Analyzing Market Volatility

This is how Central Bank liquidity affects markets: a step-by-step guide. Central Banks create bank reserves when they perform QE. Bank reserves are often referred to as ''Liquidity''. When Central Banks engage in liquidity creation (e.g. with QE), they do that in the hope that it activates the so-called Portfolio Rebalancing Effect. To understand this, let’s start from what QE does to the balance sheet of a commercial bank - take a look at the chart below. Following the GFC, regulators forced banks to own more HQLA (high quality liquid assets) to meet depositor outflows. Bank reserves and bonds qualify as ''HQLA'' as they are liquid enough to be converted in cash to meet potential outflows quickly. But banks are not indifferent between owning bank reserves and bonds, and especially if the amount of reserves grows dramatically as a result of QE. Bank reserves are a zero-duration and low-yielding instrument which can be suboptimal to own in big sizes especially if compared with bonds which offer higher returns and duration hedging properties. And this is when the Portfolio Rebalancing Effect kicks in. Once QE starts, Central Banks take away bonds and inject new reserves in the banking system. Loaded with suboptimal reserves, banks will try to switch back the composition of their portfolios towards more bonds. They will bid up safer bonds first, and bid up riskier bonds later when the hunt for returns intensifies. This will kick in a virtuous cycle of low volatility and a hunt for riskier assets: the Portfolio Rebalancing Effect in action. Summarizing: 1️⃣Central Banks expand their balance sheet and purchase government bonds, and often also corporate bonds and mortgage-backed securities. 2️⃣Commercial Banks are on the (forced) receiving end of QE, and hence their portfolio composition gets skewed towards more reserves, and less bonds; 3️⃣But reserves are sub-optimal to own compared to regulatory-friendly bonds for the reasons we discussed, and hence they look to rebalance their portfolios; 4️⃣They start buying the very same bonds QE is buying, hence suppressing volatility further and compressing credit spreads across the board. Other banks who have resisted the temptation have now held inert bank reserves for a while and missed on the ‘‘carry’’ party, and given the reduced volatility pile on and rebalance their portfolio too; 5️⃣Asset allocators and investors across the world are more and more encouraged to take additional risks in their portfolio, supporting the flow of credit and capital. Does the Portfolio Rebalancing Effect make sense to you? 👉 P.S. If you liked this post, you'll love my macro research. 🛑 You can receive it in your inbox FOR FREE! 👇 Sign up below: https://lnkd.in/dp_Ng89T

The VIX panic recorded at the start of April may only hint at more weakness to come for stocks. Volatility spikes are fairly reliable market timing indicators in small corrective processes, but are unreliable as bottoming signals during periods of greater distress -- and often occur well in advance of the ultimate lows. The volatility index has spiked and closed at a level above 40 for the first time since the 2020 selloff. The market bottomed within eight weeks after an initial VIX close above 40 in four of the seven other instances since 1995; however, the initial VIX jump was followed by more extensive market weakness during the earnings recessions of 2001, 2008 and 2015. Panics in 2001, 2008, 2015 all occurred more than 22 weeks before ultimate market lows, and the average six-month S&P 500 return after the initial spikes was -9.5%. Bloomberg Intelligence

