours later-a shift that highlights how investors must now deal with the increasingly gloomy global economic outlook.

The volatility shock highlights how investors are preparing for the Fed to start withdrawing from the Fed. Massive stimulus plan, Which helped push the stock market to a record high. In a year when investors poured hundreds of billions of dollars into the stock market, a new type of coronavirus has increased the risk of stocks.

Katie Koch, co-head of fundamental equities at Goldman Sachs Asset Management, said: “Uncertainty will increase volatility, which may cause people to stay away.” “Our market valuation is very high, and the market has digested a lot of good news, so When the message flow turns slightly negative, this can cause damage.”

Traders and asset managers have been removed from Federal Reserve, The company began in November to cancel the policy it implemented last year to reassure the market at the height of the coronavirus crisis.

The spread of the new Omicron coronavirus variant may complicate the Fed’s pullback, which may undermine the economic recovery, and the economic recovery gives the U.S. central bank confidence to control its stimulus program because it focuses on responding to hot threats. inflation.

Federal Reserve Chairman Jay Powell expressed his continued commitment this week Slow down Part of the central bank’s $120 billion monthly bond purchase plan, which began last month. He also said that rising inflation levels may also need to be reduced more quickly.

Back and forth, and news reports with conflicting views on these two issues Strength of existing vaccines In response to the Omicron coronavirus variant and the severity of the disease caused by the virus, it provided the fuel for the sharp rise and fall of the US stock market.

Investors have been struggling to deal with conflicting forces, and the tightening of financial conditions — partly due to market volatility — has dampened concerns that the spread of Omicron variants may inhibit economic growth, which is usually a hint of monetary policy relaxation.

The 2021 global stock market value appreciation line chart (trillion dollars) shows that the decline in stock prices has reduced stock valuations by 5.4 trillion dollars

Matt Freund, the co-chief investment officer of Calamos Investments, said: “What the Fed is doing, what is happening in policy, and what is happening in the economy, all of which support the view that volatility will increase.”

This week, the stock market volatility index jumped to the highest level since February. The volatility of the US$22 trillion US Treasury bond market, the backbone of the global financial system, is currently at the highest level since the March 2020 turmoil.

The benchmark S&P 500 US stock index recorded its biggest intraday volatility since March on Wednesday, and the broader market index suffered its worst two-week decline in more than a year. The daily volatility is particularly strong: The S&P 500 has fluctuated 2% or more between the highest and lowest points of the day for three consecutive trading days, a continuous rise that has never occurred in the whole year.

Although the United States has been at the center of recent market turmoil, volatility in Europe is also increasing. The expected volatility indicator for 50 blue-chip stocks in the Eurozone hit their highest level in a year last Friday and has been at a high level. Similar indexes of Hong Kong’s Hang Seng Index and Tokyo’s Nikkei 225 Index also rose.

The daily intraday bar chart (percentage) of the US benchmark shows that the S&P 500 index fluctuates between highs and lows on volatile days

In addition to the uncertain economic situation, investors are still struggling to deal with challenging trading conditions during the US Thanksgiving holiday and Christmas holidays.

Normally, this is a period of low trading volume of the year, and fund managers are reluctant to place big bets, but prefer to exclude risks and book profits before the end of the year.

“A lot of people don’t want to trade at this stage [of the year] Trading volume may decrease, which may increase volatility and increase the magnitude of these volatility,” said Jason Hedberg, head of global equity derivatives sales at UBS.

Greg Boutle, derivatives strategist at BNP Paribas, added that the surge in volatility may be self-sufficient because hedge funds that are sensitive to volatility automatically adjust their exposures and therefore may cut their positions. The sell-off will exacerbate the economic downturn.

Fund managers also stated that the large broker-dealers they usually trade with have increased the cost of executing large transactions because if volatility remains high and the market falls, they will take action to protect themselves from any impact.

In turn, some investors will either protect their portfolios, or directly bet on tail risks, or unlikely but influential events that may cause the stock market to fall.

John Brady, managing director of RJ O’Brien, said that as the Fed’s crisis measures that supported asset prices have begun to withdraw, the importance of preventing sharp stock market volatility has once again been highlighted.

This was proved last Friday, when the derivatives market lighted up again. Investors have traded more than 26 million put options-these contracts can be rewarded if the price of the security falls. This is the second-highest level on record, just behind the day in February 2020 when global financial markets first began to respond to the coronavirus pandemic.

The line chart of the number of put options (m) traded in the U.S. each day shows that traders are turning to derivatives to prevent market sell-offs

Others, such as Goldman Sachs’ Koch, said they are using dislocations to adjust their portfolios because some of the declines seem to be excessive.

This disagreement between fund managers means that as the last trading days of the year approach, investors are ready for further volatility in the future.

For John Leonard, global head of equity at Macquarie Asset Management, market volatility is recalling a similar event three years ago when Christmas Eve sell-off Scarred stock.

“This is a natural result of the combined events of the Omicron variant and the Powell pivot,” he said. “The combination of these two things created volatility. You will have to wait for the dust to settle.”

Additional reporting by Madison Darbyshire in New York

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