Michelle Meyer, Bank of Americas head of U.S. economics, said in a note on Feb. 28 that “it will take time for the hard economic data to show the impact but we are already seeing evidence in early economic indicators.”
Major stock market indexes suffered their worst week since the financial crisis last week amid a virus-driven equities selloff and associated lurch towards safe-haven assets like bonds.
U.S. Treasuries absorbed major capital flows last week, with the yield on the 10-year note hitting a new record low. Bond yields move in the opposite direction to prices, with falling yields a sign of growing interest by investors, fearful that the economic impact of the outbreak could be greater than previously thought.
“People flow, supply chains, trade volumes, and commodity prices are all up in the air,” said David McAlvany, CEO of the McAlvany Financial Companies, in an emailed statement. “The problem is unbound.”
Still, much of the economic picture remains blurry.
“Thus far the impacts reported have been macro in nature,” said Jimmy Hinton, senior managing director at Transwestern, in an emailed statement. “Even the largest, most sophisticated publicly listed logistics companies and retailers have only changed their guidance. They have not yet reported hard results or impacts. It is still too early to tell what the impacts are or will be.”
Markets, which tend to front-run hard economic data, have struggled to digest the shifting landscape of virus-related news. Stock market volatility last Friday, as measured by the VIX “fear gauge,” spiked intraday to levels reminiscent of the 2008 financial crisis.
In a separate note, the Bank of America said automated trading systems may have contributed to the uptick in volatility.
“One reason is the rise of automated investing systems that rely on machines and algorithms to capture short-term trends or rebalance portfolios,” said Niladri Mukherjee, head of portfolio strategy, Chief Investment Office, Merrill and Bank of America Private Bank.
According to estimates cited in the note, as much as 90 percent of equity futures trades and 80 percent of cash equity trades take place without human involvement.
“This makes modern markets more vulnerable to abrupt dislocations,” Mukherjee added.
Derivatives trader Kevin Muir explained in an emailed statement that certain exotic options trading strategies were driving markets to whipsaw in what he called a “vicious feedback loop.”
“With the decline in the stock market, we have flipped to the point where dealers are short gamma,” Muir told The Epoch Times. “When short gamma, dealers need to short more stocks as they head lower which leads to a reflexive downward spiral. On top of that, as the stock market decline increases in ferocity, dealers mark the volatility of their book higher. This action results in them having to hedge even more with more sales,” he said.
“All of this creates a vicious feedback loop,” he said. “The real question is where does it stop?”