From widespread technology outages to unexpected acquisitions, from unprecedented volatility to political upheaval, it might feel as though this summer has been a standout in terms of unprecedented activity. However, traders representing firms with a total US$4.27 trillion in AUM had mixed takes on the events of recent months — with some even hoping for greater volatility as we move into September.
“In my experience, if the markets fail to deliver a ‘summer surprise’, then for sure something else will pop up which inevitably interrupts holiday plans,” says Marc Wyatt, head of global trading at T. Rowe Price (US$1.57 tn AUM).
There was certainly no shortage this year, although Eric Heleine, head of the buy-side trading desk at Groupama Asset Management (US$1.8 bn AUM), argues that “compared to previous years this summer was marked by a relatively low overall volatility”. Eric Boess, global head of trading at AllianzGI (US$555 bn AUM), agrees. “If one excludes 5 August, it was as quiet as a summer could be,” he opines. “Maybe that is no surprise after the massive equity rally in Q1 and neither FX nor longer term rates moving much. Irritating given the geopolitical backdrop, though.”
Equity flows over the summer were in line with those seen earlier in the year, according to the Investment Company Institute’s (ICI) estimated long-term mutual fund flows figures, but elevated on a year-on-year basis. The US$60.4 billion outflow observed in July only narrowly exceeded the US$60.2 billion recorded in April, while June’s US$39 billion was the second lowest outflow of the year to date. Compared to last summer, however, July’s outflows rose by 41% from US$43 billion.
“The presence of significant risk factors and technical adjustments created pockets of volatility and uncertainty, distinguishing this summer from others”, Heleine acknowledged. For Joe Collery, head of trading at Comgest (US$32.3 bn), “the top event for us was the lack of liquidity, with most developed markets being down more than 30% versus year-to-date averages”. Groupama Asset Management’s Heleine agrees that this has been an issue; “the most important challenge this summer was to maintain a high level of operability and performance with a short staffed organisation, spiking volatility and poor liquidity conditions”, he told Global Trading.
By contrast, at T Rowe Price Wyatt reports that “the most notable event of this summer was the US equity index rebalancing which took place at the end of the second quarter (and on a Friday nonetheless). The trading team was engaged with PMs in the lead up to rebalance and the notional traded on our US equity desk that day was multiple times what we see on a ‘normal’ day”.
Blue screens of death
Some of the events that have had the greatest impact on markets have broken through to the ‘real world’, making headlines outside the financial sector. The Crowdstrike outage of 19 July saw widespread chaos, grounding flights (which at least had the upside of helping companies meet their carbon reduction targets) and seeing photos of exchanges’ blue screens of death splashed all across social media. Some sources reported that trading was being put on hold at certain firms, while others suggested that reports of the chaos were inflated.
A few months on, and the latter group may have been correct. “[It’s] amazing how critical
a handful of providers are for our global IT infrastructure, but [this was] not a market event, at least not outside some specific stocks,” says Boess. Aside from its inclusion in the list of general summer activity, what appeared at first to be a devastating crisis has transformed into a cautionary tale of overreliance on a small pool of tech providers. Whether it is the first in a string of this type of lesson remains to be seen.
5 August
The second event to catch public attention was the 5 August stock crash and all that surrounded it. “[It was] one of the most violent moves in volatility and stock prices since Covid,” says Boess. A combination of factors sent US markets into a brief freefall, with wobbles in AI and tech stocks, anticipations of Bank of Japan interventions and concerns of a recession in the US prompting the unwinding of many JPY carry trades. “The unexpected reversal of the carry trade on the Japanese yen added to market uncertainties, affecting currency markets and investor strategies,” confirmed Heleine.
In July, LSEG’s Lipper Alpha reported that Europe saw “general inflows” in equities, but added that “equity markets looked somewhat vulnerable given the high valuations of the market leaders”. This fostered a nervousness among investors, it said, causing them to “[react] quite fast on any news that may impact the current market environment negatively”. This was apparent by 5 August, when the VIX closed at a post-Covid high and fears of a global financial crash were raised.
“The peak in volatility was primarily concentrated in equities,” explains Heleine, with Boess quipping that “fixed income barely noticed the house next door was on fire”. Subsequent trend-following and volatility control strategy adjustments caused “very negative price action,” Heleine continued, but added that this took place over just three days. “The market quickly reversed this positioning adjustment.”
“I am still surprised that we did not see more bodies floating,” muses Boess. “Usually such moves kill a hedge fund or two, but this event had surprisingly few casualties. The recovery was faster than I expected as well.” While things may seem to have calmed down for now, Heleine warns that “the combination of these elements suggests that while the broader market environment was calm, underlying tensions and potential catalysts for future volatility were present”.
Looking at the bigger picture, and while political upheaval can hardly be considered unprecedented anymore, this summer did see a number of drastic changes worldwide. While these shifts in power have all been impactful in the macro climate, traders suggest that political ups and downs have had little effect on markets. However, looking ahead, Heleine says, “if political and trade uncertainties persist, industrial companies might be inclined to delay certain investment decisions despite the support from final demand” later down the line.
Autumn outlook
“The outlook remains ‘constructive’ for growth towards the end of the year,” Heleine shares. “Stimulus plans continue to boost activity; financing conditions, both bank and non-bank, have further eased this summer; [and] final demand and the determinants of consumption are robust enough to encourage companies to continue their restocking and investment cycles.”
Looking to Q4, Boess says he’s hoping for “some more volatility. Not another 5 August, but some rotation, et cetera. Traders can’t show their skills if nothing is moving”.
If the first eight months of the year are anything to go by, with geopolitical tensions showing no sign of cooling, ongoing questions around the longevity of the AI bubble, and no lack of truly unprecedented events, a relaxed autumn doesn’t look to be on the cards. Whatever impact it has on the market, it’s unlikely to be boring.
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