🚨 Market Turmoil as Trade War Escalates: What Investors Need to Know Trade tensions just took a sharp turn after U.S. tariffs on China, Canada, and Mexico went into effect—triggering immediate retaliation from all three nations. 🔺 Key Developments U.S. Tariffs: 25% on most imports from Canada and Mexico and a 10% to 20% increase on Chinese goods. China's Response: 10-15% tariffs on U.S. agriculture exports—including chicken, pork, soy, and beef. Canada’s Response: Immediate 25% tariffs on $20 billion of U.S. goods, with $86 billion more in 21 days. Mexico’s Response: Retaliatory 25% 📉 Market Reaction Stocks Tumbled: S&P 500 (-1.8%), Nasdaq (-2.6%), Dow (-1.5%). Asian Markets Drop: Japan’s Nikkei (-2%), Hong Kong’s Hang Seng (-1.5%). Consumer Confidence Falls: Americans fear higher inflation and import taxes. 💡 How This Impacts Investors 1️. Higher Prices Ahead – Tariffs mean higher costs for businesses and consumers, increasing inflation risks. Goods like cars, groceries, and electronics could get more expensive. 2️. Stock Market Volatility—Uncertainty over trade could lead to wild market swings, especially in the automotive, tech, and retail industries. 3️. Corporate Profits at Risk – Higher input costs could hurt margins, especially for companies reliant on international supply chains. 4️. Potential Rate Hike Delay – The Fed may hold off on rate cuts if inflation rises too quickly, impacting fixed income and credit markets. 💭 Investor Takeaway This uncertainty isn’t going away anytime soon. Investors should stay diversified, watch for opportunities in sectors less affected by tariffs, and prepare for market volatility. Are you adjusting your portfolio to navigate these trade tensions? Let’s discuss! 👇 #TradeWar #Markets #Investing

Black Monday: What Happened? Today, the Indian markets experienced a tumultuous session, echoing the turbulence seen globally. From a sharp decline in US markets to unprecedented drops in Japan, the economic landscape is fraught with uncertainty. Here's a closer look at the key developments: 1. 𝐉𝐚𝐩𝐚𝐧'𝐬 𝐌𝐚𝐫𝐤𝐞𝐭 𝐏𝐥𝐮𝐧𝐠𝐞: Japan's stock market suffered its worst two-day drop in history, with the Nikkei 225 and Topix indices falling over 12%. This decline highlights the global interconnectedness of financial systems and the risks associated with the "carry trade" strategy. 2. 𝐓𝐞𝐜𝐡 𝐒𝐞𝐜𝐭𝐨𝐫 𝐋𝐨𝐬𝐬𝐞𝐬: The "Magnificent 7" tech giants erased over $1 trillion in market cap in a single day, reflecting severe volatility within the sector. This event underscores the importance of diversification and risk management. 3. 𝐂𝐫𝐲𝐩𝐭𝐨 𝐌𝐚𝐫𝐤𝐞𝐭 𝐂𝐨𝐥𝐥𝐚𝐩𝐬𝐞: The cryptocurrency market saw a staggering $500 billion wiped out in 24 hours. This volatility reminds us of the inherent risks in digital asset investments. 4. 𝐄𝐦𝐞𝐫𝐠𝐞𝐧𝐜𝐲 𝐄𝐜𝐨𝐧𝐨𝐦𝐢𝐜 𝐌𝐞𝐚𝐬𝐮𝐫𝐞𝐬: With recession fears mounting, markets are pricing a 60% chance of an emergency rate cut by the Federal Reserve. South Korea also halted sell orders to stabilize its market. 5. 𝐔𝐒 𝐑𝐞𝐜𝐞𝐬𝐬𝐢𝐨𝐧 𝐅𝐞𝐚𝐫𝐬: Economic data from the US points to potential recession risks, with unemployment reaching a nearly three-year high. Persistent inflation and economic slowdown concerns may necessitate aggressive monetary policy actions. 6. 𝐌𝐢𝐝𝐝𝐥𝐞 𝐄𝐚𝐬𝐭 𝐄𝐬𝐜𝐚𝐥𝐚𝐭𝐢𝐨𝐧: Rising tensions in the Middle East, including recent strikes in Tehran and Beirut, add geopolitical uncertainty. Oil prices have dipped due to demand concerns, further complicating the global economic outlook. 7. 𝐏𝐨𝐥𝐢𝐭𝐢𝐜𝐚𝐥 𝐔𝐧𝐫𝐞𝐬𝐭 𝐢𝐧 𝐁𝐚𝐧𝐠𝐥𝐚𝐝𝐞𝐬𝐡: The resignation of Prime Minister Sheikh Hasina amid protests and military intervention poses challenges for regional stability, particularly for neighboring India. 𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭 𝐒𝐭𝐫𝐚𝐭𝐞𝐠𝐲 𝐀𝐦𝐢𝐝 𝐔𝐧𝐜𝐞𝐫𝐭𝐚𝐢𝐧𝐭𝐲: At Wright Research, we believe that the current market volatility requires a cautious approach. We are adding cash positions and deploying hedges in our portfolios, while closely monitoring global economic shifts. As the markets navigate these turbulent waters, our focus remains on resilience and strategic adaptation. In these challenging times, staying informed and agile is crucial for investors. We encourage a balanced approach, considering both opportunities and risks as we move forward. #InvestmentStrategy #MarketVolatility #BlackMonday #GlobalEconomy #WrightResearch

