Liquidity is no longer the biggest worry for traders in financial markets, following a year in which markets survived a series of major shocks without the ability to buy and sell becoming too severely impaired.
Instead, volatility has climbed to the top of the list of traders’ concerns in 2023, as rising global interest rates and geopolitical tensions spark big moves in markets, according to a survey of traders by JPMorgan.
Traders and investors had for the previous six years listed liquidity as their biggest concern, with many worrying about the risk of a financial accident caused by a breakdown in the functioning of important markets, including in US Treasuries that form the bedrock of global finance.
But Scott Wacker, head of fixed income, currency and commodity ecommerce sales at JPMorgan said that in 2022 “we didn’t see many breaks in the system in terms of liquidity”, despite market shocks including the fallout from Russia’s invasion of Ukraine and the crisis that hit UK pension funds and the gilt market.
“The underlying availability of liquidity was there and the markets functioned really well,” he said.
Nearly half of the 835 traders surveyed named volatile markets as their key daily challenge, with 22 per cent citing liquidity availability — down 13 percentage points.
That marks a departure from the acute fears of a market breakdown that came to the fore during the coronavirus crisis in 2020 when the Federal Reserve was forced to make an unprecedented intervention to restore order to US debt markets.
Wacker said that previously traders have “seen some markets break especially pre and post the beginning of the pandemic. As clients were looking to trade more and more electronically over the past decade, the resiliency of markets weren’t what they’d like.”
Antoine Bouvet, senior rates strategist at ING, said that although poor liquidity hampered trading last year, “it didn’t feel like it was impossible [to] trade some assets for weeks on end” and that even illiquid markets “kept functioning.”
“We came pretty close with the [UK pension fund] crisis, it was a last ditch intervention by the Bank of England . . . The market’s functioning was impaired but didn’t stop ,” he added.
The elevation of volatility to the top of the list of concerns highlights how the changing economic environment, marked by a growth slowdown, record inflation, climbing interest rates and the looming threat of a recession, have fuelled big swings in markets. Last year, the Bank for International Settlements warned that rising volatility could undermine central banks’ abilities to tame soaring inflation.
“2022 was kind of an amazing year in volatility terms,” said Wacker. “Everything that could change, kind of did.”
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