Liquidity across U.S. markets is now at its worst level since the early days of the pandemic in 2020, according to investors and big U.S. banks
Relatively small deals worth just US$50-million could knock the price or prompt a rally in exchange-traded funds and index futures contracts that typically trade hands without causing major ripples, says Michael Edwards, deputy chief investment officer of hedge fund Weiss Multi-Strategy Advisers LLC.The fraught conditions have collided with a big shift in the global economy that has caught many portfolio managers off-guard: a growth slowdown, rising interest rates and intense inflation.
Through a series of regulations introduced over the past 12 years, banks are now required to hold bigger capital cushions to protect their balance sheets against major swings. Meanwhile, the health of the U.S. government bond market – a benchmark for trillions of dollars in assets globally – is at its worst since the March 2020 market meltdown, according to a Bloomberg LP index.
That has manifested in choppier trading. Mr. Sinclair estimates that the VIX index, a gauge of volatility in the U.S. stock market, had jumped more than 5 points on a single trading day nine times in the 15 years before the financial crisis. In the 15 years after the crisis, it has happened 68 times.
In May, investors hoping to trade e-mini futures on the S&P 500 – one of the most important contracts that big money managers use to bet on the direction of the market – saw tiny offers to buy and sell when looking at their trading screens.
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