2016 – A Year Of Trading Dangerously
If 2016 taught traders anything, it was that old norms were useless and the concept of the market as a discounting mechanism (as opposed to an algo-driven headline-reacting maelstrom of manias) is lost forever. This flipping of reality is nowhere more evident in the topsy turvy shifts in risk expectations across global asset classes – where ‘safe’ is now riskiest and ‘riskiest’ is now safe.
Cross-asset-class correlations collapsed in 2016 – from S&P and Dow decoupling to bonds and stocks recoupling and high- and low-beta stocks losing all relationship.
And as correlations broke, as Bloomberg notes, traders now see currencies and Treasuries as more volatile than when the year began, the opposite of their outlooks for several other major asset classes.
Expected swings in foreign exchange swelled this year, with the JPMorgan Global FX Volatility Index averaging its highest level since 2011, as political surprises such as Brexit brought turbulence to markets. A Bank of America Corp. measure of U.S. government bond fluctuations advanced for the first time in three years amid a recent selloff in the debt.
And while equity risk has risen modestly in the last few days, Bonds remains ‘riskier’ than Stocks – despite the former having already surged in yield (and at record short positioning) and the latter at near-record valuations.
Will 2017 be the year to normalize these relationships?