HomeFinancial Markets Waiting for Something

Financial Markets Waiting for Something

In 2020 so far, the world has been marked by some remarkable occurrences.  From the now global recession, a health crisis, leading to economies shutting down. With this cocktail of factors, one would think that the financial markets would be “all over the place”, as volatility usually increases in such times. 

However that in recent months has not been the case. With the exception of the stock market and Gold which experienced higher than usual volatility, the year so far continues to show consolidation on other major asset classes.

Lowest Trading Day Ranges on Record

In the last thirty days or so, the degree of coiling across asset classes for total return indices  (commodities, equities, munis, currencies and even corporates) has no rival. It looks like the markets are waiting up for something as the 100-trading day ranges are at the lowest on record at 21%.

Similar market conditions typically form ahead of important events. For example, before the much anticipated Brexit vote in the United Kingdom, financial markets waited in tight ranges. Not so tight like the ones these days, though. Also, before President Trump’s election in 2016, no investor was willing to take risks, so ranges dominated the markets.

If the passive investor does well in such an environment, the active investors suffer. Active traders aim at beating a benchmark, typically the S&P500 or other broad market indices.

However the S&P500 is up over 35% in the last two months, recovering from the coronavirus lows, while the other markets remain stuck in ranges. Passive investing outperforms active investing so far this year.

One explanation for the lack of volatility comes from the  intervention of central banks . The extent of the economic crisis and the unprecedented situation turned central banks into active players on the international financial markets. Assets buying takes place on all continents, albeit on various degrees.

Also, central banks’ communications improved significantly. Monetary policymakers want to make sure the general public understands the situation and why the central banking system acts the way it does.

Only in the United States, the Fed’s communication this year is centered around “financial stability.” Any investor and trader knows that the central banking world uses cryptic wording to communicate decisions, and the frequency of some key phrases is interpreted as hawkish (bullish) or dovish (bearish) for the general market sentiment.

A second reason for the recent ranges may come from what lay ahead – summer trading conditions (typically dominated by slow activity) until the main geopolitical event of the year: the United States Presidential election in November.

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