Strategy Video: Risk Collapses When Leveraged Selling Drowns Liquidity
• There are a number of ominous catalysts lurking in the financial system: Fed hikes, China, emerging markets
• While a fundamental spark can certainly spur a change in tide, systemic deleveraging is a result of mechanics
• With such a concentrated position in 'risk' in asset type and leverage, a turn in thin volume can be trouble
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What could eventually turn the general sentiment in the market: a Fed rate hike; China financial or economic trouble; a reversal of capital flows into the emerging markets? There are numerous pitfalls that exist in the global markets, and any one can carry knock-on effects for other precarious situations. However, what truly destabilizes the situation would be more mechanical in nature. After years of speculative build up as investors chase higher returns in a low-yielding world, the foundations for the run have grown unstable. A dependency on riskier assets and leverage has come at the same time volume and participation have dried up. This is the practical risk-reward imbalance that can lead to market crashes. When the sudden need to exit the markets on geared positions meets the bottleneck in volume, the results can be destructive. We revisit liquidity, leverage and participation in today's Strategy Video.
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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.