It is beginning to feel a lot like 2008. Do we even remember 2008? The financial markets have been on the most wild of rides in recent memory. Every security in the FTSE 100 was down Tuesday with the index losing the most ground since the Brexit vote. The catastrophe in Britain followed on the heels of the Dow Jones Industrial Average's worst one-day drop in history in New York. The benchmark U.S. index was down 1,600 points from its peak Monday, down over 4 percent for the day. The S&P 500 joined the Dow, as both saw their largest percentage loss since 2011. Like the FTSE, every Dow company was negative at the close. In other words, we may be heading back to the days of the old and a new normal.
While markets recovered somewhat on Tuesday, U.S. markets looked to be headed for more losses as off late Wednesday. What is the issue? The financial markets have been on a nine-year tear. Since the bottom of the Great Recession, central banks have propped up equities and fixed income instruments through various methods. With a return to normalization and higher interest rates being discussed, investors are getting out of risky assets and heading toward safe havens. Surprisingly, this has not included an appreciation of the greenback. U.S. President Donald Trump's promise of heavy fiscal spending and newly implemented tax cuts coupled with the administration's stated goal of weakening the dollar have seen it lose ground globally. This may just be a long overdue market correction. This may also be a more fundamental reckoning with core issues swept under the rug following the 2008 crisis to be dealt with when markets were more able to absorb shocks. With markets up over 23 percent in the last year, a 4 percent drop is not yet cause for alarm.
The VIX volatility index is up over 105 percent in the last two days, and with a lower open on Wednesday, the VIX may continue to spike. Minutes into newly minted U.S. Federal Reserve (Fed) Chair Jerome Powell's term, the financial markets began their rollercoaster ride. While merely a coincidence, these moves, should they continue, may force Powell to make public comments much earlier than anticipated following the last unanimous Fed decision to hold rates steady. Public commentary from the Fed chair, followed by administration officials, may alleviate jitters in the markets. The recent drop in crude prices have also heightened the fear of inflation and higher interest rates. Or, this may all just be the market taking a breather.
Whatever the cause of the recent sell-off and its future, as we head into the weekend, I believe any talk of raising interest rates will definitely be put on hold now. Powell will be hard pressed to push for any rate hikes until the fall, and even then, only if markets are up 5 percent to 10 percent above their current levels, which I believe to be nearly impossible.
On a more interesting note, the cryptocurrency market is mirroring the financial markets in its motions albeit with much more exaggerated moves. Bitcoin is already down 44 percent this month, and over 60 percent from its peak. I had predicted 90 percent drops for all cryptocurrencies from their peaks and that all but two or three would be completely wiped out. This prediction has nearly come true and it has only been a little over one month into 2018.
On Wednesday, bitcoin was up over 20 percent, but this is merely a dead cat bounce with the rug about to be pulled out from under it. I am not sure how deep short interest is in the currency, especially as with such volatility, counterparties are forcing writers of options and naked sellers to put up a lot of collateral. With no underlying securities to borrow from, market makers in the derivatives markets themselves are party to these transactions and, therefore, the market is far from efficient. There is a limit to arbitrage and therefore the fall of cryptocurrencies will be much slower than if this was a deeper mature security or short fix market.
In short, the markets will continue to be volatile in the coming weeks and cryptocurrencies will continue on their death spiral. Be warned.
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