06 Jun SEVERAL MORE WARNINGS ABOUT THE LACK OF LIQUIDITY
According to a survey taken by JP Morgan the greatest risk to quantitative strategies is not a sharp increase in rates or poor economic data but rather a collapse in liquidity. According to the Bank, “people know this is happening, it is not just a theory but nothing is being done about it.”
JP Morgan did not state the reasons for the collapse in liquidity but is concerned such is a systemic risk to the markets, a clearing house or ETF sponsor.
PIMCO the giant bond firm made a similar statement yesterday stating liquidity in corporate bonds is drying up just when the market needs it most. PIMCO commented patchy liquidity is a legacy of post crisis regulation that has thwarted banks’ ability to hold inventory. With dealers less able to warehouse risk to help investors ride out tough conditions trading has become “more frictious.”
In my view the volatility on Monday and Tuesday are great examples of the rising liquidity crisis. At the close on Monday it felt as the NASDAQ was going to plunge another 3%. Conversely at the close Tuesday it appeared the Dow could have added another 500 points.
Unfortunately change/reform will only occur after a crisis and this change/reform will then become a primary cause for the next crisis. I point to the lack of liquidity, the result of Dodd Frank as recent evidence of this view.
Commenting about yesterday’s market action, the averages again advanced on optimism Mexican tariffs will be avoided. Oil officially entered into a bear market defined as a decline of 20% from its recent high. The issue at hand this decline took about 10 trading days. Wow!
Last night the foreign markets were mixed.. London was up 0.41%, Paris up 0.34% and Frankfurt up 0.21%. China was down 1.17%, Japan down 0.01% and Hang Sang up 0.26%.
The Dow should open nominally higher on the prevailing view of a more dovish monetary policy. The 10-year is up 8/32 to yiled 2.11%.