August 8, 2022

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Traders have been struggling to keep up with wild market swings this week as one...

Traders have been struggling to keep up with wild market swings this week as one surprise after another upends conventional wisdom about -pandemic global economy.
It just hasn’t calmed down – the heart monitor is up in the red,” said David Bergin, senior trader with Goodbody.

Shares in rocketed as much as 19pc in early trading yesterday, retracing ground it lost in January and adding $270bn to its value at the open following a strong earnings report. Later in the day, surprisingly strong US jobs data convinced investors that interest rates would rise faster than expected.
That bullish news followed a Thursday nightmare for Facebook owner Meta, which lost 20pc of its value, or $251bn (€219bn) in the biggest single-day wipe-out in stock market history.
As Mark Zuckerberg was counting his losses, European Central Bank president Christine Lagarde shocked markets by seeming to reverse her firm stance against rate hikes in 2022, sending bond markets into a frenzy.
“The volatility offers great opportunities,” said Mr Bergin.
“There are stocks that have been really beaten up, but it pays to be patient. Valuations have to reset as interest rates go up.”
Many market strategists are expecting lower returns but higher volatility from stocks as the major central banks embark on policy tightening, draining markets of the flood of cheap money that has been supporting them for years.
That process should see a rotation away from companies based on future growth and towards those that have dependable earnings today, which explains the divergence between Amazon and Meta in recent days.
But the action is not just on stock markets. Bonds have been skittish, too, as traders try to digest new information on inflation and growth.
The acute spike in European bond yields followed press conference remarks by Ms Lagarde, who wrongfooted markets by diverging from the ECB’s earlier boilerplate script on rates policy.
“What traders are trying to figure out is how far the hiking cycle will have to go to curb inflation,” said Ryan McGrath, head of fixed income strategy at Cantor Fitzgerald Ireland.
“[The ECB] have to be firm on inflation but they don’t want to dampen growth. It’s a difficult job which is leading to a lot of volatility on bond markets.”
Market prices now suggest the ECB will have to taper bond purchases more rapidly, ending them in September instead of October and possibly pulling the first rate hike forward from December, which was the consensus timing before Ms Lagarde spoke.
Another factor could be the increasing influence of small retail investors and the recent big falls in cryptocurrencies.
“The moves now seem to be very exaggerated and nobody can really give you a reason why it’s happening,” said Goodbody’s Mr Bergin. 
“The market is a little different now with a lot of retail investors. Crypto has taken a hit and retail investors have to sell their stocks to cover margin.”

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