Displaying items by tag: liquidity

(Miami)

FINSUM is at the Inside ETFs conference in Hollywood, FL this week, and we wanted to bring you a little live coverage. Yesterday, there was a major session at the event discussing the outlook for fixed income. The consensus was that even though the Fed has paused, there is now way to tell when rates may rise again. Further, while China’s economy looks weak right now, that could turn around rapidly in the event of a trade deal with the US. Finally, all of the five panelists discussing fixed income said the ”liquidity mismatch” between ETFs and fixed income instruments is overblown and that there is not nearly as much to worry about as some think.

FINSUM: Fixed income’s outlook is murky right now. On the one hand, the Fed has paused, but on the other, rates could start rising anytime. On balance, we do think the risk-reward is slightly in favor of a shorter-duration long position.

(New York)

JP Morgan just published what could be the most well-documented financial crisis forecast ever written. The bank’s quant team put out a 143-age report chronicling how the next crisis will unfold which features the opinions of almost 50 of Wall Street’s top analysts and strategists. The consensus is that there will be a major “liquidity crisis” with huge selloffs in major asset classes, and no one to step in to buy. The losses will be exacerbated by the shift to passive management and the rise of algorithmic trading. JP Morgan says that the Fed and other central banks may even need to directly buy stocks, and there could even be negative income taxes. The bank thinks the crisis will hit sometime after the first half of 2019, most likely in 2020.

FINSUM: Assessing the validity of these kinds of predictions is always hard. While we have no idea about the timing, or whether this will actually happen, the argument is well thought out and quite logical.

(New York)

One of the market’s big worries over the last few years has been centered around the idea that ETFs may have some sort of implosion the next time there is a Crisis, or at least some major volatility. However, S&P has just come out with a report saying that won’t be the case. The piece cites the numerous instances of when major volatility hit markets, including this past February, and ETFs held up just fine. That said, ETFs do have the potential to be distortive, and they have been implicated in some major flare ups, such as that linked to the CBOE Volatility Index this winter. S&P concluded that “There’s not much cause for concern for systemic risk … But we have been able to quantify that there’s some minimal impact”.

FINSUM: Our feeling is that equity ETFs should be fine. However, for less liquid fixed income and other low liquidity areas, ETFs could theoretically have a “liquidity mismatch” which might cause some issues.

(New York)

The old fears are rising anew, and not without reason. With volatility now back in a big way, fears are once again stirring about the reliability of ETFs. In previous market flare ups there have been some major ETF losses. The ETF industry is worth $4 tn and has never been through a bear market at its current size. The biggest fears are in fixed income ETFs, where the “liquidity mismatch” is greatest between the tradable ETFs and the illiquid underlying bonds.

FINSUM: With rates and yields set to rise, there could be some volatility in fixed income, which means there could be some big issues in fixed income ETFs, especially in the most illiquid areas.

(Washington)

The financial industry just won a big concession from regulators. In a piece of Obama era legislation, mutual funds were set to have to make disclosures to investors whenever they hard large piles of hard-to-sell assets. However, the SEC has just pulled away from the measure, saying mutual funds will not need to do so. The measure was set to take effect in 2019, but has now been delayed because of disagreement on the total scope of the disclosures.

FINSUM: The big sticking point with this rule is that it would force asset managers to make judgments about liquidity even when they have little insight into it.