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The Market Risk and Liquidity Risk of an S&P 500, Financial Market Reversal

The Market Risk and Liquidity Risk of an S&P 500, Financial Market Reversal

John Kicklighter,

Talking Points:

• A Fed rate hike, Greek crisis and even a uniform speculative slump are 'market risks'

• Liquidity risk arises from the evaporation of market depth that can see values plummet

• Both the 2008 Great Financial Crisis and SNB rate floor collapse were liquidity risks

Want to develop a more in-depth knowledge on the market and strategies? Check out the DailyFX Trading Guides we have produced on a range of topics.

The threat of a correction to the excessive 'risk' exposure we've seen build in markets like US equities, Yen crosses, high-yield, and fixed income amongst others grows with each week. However, when this shift is realized, there is a far greater peril to the market in the form of intense 'liquidity risk'. Market risk reflects those things that investors regularly worry over: Fed rate hikes, a Greece-stoked Eurozone crisis, a global recession or even a simple pullback in market price. Yet, the severity of fallout from such a market change is amplified dramatically through liquidity problems. Perfect examples of what liquidity risk can wrought include the fallout from the 2008 Great Financial Crisis (GFC) and the SNB's decision to drop the EURCHF exchange rate floor. With those examples in mind, current conditions may be feeding a far more pervasive and thereby severe liquidity risk for the foreseeable future. We look at what should really trouble investors in this weekend's Strategy Video.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.