Wednesday, September 30, 2020

Historic day in markets has traders rethinking what's possible

Mar 10. 2020
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By Syndication Washington Post, Bloomberg · No Author · BUSINESS 

What started with the biggest oil-price collapse since 1991 is shaping up to be one of the wildest days in years for global markets.

Panic selling, margin calls, vanishing liquidity and coronavirus work-from-home arrangements were just some of the challenges traders faced as risk assets plunged, currency volatility soared and money flooded into government bonds. They also had to figure out how an oil-price war and rapidly spreading outbreak will affect the global economy, companies and geopolitics.

"The day has been absolutely chaotic," said Eugene Kang, whose team trades assets including Russian government bonds at NH Investment & Securities Co. in Seoul. "Financial markets have been caught off guard."

Here's how the turmoil is playing out on trading desks around the world.

- Blowout in Oil

Zhang Chenfeng, an oil-trading analyst at Chinese hedge fund Shanghai Youlin Investment Management Co., hardly slept last night. He knew Saudi Arabia's decision to launch an all-out price war with Russia would pummel the market, but the 30%-plus decline on Monday still came as a punch to the gut. "It was shocking," Zhang said. "It was historical."

It also quickly spread to other markets. The 10-year Treasury yield fell below 0.5% for the first time. Oil-sensitive currencies plunged, with the Mexican peso weakening 6%. Futures on the S&P 500 Index sank about 5% -- triggering trading curbs -- and European stocks looked set to follow Japan into a bear market.

- Hypnotized by Selling

Some trading floors were eerily quiet. "It's almost like everyone is hypnotized together and levels are just going south with nobody able to halt the slide," said Tsutomu Soma, a bond trader at Monex Inc. in Tokyo, who has been in the market long enough to experience the Black Monday crash in 1987. "It's been a while since I saw this kind of sell-off," he said. "But I'm not seeing the kind of yelling across the trading floor or people throwing in their towels like back in the old days. Perhaps it's a difference in the generations I'm surrounded by now."

For one of those millenials, 29-year-old Futures First research analyst Rishi Mishra, market madness has given way to hysteria. "To me, personally, it's just funny now! The kind of prices that traded today, no one could make any sense out of them."

"These moves are pretty amazing," said Takeo Kamai, head of execution services at CLSA Securities Japan. "We are witnessing once-in-a-career type moves and I think many professionals are left in awe. Only a handful could have fathomed this type of scenario for global markets in 2020."

- Currencies Gone Wild

As the turbulence spread to currencies, some traders struggled to keep up with rapid swings in markets that had only just recently seen volatility plunge to record lows. Both the Australian and New Zealand dollars had quick legs down before recovering some of the losses. The yen surged as much as 3.6% and Norway's krone slid 4.7%.

"When you see a 4% move in just a couple of minutes, it tends to be pretty safe to take the other side of the short -- but this time it was just too short a window," said Stuart Simmons, a senior portfolio manager in Brisbane, Australia, at QIC Ltd., which oversees $54 billion (A$83 billion) in assets. "When they start triggering stop losses, the currencies end up cascading on themselves. Price action turns dysfunctional."

Margin calls may have added to the volatility, said Margaret Yang, a strategist at CMC Markets Singapore Pte. "We have seen more margin calls and fundings this morning," she said. But some clients were also topping up to take larger positions, Yang added, a sign that at least some viewed Monday's turbulence as an opportunity.

- Coping With Panic

With fear in the air, the only topic of discussion at GAM Investment Management is how much worse this can get, said Paul McNamara, who oversees more than $7 billion of developing-market fixed-income assets.

In Taipei, where the normally subdued Taiex index plunged more than 3% and closed at its low for the day, two fund managers took starkly different approaches to the rout. Shin Kong Investment Trust's Sean Lee sped up adjustments to his holdings, saying he needed to act fast because "it's hard to say what will happen next."

By contrast, SinoPac Securities Investment Trust's Hiroki Lu is planning to wait before making big moves.

"I just checked market performance when it opened and moved on to do other things. There is no point of monitoring markets in a situation like this -- it's too volatile and investors are too panicky," Lu said. "It's not the first time that the market has been so panicked, so I am cool about it. My clients didn't ask about it, either."

- Working From Home

Mandatory work-from-home arrangements imposed by financial firms to contain risks from the coronavirus outbreak added another layer of uncertainty.

"When you're working at home without colleagues, you feel more nervous about things because you're on your own," said Shane Oliver, head of investment strategy and chief economist at AMP Capital Investors.

Kirby Wang, managing director at Beijing Haihuiyuan Investment Co., has been working from his home office for more than four weeks. He has to balance his time spent on investing with teaching his young children Chinese poetry, after their school moved all classes online. The market is bringing back uncomfortable memories of 2008, when he worked at Lazard Asset Management in New York. "I certainly hope this won't be as bad as 2008, but it's not out of the question," he said.

Luke Hickmore, a money manager at Aberdeen Standard Investments, is finding having a dog is helping him deal with the plunge in Treasury yields.

"It's a lot calmer with a labrador," he said. "I did try to explain it to her -- she licked my cheek, fair reaction."

- Welcoming Volatility

For some investors, the return of market volatility couldn't have come sooner. Chris McGuire, whose Phalanx Japan AustralAsiaMulti-strategy Fund is geared to profit from widening price swings, has gained nearly 10% this year through March 6, after a rough past three years that saw his firm's assets under management drop to $22 million from about $160 million.

Chicago-based McGuire, whose fund is still up about 13-fold since April 2005, said his bets on Japanese convertible bonds have "finally" started to pay off again. "Covid-19, at least for now, is providing the black swan event that the markets never realized could happen," he said.

Ali El Adou, head of asset management at Daman Investments in Dubai, said he rushed to the office much earlier than usual on Monday so he could invest quickly if needed: "Although markets are crashing and volatility is spiking, we are closely monitoring prospective investment opportunities."

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