LONDON, June 24 (IFR) - We’ve said it before and we’ll say it again. These markets are broken. That was true when global assets were rallying hard over the course of April and May, and it is true now as all asset classes tumble.
In reality, that has been the case pretty much since the sub-prime crisis kicked off nearly six years ago. Since then, liquidity has drained from the market, making it pretty much one-way traffic in terms of direction at times of acute stress. That will always exacerbate the price action, and make finding fair value extremely difficult.
That has not been helped by the current trading model in the banking sector. Risk has become a dirty word. The regulations imposed and the lack of financial reward mean that an increasingly younger set of traders who have not seen a truly liquid market are unwilling to put their necks on the line, and who can blame them?
The media and other commentators, though, continue to pretend that things are normal. They are not, and one would suggest they may never be normal again. The business of trading the markets has fundamentally changed. There is no concept of that ghastly phrase risk-on/risk-off. One day it will be time to buy everything; the next day, time to just dump it all.
And that is the world we live in. Just over a month ago, the markets were never going down again. Just shut your eyes and buy it even though US stocks were making daily record highs, credit was taking out multi-year tights, and core and peripheral bond yields were following suit.
We said at the time that a bubble was forming, and the only thing that might pop that bubble was the removal of the crutch that supported the whole market, namely the stimulus of the global central banks.
Now, of course, none of the central banks have yet removed that stimulus. The Fed, however, has had the temerity to suggest that it may begin to slow its asset purchases, and might even stop them altogether in a year’s time. The key words in that last sentence are “slow” - not stop - and “in a year’s time.” In other words, it is a long way down the line.
Given the market reaction over the last month, though, you would have thought the Fed was asking the US primary dealers to bid for the paper it owns right now. Everything has capitulated. Treasuries, equities, credit, commodities and emerging markets. You name it, they have tried to sell it. And nobody wants it. That more than anything else highlights how broken these markets are. And it could well be terminal. (Reporting by Adam Parry, editing by Julian Baker)