One of the most concerning developments is the growing divergence between professional and retail investors. Institutional investors have quietly reduced risk, shifting toward defensive sectors and fixed income, while retail traders continue chasing speculative trades. Sentiment surveys confirm this imbalance, showing extreme bullishness among small traders, especially in options markets. With these risks building under the surface, prudent investors should proactively protect their portfolios. No one can predict precisely when the market will correct, but the ingredients for a sharp downturn are clearly in place. Savvy investors should use this period of complacency to reduce risk exposure before the cycle turns. Here are six practical steps investors should consider: ▪️ Rebalancing portfolios to reduce overweight exposure to technology and speculative growth names. ▪️ Increasing cash allocations to provide flexibility during periods of volatility. ▪️ Rotating into more defensive sectors like healthcare, consumer staples, and utilities that tend to outperform during corrections. ▪️ Reducing exposure to leverage by avoiding margin debt and leveraged ETFs. ▪️ Using options prudently—not for gambling, but for protecting portfolios through longer-dated puts on broad market indexes. ▪️ Focusing on companies with strong balance sheets, stable earnings, and reasonable valuations. ▪️ The explosion of zero-day options trading is not a sign of a healthy market. It is a symptom of an unhealthy market increasingly driven by speculation rather than investment discipline. Retail traders have moved from investing to gambling, chasing fast profits while ignoring the mounting risks. Greed is rampant, leverage is extreme, and complacency is near record levels. Markets can remain irrational longer than expected, but history tells us these speculative periods always end in a painful correction. Bull markets do not die quietly; they end with euphoric retail excess followed by painful corrections. Investors who recognize the signs early will avoid the worst of the fallout and be positioned to capitalize when value opportunities return.

Why Are Global Stock Markets in Red? Global stock markets are experiencing significant declines. Two Major Reasons: Liquidity & Macros 📌 Liquidity Issues: - Cheap Borrowing: The USA and Japan have historically been sources of cheap borrowing, with Japan offering near 0% interest rates for decades. - Yen Strengthening: Recently, the yen has strengthened by about 13% since mid-July. This sudden change and a potential increase in Japanese interest rates create a liquidity crunch. - Carry Trade Unwinding: Global investors, who preferred the yen for carry trades due to its low borrowing cost, are now unwinding these trades to cut losses, contributing to market declines. 📌 Macro Factors: - Recession Fears in the US: Growing concerns about a potential recession. - Uncertainty About Rate Hikes: Investors are uncertain about future interest rate hikes. - Geopolitical Tensions: The Iran-Israel conflict adds to the uncertainty, prompting investors to seek safer investments. 📌Personal Strategy: I plan to be cautious over the next 5-6 months, closely monitoring the markets and investing in tranches rather than buying every dip.

