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My colleague, Derivatives Strategist Brian Hughes, recently likened today’s market behavior to a duck: placid on the surface, but legs beating like crazy below. This metaphor highlights how the alpha experience of managers has been volatile, while the activity at the market level has looked quite muted by comparison. Our team, leveraging recent insights from Macro Strategist Juhi Dhawan, believes this is a symptom of a market that changes its mind frequently regarding what path the economy is actually on. Are we heading for a sustained recovery, or will the economy wilt once the US Federal Reserve (Fed) starts to taper its asset purchases? Should we be more focused on inflation upside risk or whether China’s struggles might lead to deflation? Is there additional fiscal stimulus on the way, or will the Delta variant get us first? There are seemingly countless “A or B” narratives.

The market has appeared to be more prone to these types of shifting narratives for the past four or five years. This has particularly been the case since the onset of COVID-19 in March 2020. The nature of this uncertainty means there may not be clear trades from the below insights. However, we hope they provide some historical context for the market we’re experiencing and some solace for investors who feel like…

MARKETS
Gordy Lawrence
CFA
Director of Global Derivatives
Boston

In their June 2021 paper, Why fragility is the new reality for the stock market, our colleagues Brian Hughes and Gordy Lawrence conclude that: ”An imbalance has developed between the supply of and demand for liquidity, and as a result we’ve seen a significant increase in the potential for the public equity market to jump from a state of calm to one of chaos.”

Within our global trading department, we couldn’t agree more. Here are our latest thoughts from a trading perspective on ways to potentially navigate those states of “chaos” that may arise, often unexpectedly, amid market shocks or bouts of heightened…

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Over the past several weeks, a number of high-profile individual stocks have experienced what many observers see as retail-driven, options-assisted “melt-ups.” Most of these stocks have rallied at least 25% – 50%, including one outlier that has garnered the most attention with its breathtaking run in recent weeks and a quadruple-digit year-to-date return as of this writing.

This meteoric stock rise and others have seemingly defied logic and left many institutional investors scratching their heads, concerned that we may be in for a replay of what we saw earlier this year. I think that’s unlikely.

In January 2021, a handful of “meme stocks” experienced similar upside moves, which caught many hedge fund managers by surprise, triggering widespread…

MARKETS

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Gordy Lawrence
CFA
Director of Global Derivatives
Boston

In my last blog post, I provided a little perspective on the crowd-sourced frenzy that gripped the markets back in February 2021. Late March saw another bout of short-lived market mania. Here are my thoughts on that.

What happened

A US-based family office managing concentrated, levered gross exposures (similar to hedge funds) in total-return swaps1 estimated to be valued at around US$40 billion, with 10x leverage, pushed up prices for a small set of stocks. When prices subsequently went down, margin calls from prime brokers (PBs) came flooding in from multiple market players. With the fund unable to cover those calls, PBs were forced to liquidate some US$30 billion of exposures.

My interpretation

Three observations on this episode from my vantage point:

  1. I don’t expect it to become a systemic issue, given the…

 

MARKETS

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Nanette Abuhoff Jacobson
Nanette Abuhoff Jacobson
Global Investment and Multi-Asset Strategist
Boston

Commentators have written extensively about the recent surges in various pockets of the equity market — most recently, in heavily shorted stocks. Given the complexity and opacity of this market segment, the breathtaking moves left many investors understandably unsettled. While there is still more to learn about the volatility unleashed by the so-called “short squeeze,” for now, I’d like to address some client questions about the episode and attempt to put it in a larger context.

What happened?

A group of retail investors identified a handful of beaten-down stocks deemed to be “COVID losers” and went long these companies, both outright and on a leveraged basis via options. Positive investor sentiment in combination with thin market liquidity drove the stock prices higher. Call options buying accelerated the upward climb, as banks (which sold the options) had to…

MARKETS

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Nanette Abuhoff Jacobson
Nanette Abuhoff Jacobson
Global Investment and Multi-Asset Strategist
Boston

The upcoming US election is arguably the biggest near-term risk facing global markets right now. Questions continue to swirl around both the election process and the potential outcome, not to mention the looming specter of post-election controversy if it appears that President Trump has lost. The large number of mail-in ballots could mean delayed results and legal challenges, perhaps even civil unrest.

In addition, risk markets would be inclined to initially react poorly to a “blue-wave” scenario where Democrats win the White House and control both houses of Congress, which would likely pave the way for higher corporate taxes and increased government regulation. As of this writing, that looks to be a…

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Nanette Abuhoff Jacobson
Nanette Abuhoff Jacobson
Global Investment and Multi-Asset Strategist
Boston
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