(Bloomberg) -- Turmoil, meet month end. Month end, meet turmoil.
The latest bout of risk-off moves in global markets has arrived just as investors prepare to close out the month and quarter. That leaves many with a conundrum: just how much of the current tumult is down to shifting fundamentals, and how much to portfolio rebalancing that usually accompanies the quarter end?
The conclusion could be key to everything from the fate of the epic bull market in stocks and the chances of a bear market in bonds to the path charted by the greenback. It’s particularly important to short-term money market rates, which had been grinding higher as the U.S. raises benchmark borrowing costs and the era of easy money nears its end.
“Markets have been volatile on alternating headlines and systematic flows in an illiquid trading environment,” JPMorgan Chase & Co. strategists including Marko Kolanovic wrote in note. “While a number of narratives have come out to attempt to explain the recent market weakness, we believe these risks shouldn’t derail the larger positive fundamental forces.”
Indeed, fewer players had the chance to exert larger-than-normal downward pressure as the holiday-shortened week sapped the market of its usual trading activity. Over the past eight years when U.S. stocks dropped more than 1 percent, volume on the U.S. tape has hit 8.6 billion trades on average. Tuesday’s session, however, fell about 1 billion short of that norm, data compiled by Bloomberg show.
Still U.S. 10-year Treasury yields, which had been locked above 2.8 percent for almost two months, finally fell below that threshold late in U.S. trading on Tuesday. Eurodollars advanced by five to seven basis points, while expectations for more Federal Reserve hikes faded.
Month-end buying in fixed income did squeeze shorts into the close, according to Andrew Brenner, the head of international fixed-income at NatAlliance Securities in New York. Yet that may not be the end of declines in bond yields.
Considering everything from lower trending economic data to fading rate hike expectations, it’s likely 10-year yields “get an acceleration through to 2.65-ish” percent before getting to 3 percent, he wrote in a Tuesday note.
One sign that rebalancing is at work: The yen was falling against the dollar on Wednesday, belying its usual status as a safe haven in times of trouble. For Kit Juckes, chief currency strategist at Societe Generale AG, it’s a reason not to over-read the current moves.
“These markets are all sound and fury,” he said in a tweet. “Simply looking for yesterday’s sell-off to continue today is as silly as expecting the Monday rally to continue yesterday.”
Beyond the usual quarter-end portfolio tinkering, however, fundamental issues could still weigh on sentiment. Though growth remains strong, the peak in corporate earnings has passed -- and what remains in its place is an era of uneven global expansion, political uncertainty and a shift in market regime, according to analysts at Sanford C. Bernstein & Co.
“As this unusually synchronized phase ends expect volatility and correlation to rise,” wrote the firm’s global quantitative strategy team, headed by Inigo Fraser-Jenkins. “This does not make us bearish, but reduces the upside from here.”
Meanwhile in equities, Tuesday’s declines would appear to be about news rather than portfolio rebalancing. The S&P 500 Index was higher in the middle of the day before a steady stream of negative tech stories dragged some of the biggest companies lower. Even the Nasdaq 100 Index started Tuesday in the green; it ended the day with the biggest drop since February’s rout.
U.S. stock futures, including contracts for the Nasdaq, turned positive on Wednesday as tech fears began to ease, while the yen slumped. The yield on 10-year Treasuries fell, however, hovering around 2.77 percent.
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