A detailed intuitive and mathematical explanation of Hedging with Implied vs. Actual Volatility *Implied Volatility: Represents the market's expectation of how volatile the stock will be in the future. Derived from the market price of options. It is forward-looking and reflects market sentiment. Traders hedge using implied vol when they trust the market’s view on future volatility. * Actual Volatility Represents the historical volatility of the stock over a past period. Backward-looking and reflects actual price movements. Traders hedge using actual vol when they have confidence in their own forecasts of future volatility based on historical data. *Hedging with Implied Vol: Pros: It provides smoother P&L (Profit and loss) since it aligns with market prices. Easy to observe and obtain from market prices. Profitable if the actual volatility turns out to be higher than implied when buying options, or lower when selling options. Cons: Uncertainty about the actual amount of profit. It can be less accurate if the market's volatility forecast is incorrect. *Hedging with Actual Vol Pros: Predictable profit at expiration No standard deviation in final profit if the forecasted actual vol is accurate Cons Significant P&L fluctuations during the life of the option Relies heavily on the accuracy of the vol forecast *Mathematical Explanation *Expected Profit and Standard Deviation 1. Expected Profit: The profit from hedging an option is influenced by the difference between the actual and implied vol. The formula for expected profit when buying an at-the-money straddle (image attached below) Where: σ = Actual volatility σ~ = Implied volatility S = Current stock price T = Time to expiration t = Current time *Standard Deviation of Profit: The risk associated with the profit is given by the standard deviation of the profit. The formula for the standard deviation of the profit: (Image attached below) This depends on the actual vol and not on the implied vol *Hedging with Different Volatilities *Actual Vol = Implied Vol: When hedging with the same volatility as the market price, the standard deviation of profit is zero. The expected profit is small relative to the market price of the option. *Actual Vol > Implied Vol: Hedging with actual volatility higher than implied can result in expected profit, but also brings a higher standard deviation of profit. The risk of loss exists if hedging is not accurately aligned with actual volatility. *Actual Vol < Implied Vol: When actual volatility is less than implied, hedging with lower volatility ensures no loss until a certain point of underestimation. This scenario tends to have a more dramatic downside compared to the upside. Hedging with implied vol is generally more aligned with market expectations and tends to provide smoother P&L. Hedging with actual vol provides more predictable results at expiration but with higher risk and P&L fluctuations during the life of the option

The Cost of Uncertainty: Global Economic Impact of US Tariffs 🔎 Following the US reciprocal tariffs announced on April 2nd and set to take effect on April 9th, our latest assessment highlights a rapidly evolving trade landscape. Below are our key takeaways: 📌 Tariff Shock: A Historic High On April 9, US import tariffs will reach 20.6%, the highest since the 1890s. Some countries retaliated, others negotiated, but one thing is clear: uncertainty is expensive. The 10% universal minimum tariff and record tariff hikes on 50 countries exceeded expectations. China faces 59% tariffs on its exports to the US. Vietnam, Thailand, Indonesia, Taiwan, and India see increases of 18.5-40.4pps. EU tariffs rise by +20pps, bringing the average to 13.3%—though bilateral deals could reduce this to 11.8% by Q4 2025. China's retaliation? A +34pps tariff hike on US imports, translating to an estimated $64bn annual export loss.Potential EU retaliation? Targeting all US imports (excl. LNG), leading to a $26bn annual export loss. Some nations—Israel, Vietnam, India, and Thailand—are cutting tariffs or increasing imports to offset risks. 📉 Growth Slump & Inflation Pressures Global GDP growth is now projected at +1.9%—the lowest since 2008. Global trade of goods is expected to contract (-0.5%) in volume. US inflation will peak at 4.3% by summer, delaying Fed rate cuts until October (projected 4% by end-2025, 2.75% by mid-2026). Europe won't escape the slowdown: growth forecasts revised to +0.8% in 2025, +1.5% in 2026, despite Germany’s fiscal push. China steps up stimulus—at least RMB 800bn (0.6% of GDP)—to keep growth near +4.6% (2025) and +4.2% (2026). 📉 Markets React: Recession Risks Rise Global stock indices dropped 2-6% on day one. If a full recession unfolds, expect at least 10pps more downside. The USD weakened (-1.8%) against the EUR and most major currencies. Government bond yields fell as recession fears outweighed inflation risks. 🚨 What’s Next? With the US recession now our baseline, high volatility will persist as markets digest upcoming trade negotiations. Uncertainty remains the biggest cost. #TradeWars #Tariffs #GlobalEconomy #Inflation #Markets #Recession #EconomicOutlook

