Traders brace for more market shocks after a week of wild swings

(Bloomberg) – Bank runs. Strengthening the Federal Reserve’s resolve against inflation. Credit risk and recession risk. Investors have weathered many shocks over the past few days. It can be impossible to shake them all off at once.

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The problem for traders is that when one threat recedes, another takes its place. The economy is too hot – or at risk of being eroded by financial strains. One day bond yields are soaring on inflation fears, the next they are plummeting as lenders’ efforts convince everyone that the Fed will step down.

The result has been increasingly wild moves across the asset class spectrum, swings that could continue through another news-filled segment.

“Next week is impossible to position,” said Jim Bianco of Bianco Research. “What stocks want is no contagion and the Fed to reverse the hike. You will get one or the other, not both.”

In a week that saw the biggest US bank failure in more than a decade and a stock decline that dwarfed any in five months, perhaps the most jarring event was in Treasuries, where yields experienced their biggest two-day fall since the financial crisis. Rating trauma like this has a habit of forcing speculative money into evasive maneuvers, especially in an economy where Fed fears have made short bonds a popular trade.

Aside from the impact on speculators, earlier Treasury swings in the magnitude of Thursday and Friday contain worrying signals for the cross-asset landscape and the US economy. Data compiled by Bespoke Investment Group shows that two-year Treasury years have seen two-day declines of 45 basis points 79 times in their nearly 50-year history. With two exceptions, in 1987 and 1989, all of these episodes occurred either during or within six months of a US recession.

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Only time will tell if the collapse of SVB Financial Group portends an ever-present risk to the financial system, but investors didn’t wait for clarity. the S&P 500 slipped 4.6% in five sessions, the sharpest since September. Financials in the bar plummeted 8.5%.

The turmoil in stocks may have been greater than the superficial numbers suggest. A note from a Goldman Sachs trading desk said Thursday and Friday were an “8” on a scale of 1 to 10 in terms of customer rush. Client positioning skewed bearish, particularly in banks, with hedge funds and traditional fund managers trimming the group amid SVB woes. The former were net sellers of financial stocks for nine weeks.

At Morgan Stanley, “recession trading was fairly widespread” among clients who reacted to hawkish comments from Fed Chair Jerome Powell on Tuesday and Wednesday, according to a trading desk report. Long-short hedge funds retreated from the market overall, while retail investors sold about $1.6 billion worth of stocks.

While all of this points to higher volatility, it has been a mistake in recent years to underestimate the stock market’s ability to correct itself on the fly. Bloomberg columnist Aaron Brown noted last week that investing environments like today’s — when bond yields are high and stock valuations are high and stocks are already down 10% — in data stretching back more than a century have almost always settled in favor of equity bulls. It is evidence of the market’s tendency to rise.

However, with key US consumer inflation data due Tuesday and the Fed’s March 21-22 meeting, it takes considerable strength to make large bets on stocks or other risky assets. Risks away from equities flared again on Saturday as one of the largest stablecoins in the crypto world traded well below its one-dollar mark.

“If you have bets with expiration dates, prepare to be crushed some more,” said Peter Mallouk, president of Creative Planning. “That’s the price you pay for speculation and that’s what we’ve seen here. We will continue to see speculators continue to be swiftly punished.”

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