Throughout the summer, one word came to dominate the discussion around markets: complacency.
Markets were boring. People got bored.
Volatility was back. And there’s reason to think this will continue.
In a note to clients out Monday, Kit Juckes at Societe Generale highlighted data from the CFTC showing that right now, investors are long both stocks and bonds.
This means investors expect both stock prices to rise and bond yields to fall, outcomes that typically don’t happen at the same time (though this has often been the case since the financial crisis).
“The market is long both equities and Treasuries, something that has echoes of late 2012, when US yields bottomed and the ‘taper tantrum’ was just a few months away,” Juckes wrote.
“The positioning suggests (to me, anyway) a risk both that any bounce in bond markets that comes from weaker equities and risk assets will be modest, and that we are probably set for a period of increased nervousness and choppy markets in general.”
The gross oversimplification is that stocks are riskier assets which rise in price when people see improving prospects for corporates and the broader economy.
Bonds are safer assets that rise in price — which, correspondingly, sees yields fall — when investors are less certain about future growth prospects.
But with market positioning indicating that investors are betting both assets will rally, either a drop in stock prices or a rise in bond yields isn’t likely to be met by its inverse.
Instead, we’re likely to see what we saw Friday — stocks fall, yields rise, and volatility making a comeback.
On Monday morning, stocks were selling off again and bond yields were up slightly.
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