If markets were worried about the spill over effects from Friday’s $20bn block trade margin call, and the potential spill overs from the Ever Given container ship getting stuck in the Suez Canal, then yesterday’s price action suggested the fallout was fairly contained.
European markets finished yesterday’s session broadly higher, while US markets finished the day well off the lows of the day, despite opening the week sharply lower, though the Russell 2000 did rather get taken to the cleaners, finishing the day over 2.8% down, commented Michael Hewson, chief market analyst at CMC Markets UK, this morning.
US 10 year yields also continued to move higher, he pointed out, making a fresh one year high, as markets looked ahead to tomorrow’s US infrastructure plan, and this week’s payrolls report, amidst the prospect of a really strong number, with some estimates pushing up towards the 900k level.
“With the end of the month, and the end of the quarter approaching, we can still expect to see a fair amount of volatility over the next couple of days, in what is also going to be a shortened week due to the approach of Easter, however it would be surprising if the events of the last few days did anything more than raise volatility levels,” Hewson said.
“One could argue that this type of event is also quite healthy and a salutary reminder, that despite the tried and trusted mantra of the last decade, that buying the dips is the only game in town, that the market still has the capacity to teach the unwary a very harsh lesson, if you take liberties with your risk management strategy,” he added.
Consequences of low interest rates
Hewson pointed out it is “a timely reminder” of the consequences of a low interest rate environment, created by central banks, helping to push investors of various levels of experience into taking risks that they would probably not otherwise have taken.
“Already this year we’ve had the GameStop saga and the entry of retail traders into the market by way of trading apps like Robin Hood, which has opened up the markets to a broader range of traders, with varying levels of experience.”
“Now we’ve got the spectacle of the professionals getting it wrong as well, maybe this can act as a lesson and a reminder that the market doesn’t take prisoners, whoever you are, and whatever your experience level,” he noted.
For the banks involved the losses will be “painful,” Hewson continued, “and probably a little embarrassing, however they aren’t likely to undermine confidence in the stability of the financial system.”
From the events of the last 12 months, the banks are much better capitalised than they were back in 2007, with the pandemic seeing them set aside over $115bn in loan loss reserves in the first half of last year, and while the levels of provision slowed in the second half, a continued economic recovery through the rest of this year could well see some of these provisions get added back, assuming no further nasty surprises, he explained.
“In light of yesterday’s recovery of the lows today’s European market session looks set to be a positive one, with the DAX set to open at a new record high,” Hewson concluded.