Market Turmoil Like Fourth Quarter 2018 Looms Again: Citigroup
Market Turmoil Like Fourth Quarter 2018 Looms Again: Citigroup
(Bloomberg) -- A mismatch between high investor uncertainty and low levels of volatility means that markets should be prepared for the kind of sell-offs of risk seen in late 2018, according to Citigroup Inc. strategist Matt King.
“It was a taste of how markets should have been pricing risk all along,” King said of the turmoil in the final three months of 2018. That “was not some strange anomaly in which investors overreacted to a Fed speech and then found seasonal illiquidity amplified the market moves when they tried to withdraw their money,” he wrote in a note to clients Thursday.
One narrative of the 14% slide in the S&P 500 Index that quarter was that it stemmed from Federal Reserve Chairman Jerome Powell’s hawkish signals about continued monetary tightening. And that the impact was exacerbated in December thanks to a relative lack of market liquidity due to year-end holidays. Liquidity concerns are indeed an issue, according to Citigroup analysis -- but a persistent and not a seasonal one.
One key reason for low volatility is that investors increasingly hold the same positions, the Citigroup analysis showed. Reduced fund flows and an investor reluctance to bet against central banks, has also contributed.
This backdrop can in turn leave markets ripe for disruption if investors all head to exit the same assets at the same time -- say if there are increasing concerns about a recession.
And what’s worrying now is that measures of uncertainty have climbed to pre-financial crisis levels, yet volatility has shifted lower by more than a normal business cycle could explain, King wrote. He and his team assessed uncertainty based on metrics including news articles.
The bottom line is that “we expect more similar episodes” to the wreckage of two quarters ago, King wrote.
To contact the reporter on this story: Cormac Mullen in Tokyo at cmullen9@bloomberg.net
To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Joanna Ossinger
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