Originally published at Bloomberg.com | February 15, 2018
Get ready for the post-new normal.
Recent market volatility reflects more than just an unwinding of positions or the failure of a few esoteric volatility products. The catalyst for the selloff arrived on Feb. 2 in the form of higher-than-expected U.S. wage inflation. Although a few data points aren’t conclusive evidence, it won’t be long before market participants begin to doubt the Fed can remain committed to “gradual normalization.” The implications of such a shift in sentiment cannot be overstated.
Yes, positioning and market structures have exacerbated market moves. The unwinding of consensus positions in global equities and in trades that would benefit from subdued volatility meant that losses in those markets were more pronounced than elsewhere. Oil prices were another positioning casualty.
But this was not a mere “risk-off” episode. Had it been, bond yields would have fallen, not risen. Continue Reading.