𝐓𝐡𝐞 𝐄𝐧𝐝 𝐨𝐟 𝐭𝐡𝐞 𝐏𝐚𝐫𝐭𝐲: 𝐖𝐡𝐲 𝐉𝐚𝐩𝐚𝐧'𝐬 𝐑𝐚𝐭𝐞 𝐇𝐢𝐤𝐞 𝐒𝐩𝐞𝐥𝐥𝐬 𝐃𝐢𝐬𝐚𝐬𝐭𝐞𝐫 𝐟𝐨𝐫 𝐆𝐥𝐨𝐛𝐚𝐥 𝐌𝐚𝐫𝐤𝐞𝐭𝐬 A seemingly innocuous decision by Japan's central bank set off a chain reaction that reverberated across the globe. This is the story of how Japan's decision to raise interest rates and strengthen its currency, the #Yen, sent shockwaves through global markets, wiping out billions in value and leaving investors scrambling to reassess their strategies. It's a tale of interconnectedness, risk, and the delicate balance of the global economy. For years, Japan had been the world's ATM, offering ultra-low interest rates and a weak Yen. This made it incredibly attractive for investors to borrow Yen and invest in higher-yielding assets, particularly US equities. This strategy, known as the "Yen carry trade," became so popular that it propped up stock markets worldwide. However, this seemingly endless party came to an abrupt end when Japan decided to tighten its monetary policy. Rising inflation and a desire to strengthen the Yen prompted the central bank to raise interest rates and reduce bond purchases. The impact was immediate and dramatic. The Yen's appreciation triggered a massive unwinding of the carry trade. Investors rushed to repay their Yen-denominated loans, causing the currency to strengthen further and pulling money out of equity markets. The result was a global market selloff, with major indices like the Nikkei 225 and the S&P 500 experiencing significant declines. The volatility index (VIX), a measure of market fear, spiked to levels not seen since the 2008 financial crisis, underscoring the panic that gripped investors. The fallout from Japan's move was not limited to stock markets. It also affected currencies, commodities, and even geopolitical tensions. The US dollar, often considered a safe haven, weakened against the Yen, adding another layer of complexity to the unfolding crisis. As the dust settles, questions abound. How long will this market downturn last? Will central banks be able to stabilize the situation? What does this mean for the future of global trade and investment? The answers to these questions are far from clear, but one thing is certain: the world is entering a new era of financial uncertainty. The old assumptions about cheap money and endless growth are being challenged. Investors will need to adapt to this new reality by focusing on risk management, diversification, and long-term value. The Japanese tsunami serves as a stark reminder of the interconnectedness and fragility of the global financial system. It highlights the risks inherent in relying on a single country or strategy for economic stability. It also underscores the importance of adaptability and resilience in the face of unexpected events. #inflation #interestrates

In S&P Global Ratings' latest edition of #CreditWeek, Nicolas Charnay explores how intensifying trade tensions and policy uncertainties are weighing on global credit conditions and will shift the landscape for financial institutions—with ripple effects that will be felt widely, but unevenly. ➡️ The earliest potential effects will be on financial institutions that have larger exposure to the directly targeted sectors and countries. Many global banks may need to boost credit-loss provisions in response to weaker economic expectations. All this points to a drag on profits for global banks, a trend that we already expected for this year. ➡️ Market volatility has raised counterparty risk, and a sustained period of volatility (particularly in bond and foreign exchange markets) could expose known or unknown vulnerabilities in the global financial system. ➡️ Higher market volatility, increased investor risk-aversion, lower economic growth, and accelerating global fragmentation are negative credit developments. Read and subscribe for forward-looking insights on emerging and established credit risks, answering the questions that matter to markets today.